As filed with the Securities and Exchange Commission on August 29, 1996.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
----
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
----
Pre-Effective Amendment No. __ /____/
----
Post-Effective Amendment No. ___ /____/
(Check appropriate box or 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 office) Zip Code
(617) 375-1700
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, including Area Code)
With a copy to:
Susan S. Newton, Esq. Jeffrey N. Carp, Esq.
John Hancock Advisers, Inc. Hale and Dorr
101 Huntington Avenue 60 State Street
Boston, MA 02199 Boston, MA 02109
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. This Registration Statement relates to shares previously registered
on Form N-1A (File Nos. 33-32246 and 811-5968).
It is proposed that this filing will become effective on September 28, 1996
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
JOHN HANCOCK TAX-FREE BOND TRUST
CROSS-REFERENCE SHEET
Items Required by Form N-14
<TABLE>
<CAPTION>
PART A
- ------
Item No. Item Caption Prospectus Caption
- -------- ------------ ------------------
<S> <C> <C>
1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE OF
Cover Page of Prospectus PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis and Risk Factors SUMMARY; RISK FACTORS AND SPECIAL
CONSIDERATIONS
4. Information About the SUMMARY; INFORMATION CONCERNING THE
Transaction MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF REORGANIZATION;
CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Registrant SUMMARY; BUSINESS OF TAX-FREE BOND FUND
6. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Company Being Acquired SUMMARY; BUSINESS OF MANAGED TAX-EXEMPT FUND
7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS;
SUMMARY; INFORMATION CONCERNING THE MEETING
8. Interest of Certain Persons NONE
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be
Underwriters
<PAGE>
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
- -------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION ABOUT
About the Registrant TAX-FREE BOND FUND
13. Additional Information About ADDITIONAL INFORMATION ABOUT
the Company Being Acquired MANAGED TAX-EXEMPT FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT TAX-
FREE BOND FUND; ADDITIONAL
INFORMATION ABOUT MANAGED TAX-EXEMPT
FUND; PRO FORMA COMBINED FINANCIAL
STATEMENTS
PART C
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Item No. Item Caption
- -------- ------------
15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
</TABLE>
2
<PAGE>
CHURCHILL DRAFT LETTER
Dear Fellow Managed Tax-Exempt Fund Shareholder,
In June we asked you to approve several proposals designed to increase the
administrative efficiency of your Fund. Since that time, however, we have
determined that a merger of your Fund would be more beneficial to you.
Accordingly, we will reimburse your Fund for the cost of the June proxy.
At a special meeting of shareholders on November 14, 1996 at 9:00 A.M., you will
be asked to approve the merger of your Fund into the John Hancock Tax-Free Bond
Fund.
YOUR BOARD OF TRUSTEES HAS ALREADY UNANIMOUSLY APPROVED THE
PROPOSED MERGER, BELIEVING IT TO BE APPROPRIATE, GIVEN THAT
BOTH FUNDS PURSUE A SIMILAR INVESTMENT OBJECTIVE.
We believe this merger will benefit you in several respects, including:
* Greater Cost Efficiencies. Your Trustees believe that combining these
two Funds may benefit shareholders by allowing for reduced costs in investment
research, operations and other important areas. By creating a larger Fund, the
merger may lead to a reduction in long-term expenses and, ultimately, lower
costs for you.
* Increased Portfolio Diversification. By combining both Funds' assets into a
single portfolio, the Tax-Free Bond Fund will be able to achieve greater
diversification. Diversification is a known and proven technique in reducing
investment risk.
Your Vote Is Important!
No matter how large or small your investment may be, your vote makes a
difference. We urge you to review the enclosed proxy statement carefully, and to
vote by completing, signing and returning the enclosed proxy ballot form to us,
or simply follow the phone voting instructions below. Your prompt response will
help avoid the cost of additional mailings. For your convenience, we have
enclosed a postage paid envelope.
TOLL-FREE OPERATORS WHO ARE INDEPENDENT OF THE COMPANY ARE
AVAILABLE TO ASSIST YOU NOW!!!
INSTRUCTIONS
1. Call Toll-Free 1-800-437-7699 between 8:00 a.m. and 12:00 midnight eastern
time.
2. Tell the operator that you wish to send a collect phone vote to ID
No.(****) John Hancock Managed Tax-Exempt Fund.
3. State your name, address and telephone number.
4. State your confidential account number and number of shares as shown below:
Confidential account number :
Number of shares :
<PAGE>
Draft Letter- Managed Tax-Exempt Merger
Dear Fellow Managed Tax-Exempt Fund Shareholder,
In June we asked you to approve several proposals designed to increase the
administrative efficiency of your Fund. Since that time, however, we have
determined that a merger of your Fund would be more beneficial to you.
Accordingly, we will reimburse your Fund for the cost of the June proxy.
At a special meeting of shareholders on November 14, 1996 at 9:00 A.M., you will
be asked to approve the merger of your Fund into the John Hancock Tax-Free Bond
Fund.
YOUR BOARD OF TRUSTEES HAS ALREADY UNANIMOUSLY APPROVED THE
PROPOSED MERGER, BELIEVING IT TO BE APPROPRIATE, GIVEN THAT
BOTH FUNDS PURSUE A SIMILAR INVESTMENT OBJECTIVE.
We believe this merger will benefit you in several respects, including:
* Greater Cost Efficiencies. Your Trustees believe that combining these two
Funds may benefit shareholders by allowing for reduced costs in investment
research, operations and other important areas. By creating a larger Fund, the
merger may lead to a reduction in long-term expenses and, ultimately, lower
costs for you.
* Increased Portfolio Diversification. By combining both Funds' assets into a
single portfolio, the Tax-Free Bond Fund will be able to achieve greater
diversification. Diversification is a known and proven technique in reducing
investment risk.
Your Vote Is Important!
No matter how large or small your investment may be, your vote makes a
difference. We urge you to review the enclosed proxy statement carefully, and to
vote by completing, signing and returning the attached proxy ballot form to us
immediately. Your prompt response will help avoid the cost of additional
mailings. For your convenience, we have enclosed a postage paid envelope.
If you have any questions please call your Customer Service Representative at
1-800-225-5291, Monday through Friday between 8:00 AM and 8:00 PM Eastern time.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
<PAGE>
JOHN HANCOCK MANAGED TAX-EXEMPT FUND
101 Huntington Avenue
Boston, Massachusetts 02199
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 14, 1996
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of John Hancock Managed Tax-Exempt Fund ("Managed Tax-Exempt Fund"),
a series of Freedom Investment Trust (the "Trust"), a Massachusetts business
trust, will be held at 101 Huntington Avenue, Boston, Massachusetts 02199 on
Thursday, November 14, 1996 at 9:00 a.m., Boston time, and at any adjournment of
the Meeting, for the following purposes:
1. To consider and act upon a proposal to approve an Agreement and Plan of
Reorganization between Managed Tax-Exempt Fund and John Hancock Tax-Free Bond
Fund ("Tax-Free Bond Fund"), a series of a Massachusetts business trust,
providing for Tax-Free Bond Fund's acquisition of all of Managed Tax-Exempt
Fund's assets in exchange solely for the assumption of Managed Tax-Exempt Fund's
liabilities, and the issuance of Class A and Class B shares of Tax-Free Bond
Fund to Managed Tax-Exempt Fund for distribution to its shareholders.
2. To consider and act upon any other matters that may properly come before
the Meeting or any adjournment of the Meeting.
The Board of Trustees has fixed the close of business on September 20, 1996
as the record date to determine the shareholders who are entitled to receive
this notice and to vote at the Meeting and any adjournment of the Meeting.
If you cannot attend the Meeting in person, please complete, date and sign
the enclosed proxy and return it to John Hancock Investor Services Corporation,
101 Huntington Avenue, Boston, Massachusetts 02199 in the enclosed envelope. It
is important that you exercise your right to vote. THE ENCLOSED PROXY IS BEING
SOLICITED BY THE BOARD OF TRUSTEES OF JOHN HANCOCK MANAGED TAX-EXEMPT FUND.
By order of the Board of Trustees,
SUSAN S. NEWTON, Secretary
Boston, Massachusetts
October __, 1996
<PAGE>
JOHN HANCOCK MANAGED TAX-EXEMPT FUND
PROXY STATEMENT
----------------------
JOHN HANCOCK TAX-FREE BOND FUND
PROSPECTUS
----------------------
This Proxy Statement and Prospectus sets forth the information you should
know before voting on the proposed reorganization of John Hancock Managed
Tax-Exempt Fund ("Managed Tax-Exempt Fund") into John Hancock Tax-Free Bond Fund
("Tax-Free Bond Fund"). Please read it carefully and retain it for future
reference.
This Proxy Statement and Prospectus is accompanied by the Prospectus of
Tax-Free Bond Fund dated September 30, 1996 (EXHIBIT A attached). Information
about Managed Tax-Exempt Fund's shares is incorporated by reference from the
Managed Tax-Exempt Fund Prospectus which is available at no charge upon request
to Managed Tax-Exempt Fund at 1-800-225-5291.
A Statement of Additional Information, dated October __, 1996, relating to
this Proxy Statement and Prospectus, and containing additional information about
each of Tax-Free Bond Fund and Managed Tax-Exempt Fund, including historical
financial statements, is on file with the Securities and Exchange Commission
("SEC"). It is available at no charge from Tax-Free Bond Fund upon telephone
request at the toll-free number stated above. The Statement of Additional
Information is incorporated by reference into this Prospectus.
This Proxy Statement and Prospectus relates to Class A and Class B shares
of beneficial interest, no par value (collectively, the "Tax-Free Bond Fund
Shares"), of Tax-Free Bond Fund which will be issued in exchange for all of
Managed Tax-Exempt Fund's assets. In exchange for these assets, Tax-Free Bond
Fund will also assume all of the liabilities of Managed Tax-Exempt Fund.
- ------------------------
continued on next page)
Shares of Tax-Free Bond Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution, and the
shares of Tax-Free Bond Fund are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
(continued)
- ------------------
The Tax-Free Bond Fund Class A Shares issued to Managed Tax-Exempt Fund for
distribution to Managed Tax-Exempt Fund's Class A shareholders will have an
aggregate net asset value equal to the aggregate net asset value of Managed
Tax-Exempt Fund's Class A shares. The Tax-Free Bond Fund Class B Shares issued
to Managed Tax-Exempt Fund for distribution to Managed Tax-Exempt Fund's Class B
shareholders will have an aggregate net asset value equal to the aggregate net
asset value of Managed Tax-Exempt Fund's Class B Shares. The asset values of
Managed Tax-Exempt Fund and Tax-Free Bond Fund will be determined at the close
of business (4:00 p.m. Eastern Time) on the Closing Date (as defined below) for
purposes of the proposed reorganization.
Following the receipt of Tax-Free Bond Fund Shares (1) Managed Tax-Exempt
Fund will be liquidated, (2) the Tax-Free Bond Fund Shares will be distributed
to Managed Tax-Exempt Fund's shareholders pro rata in exchange for their shares
of Managed Tax-Exempt Fund and (3) Managed Tax-Exempt Fund will be terminated as
a series of the Trust. Consequently, Class A Managed Tax-Exempt Fund
shareholders will become Class A shareholders of Tax-Free Bond Fund, and Class B
Managed Tax-Exempt Fund shareholders will become Class B shareholders of
Tax-Free Bond Fund. These transactions are collectively referred to in this
Proxy Statement and Prospectus as the "Reorganization." The Reorganization is
being structured as a tax-free reorganization so that, in the opinion of tax
counsel, no gain or loss will be recognized by Tax-Free Bond Fund, Managed
Tax-Exempt Fund or the shareholders of Managed Tax-Exempt Fund. The terms and
conditions of the Reorganization are more fully described in this Proxy
Statement and Prospectus, and in the Agreement and Plan of Reorganization that
is attached as EXHIBIT B.
Tax-Free Bond Fund is a diversified series of John Hancock Tax-Free Bond
Trust (the "Bond Trust"), an open-end management investment company organized as
a Massachusetts business trust in 1989. Tax-Free Bond Fund seeks as high a level
of current income exempt from federal income tax as is consistent with
preservation of capital. Tax-Free Bond Fund seeks to obtain this objective by
investing primarily in municipal obligations, including bonds, notes and
commercial paper, the interest on which is exempt from federal income taxes.
The principal place of business of both Tax-Free Bond Fund and Managed
Tax-Exempt Fund is at 101 Huntington Avenue, Boston, Massachusetts 02199. Their
toll-free telephone number is 1-800-225-5291.
The date of this Proxy Statement and Prospectus is October __, 1996.
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION............................................................ 1
SUMMARY ............................................................... 2
RISK FACTORS AND SPECIAL CONSIDERATIONS................................. 18
INFORMATION CONCERNING THE MEETING...................................... 19
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION................ 21
CAPITALIZATION.......................................................... 28
COMPARATIVE PERFORMANCE INFORMATION..................................... 29
BUSINESS OF MANAGED TAX-EXEMPT FUND..................................... 3
General........................................................ 33
Investment Objective and Policies.............................. 33
Trustees....................................................... 33
Investment Adviser and Distributor............................. 33
Expenses....................................................... 34
Custodian and Transfer Agent................................... 34
Managed Tax-Exempt Fund Shares................................. 34
Purchase of Managed Tax-Exempt Fund Shares..................... 34
Redemption of Managed Tax-Exempt Fund Shares................... 34
Dividends, Distributions and Taxes............................. 34
BUSINESS OF TAX-FREE BOND FUND.......................................... 34
Investment Objective and Policies.............................. 35
Trustees....................................................... 35
Investment Adviser and Distributor............................. 35
Expenses....................................................... 35
Custodian and Transfer Agent................................... 35
Tax-Free Bond Fund Shares...................................... 35
Purchase of Tax-Free Bond Fund Shares.......................... 35
Redemption of Tax-Free Bond Fund Shares........................ 35
Dividends, Distributions and Taxes............................. 36
EXPERTS ............................................................... 36
AVAILABLE INFORMATION................................................... 36
AGREEMENT AND PLAN OF REORGANIZATION.................................... B-1
-i-
<PAGE>
EXHIBITS
A - Prospectus of John Hancock Tax-Free Bond Fund, dated September 30, 1996
(included with this document).
B - Agreement and Plan of Reorganization by and between John Hancock Managed
Tax-Exempt Fund and John Hancock Tax-Free Bond Fund (attached to this
document).
C - Annual Report to Shareholders of John Hancock Tax-Free Bond Fund, dated
December 31, 1995 (included with this document).
D - Semi-annual Report to Shareholders of John Hancock Tax-Free Bond Fund,
dated June 30, 1996 (included with this document).
-ii-
<PAGE>
PROXY STATEMENT AND PROSPECTUS
FOR SPECIAL MEETING OF SHAREHOLDERS OF
JOHN HANCOCK MANAGED TAX-EXEMPT FUND
TO BE HELD ON NOVEMBER 14, 1996
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trustees of Freedom Investment Trust
(the "Trust") on behalf of Managed Tax-Exempt Fund (the "Board of Trustees").
The proxies will be voted at the Special Meeting of Shareholders (the "Meeting")
of Managed Tax-Exempt Fund to be held at 101 Huntington Avenue, Boston,
Massachusetts 02199 on Thursday, November 14, 1996 at 9:00 a.m., Boston time,
and at any adjournment or adjournments of the Meeting. The purposes of the
Meeting are set forth in the accompanying Notice of Special Meeting of
Shareholders.
This Proxy Statement and Prospectus incorporates by reference the
Prospectus of Managed Tax-Exempt Fund, dated March 1, 1996, as supplemented
August 27, 1996 (the "Managed Tax-Exempt Fund Prospectus"). It includes the
prospectus of Tax-Free Bond Fund, dated September 30, 1996 (the "Tax-Free Bond
Fund Prospectus"). The Managed Tax-Exempt Fund Prospectus is available upon
request. The Annual Report to Shareholders of Tax-Free Bond Fund, dated December
31, 1995, and the Semi-annual Report to Shareholders of John Hancock Tax-Free
Bond Fund, dated June 30, 1996, are included with this Proxy Statement and
Prospectus. These materials will be mailed to shareholders of Managed Tax-Exempt
Fund on or after October __, 1996. Managed Tax-Exempt Fund's Annual Report to
Shareholders and Semi-annual Report to Shareholders were previously sent to
shareholders of Managed Tax-Exempt Fund on or about December 31, 1995 and June
30, 1996, respectively.
As of September 20, 1996, _______ shares of beneficial interest of Managed
Tax-Exempt Fund were outstanding. Shareholders of record on September 20, 1996
(the "Record Date") are entitled to notice of and to vote at the Meeting.
All properly executed proxies received by management prior to the Meeting,
unless revoked, will be voted at the Meeting according to the instructions on
the proxies. If no instructions are given, shares of Managed Tax-Exempt Fund
represented by proxies will be voted FOR the proposal (the "Proposal") to
approve the Agreement and Plan of Reorganization (the "Agreement") between
Managed Tax-Exempt Fund and Tax-Free Bond Fund.
The Board of Trustees knows of no business to be presented for
consideration at the Meeting other than that mentioned in the immediately
preceding paragraph. If other business is properly brought before the Meeting,
proxies will be voted according to the best judgment of the persons named as
proxies.
1
<PAGE>
In addition to the mailing of these proxy materials, proxies may be
solicited in person or by telephone by Trustees, officers and employees of
Managed Tax-Exempt Fund; by personnel of Managed Tax-Exempt Fund's investment
adviser, John Hancock Advisers, Inc. (the "Adviser") and its transfer agent,
John Hancock Investor Services Corporation ("Investor Services"); or by
broker-dealer firms. Investor Services, together with a third party solicitation
firm, has agreed to provide proxy solicitation services to Managed Tax-Exempt
Fund at a cost of approximately $10,000.
Managed Tax-Exempt Fund and Tax-Free Bond Fund (each, a "Fund" and
collectively, the "Funds") will each bear its own fees and expenses in
connection with the Reorganization discussed in this Proxy Statement and
Prospectus.
The information concerning Managed Tax-Exempt Fund in this Proxy Statement
and Prospectus has been supplied by Managed Tax-Exempt Fund. The information
concerning Tax-Free Bond Fund in this Proxy Statement and Prospectus has been
supplied by Tax-Free Bond Fund.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus. The summary is qualified by reference to
the more complete information contained in this Proxy Statement and Prospectus,
and in the EXHIBITS attached to or included with this document. Please read this
entire Proxy Statement and Prospectus carefully.
REASONS FOR THE PROPOSED REORGANIZATION
The Trust's Board of Trustees, on behalf of Managed Tax-Exempt Fund, has
determined that the proposed Reorganization is in the best interests of Managed
Tax-Exempt Fund and its shareholders. In making this determination, the Trustees
considered several relevant factors, including (i) the fact that Tax-Free Bond
Fund is more widely recognized in the broker community as John Hancock's primary
national tax-exempt fund, making it increasingly difficult to attract assets to
Managed Tax-Exempt Fund, (ii) the fact that the investment objectives and
policies of the Funds are substantially similar, (iii) the fact that combining
the Funds' assets into a single portfolio will enable Tax-Free Bond Fund to
achieve greater diversification than either Fund is now able to achieve, (iv)
the fact that the Tax-Free Bond Fund Shares received in the Reorganization will
provide existing Managed Tax-Exempt Fund shareholders with substantially the
same investment advantages that they currently enjoy at a comparable level of
risk, and (v) the fact that there is a reasonable likelihood that the
2
<PAGE>
Reorganization may result in improved economies of scale over time and a
corresponding decrease in the total expenses borne by Managed Tax-Exempt Fund's
shareholders. For a more detailed discussion of the reasons for the proposed
Reorganization, see "Proposal to Approve the Agreement and Plan of
Reorganization--Reasons for the Proposed Reorganization."
THE FUNDS' EXPENSES
Both Funds and their shareholders are subject to various fees and expenses.
The two tables set forth below show the shareholder transaction and operating
expenses of Class A and Class B shares of the Funds and the effect of applicable
expense limitations. These expenses are based on fees and expenses incurred
during each Fund's most recently completed fiscal year and with respect to
Managed Tax-Exempt Fund adjusted to reflect operating expenses to June 30, 1996
and with respect to Tax-Free Bond Fund (Pro Forma) adjusted to reflect changes
to fees and expenses effective December 23, 1996.
Managed Tax-Exempt Fund
Class A Class B
Shares Shares
------ ------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(As a percentage of offering price)................. 4.50% None
Maximum sales charge imposed on reinvested
dividends........................................... None None
Maximum deferred sales charge........................... None(1) 5.00%
Redemption fee (2)...................................... None None
Exchange fee............................................ None None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management fee (after expense limitation) (3)........... 0.55% 0.55%
12b-1 fee (4)........................................... 0.30% 1.00%
Other expenses.......................................... 0.21% 0.21%
Total Fund operating expenses (after expense
limitation)(3)...................................... 1.06% 1.76%
(1) No sales charge is payable at the time of purchase on investments in Class
A shares of $1 million or more, but for these investments a contingent
deferred sales charge may be imposed in the event of certain redemption
transactions within one year of purchase.
(2) Does not include wire redemption fee (currently $4.00).
3
<PAGE>
(3) Reflects the Adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.60% for each class and total Fund
operating expenses would be 1.11% for Class A and 1.81% for Class B.
(4) The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average daily net assets, and the remaining portion
will be used to cover distribution expenses.
Tax-Free Bond Fund
Class A Class B
Shares Shares
------ ------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(As a percentage of offering price)................. 4.50% None
Maximum sales charge imposed on reinvested
dividends........................................... None None
Maximum deferred sales charge........................... None(1) 5.00%
Redemption fee (2)...................................... None None
Exchange fee............................................ None None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management fee ......................................... 0.55% 0.55%
12b-1 fee (3)........................................... 0.25% 1.00%
Other expenses.......................................... 0.29% 0.29%
Total Fund operating expenses (4)....................... 1.09% 1.84%
(1) No sales charge is payable at the time of purchase on investments in Class
A shares of $1 million or more, but for these investments a contingent
deferred sales charge may be imposed in the event of certain redemption
transactions within one year of purchase.
(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. Prior to
December 23, 1996, total Fund operating expenses are 0.99% for Class A and
1.74% 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 and total fund operating expenses are those shown in the table above.
4
<PAGE>
Tax-Free Bond Fund (Pro Forma)
The table set forth below shows the pro forma operating expenses of Class A
and Class B shares of Tax-Free Bond Fund which assumes (i) that the
Reorganization took place on June 30, 1996; (ii) that the Rule 12b-1 fee for
Class A shares is 0.25%; and (iii) that the Fund's distributor is paid the
entire amount of the Class B Rule 12b-1 fee. These expenses are based on fees
and expenses incurred during Tax-Free Bond Fund's most recently completed fiscal
year.
<PAGE>
Class A Class B
Shares Shares
------ ------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(As a percentage of offering price)................. 4.50% None
Maximum sales charge imposed on reinvested
dividends........................................... None None
Maximum deferred sales charge........................... None(1) 5.00%
Redemption fee (2)...................................... None None
Exchange fee............................................ None None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management fee (3)...................................... 0.53% 0.53%
12b-1 fee (4)........................................... 0.25% 1.00%
Other expenses.......................................... 0.24% 0.24%
Total Fund operating expenses (5)....................... 1.02% 1.77%
(1) No sales charge is payable at the time of purchase on investments in Class
A shares of $1 million or more, but for these investments a contingent
deferred sales charge may be imposed in the event of certain redemption
transactions within one year of purchase.
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects lower management fee rate applicable to the Fund's average daily
net assets in excess of $500,000,000 as of June 30, 1996.
(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.
(5) 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 0.92% for Class A and 1.67% for Class B.
5
<PAGE>
If the Reorganization is consummated, the actual total operating expenses
of Class A and Class B shares of Tax-Free Bond Fund may vary from the pro forma
operating expenses indicated above due to changes in the net asset values of
Managed Tax-Exempt Fund and/or Tax-Free Bond Fund between June 30, 1996 and the
Closing Date (defined below).
Example
The following example illustrates the expenses you would pay on a $1,000
investment under the existing fees for Class A and Class B shares of each of
Managed Tax-Exempt Fund and Tax-Free Bond Fund and under the pro forma fees if
the Reorganization had occurred on June 30, 1996. The example assumes (1) a 5%
annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
Class A Class B
Shares Shares Class A Class B Pro Pro
Managed Managed Shares Shares Forma Forma
Tax-Exempt Tax-Exempt Tax-Free Tax-Free Class A Class B
Fund Fund Bond Bond Shares Shares
---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1 year $ 55 $ 68 $ 56 $ 69 $ 55 $ 68
3 years 77 85 78 88 76 86
5 years 101 115 102 120 99 116
10 years 169 189 172 196 164 189
</TABLE>
Assuming there is no redemption at the end of each time period, the
expenses you would pay on the same investment would be as follows:
<TABLE>
<CAPTION>
Class B
Shares Class B Pro
Managed Shares Forma
Tax-Exempt Tax-Free Class B
Fund Bond Fund Shares
---- --------- ------
<S> <C> <C> <C>
1 year $ 18 $ 19 $ 18
3 years 55 58 56
5 years 95 100 96
10 years 189 196 189
</TABLE>
The purpose of this example and the tables set forth above is to help
you understand the various costs and expenses of investing in each of the Funds
and what the costs would be had the Reorganization already occurred. The example
above should not be considered a representation of future expenses of the Funds
or of Tax-Free Bond Fund after the Reorganization. Actual expenses may vary from
year to year and may be higher or lower than those shown above.
6
<PAGE>
THE FUNDS' INVESTMENT ADVISER
John Hancock Advisers, Inc. acts as investment adviser to both Funds.
BUSINESS OF MANAGED TAX-EXEMPT FUND
Managed Tax-Exempt Fund is a diversified open-end management investment
company organized as a series of the Trust, a Massachusetts business trust.
Managed Tax-Exempt Fund commenced operations in 1987. As of June 30, 1996,
Managed Tax-Exempt Fund's net assets were $198,981,567. Frank A. Lucibella has
been leader of the Fund's portfolio management team since joining the Adviser in
1988.
BUSINESS OF TAX-FREE BOND FUND
Tax-Free Bond Fund is a diversified open-end management investment company
organized as a series of Bond Trust, a Massachusetts business trust. Tax-Free
Bond Fund commenced operations in 1989. As of June 30, 1996, Tax-Free Bond
Fund's net assets were $650,489,968. Thomas C. Goggins has been leader of the
Fund's portfolio management team since joining the Adviser in April 1995. A
senior vice president of the Adviser, Mr. Goggins has been in the investment
business since 1986.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF MANAGED TAX-EXEMPT FUND AND
TAX-FREE BOND FUND
Each Fund's investment objective is fundamental and may not be changed
without shareholder approval.
In considering whether to approve the Reorganization, you should consider
any differences between the two Funds' investment policies. For a discussion of
the risks associated with an investment in the Funds, see "Risk Factors and
Special Considerations."
Managed Tax-Exempt Fund Tax-Free Bond Fund
----------------------- ------------------
Investment Objective: The Fund seeks to The Fund seeks as
provide as high a high a level of current
level of current income exempt from
income exempt from federal income tax as
federal income tax is consistent with
as is consistent preservation of capital.
with preservation
of capital, by
investing primarily
in municipal securities.
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<PAGE>
Primary Investments: The types of The types of
securities in which securities in which
the Fund may invest the Fund may invest
include: include:
(1) municipal securities (1) municipal bonds,
with varying maturities, notes and commercial
the interest from which paper, the interest on
is, in the opinion of which is exempt from
bond counsel for the federal income taxes,
issuer, exempt from including debt
federal income tax, obligations issued by or
including general on behalf of the states,
obligation and revenue territories and
bonds ("Municipal possessions of the United
Securities") and States; the District of
short-term municipal Columbia; and the
securities consisting of political subdivisions,
short-term municipal agencies or
notes and short-term instrumentalities thereof
municipal loans and ("Municipal Bonds"); and
obligations, including
municipal paper, master
demand notes and variable
rate demand notes
("Short-Term
Municipals"); and
(2) cash, receivables and (2) private activity
short-term taxable bonds (the interest on
investments such as (a) which may be treated as a
U.S. Treasury tax preference item under
obligations, (b) the federal alternative
obligations of agencies minimum tax) and in
and instrumentalities of taxable and tax-free
the U.S. Government and investment grade
(c) money market short-term securities
instruments ("Short-Term ("Short-Term
Taxable Investments"). Securities").
8
<PAGE>
Investment Policies: (1) At least 80% of the (1) At least 80% of the
Fund's total assets will Fund's total assets will
consist of Municipal be invested in Municipal
Securities. Bonds.
(2) At least 65% of the (2) At least 65% of the
Fund's investments in (a) Fund's assets will
Municipal Securities will normally be invested in
be rated investment grade Municipal Bonds rated at
by Moody's Investors least investment grade by
Service, Inc. an NRSRO or, if not
("Moody's"), by Standard rated, determined by the
and Poor's Ratings Group Adviser to be of
("S&P") or by Fitch comparable quality.
Investor Services, Inc.
("Fitch") (each, an
"NRSRO") or, if not
rated, determined by the
Adviser to be of
comparable quality and
(b) Short-Term Municipals
will be rated within the
three highest ratings by
an NRSRO.
(3) No more than 20% of (3) No more than 20% of
the Fund's total assets the Fund's total assets
will consist of will be invested in
Short-Term Taxable Short-Term Securities
Investments; and no more (except that, for
than 25% of the Fund's temporary defensive
total assets will be purposes, up to 100% of
invested in Short-Term the Fund's total assets
Municipals. may be invested in
Short-Term Securities).
(4) Up to 35% of the (4) Up to 35% of the
Fund's total assets may Fund's total assets may
(subject to Trustee be invested in Municipal
approval) be invested Bonds rated B or better
by
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<PAGE>
in Tax-Exempt Bonds rated an NRSRO or, if unrated,
B or better by an NRSRO. determined by the Adviser
to be of comparable
quality.
(5) The Fund reserves the (5) No more than 25% of
right to invest more than the Fund's total assets
25% of its assets in may be invested in
industrial development industrial development or
bonds or in issuers pollution control bonds
located in any particular which are dependent,
state. directly or indirectly,
on the revenues or credit
of private entities in
any one industry.
(6) There is no limit on (6) There is no limit on
the Fund's average the Fund's average
portfolio maturity. portfolio maturity.
Investment The investment restrictions applicable to Tax-Free Bond
Restrictions: Fund are substantially similar to or more restrictive
than those of Managed Tax-Exempt Fund, except as noted
below:
(1) The Fund may not (1) The Fund may not
borrow money, except from borrow money, except from
banks as a temporary banks as a temporary or
measure and not to exceed emergency measure and not
10% of the Fund's total to exceed 15% of the
assets. Fund's total assets.
(2) The Fund may not lend (2) The Fund may lend
portfolio securities. portfolio securities in
an amount not exceeding
33 1/3% of the Fund's
total assets.
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<PAGE>
Other Investments: The Fund may purchase The Fund may purchase
restricted and illiquid tax-exempt participation
securities, enter into interests and municipal
repurchase agreements, lease obligations, lend
purchase securities on a its portfolio securities,
forward commitment or enter into repurchase
when-issued basis, agreements and reverse
acquire stand-by repurchase agreements,
commitments, write listed purchase restricted and
and over-the-counter illiquid securities,
covered call and put purchase securities on a
options on securities, when-issued or forward
securities indices and commitment basis, buy and
currency up to 100% of sell futures contracts
its net assets and and related options and
purchase listed and purchase options on
over-the-counter call and securities and securities
put options on indices, invest in
securities, securities variable and floating
indices and currency, rate instruments, swaps,
invest in variable rate caps, floors and collars
and floating rate and engage in short-term
obligations and engage in trading.
short-term trading.
FORM OF ORGANIZATION
Managed Tax-Exempt Fund is a series of the Trust, a Massachusetts business
trust organized in 1984. Tax-Free Bond Fund is a series of Bond Trust, a
Massachusetts business trust organized in 1989. Both Funds have authorized and
outstanding Class A and Class B shares. After the Reorganization, Managed
Tax-Exempt Fund's Class A and Class B shareholders will become Class A and Class
B shareholders, respectively, of Tax-Free Bond Fund.
Each share of a class of each Fund represents an equal proportionate
interest in the assets belonging to that class of such Fund. The shares of each
Fund's classes represent an interest in the same portfolio of investments of
that Fund. Except as stated below, each Fund's classes have equal rights as to
voting, redemption, dividends and liquidation. Each class bears different
distribution fees and may bear other expenses properly attributable to that
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<PAGE>
class. Shareholders of each Fund's classes have exclusive voting rights with
respect to the Rule 12b-1 distribution plan relating to their respective class
of shares.
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES
Sales Charges. Both Funds impose an initial sales charge on Class A shares
as described above in the table under the caption "The Funds' Expenses." An
initial sales charge does not apply to Class A shares acquired through the
reinvestment of dividends from net investment income or capital gain
distributions.
Tax-Free Bond Fund Class A Shares acquired by Managed Tax-Exempt Fund's
Class A shareholders pursuant to the Reorganization will not be subject to any
initial sales charge or contingent deferred sales charge ("CDSC") at the time of
the Reorganization.
Tax-Free Bond Fund and Managed Tax-Exempt Fund do not impose an initial
sales charge on Class B shares. However, Class B shares redeemed within six
years of purchase will be subject to a CDSC at the rates set forth below. This
CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the Class B shares being redeemed.
Accordingly, Class B shareholders will not be assessed a CDSC on an increase in
account value above the initial purchase price, including shares derived from
reinvested dividends. The amount of the CDSC, if any, will vary depending on the
number of years from the time the Class B shares were purchased until the time
they are redeemed, as follows:
Year in Which Class B The CDSC as a Percentage
Shares Redeemed of Dollar Amount
Following Purchase Subject to CDSC
------------------ ---------------
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
Class B shares of Tax-Free Bond Fund acquired by Managed Tax-Exempt Fund's
Class B shareholders pursuant to the Reorganization will not be subject to any
CDSC at the time of the Reorganization, but will remain subject to any CDSC
applicable upon redemption of these shares. For purposes of computing the CDSC
payable upon redemption of Class B shares of Tax-Free Bond Fund acquired
pursuant to the Reorganization and the schedule for automatic conversion of
Class B shares into Class A shares, the holding period of the Managed Tax-Exempt
Fund Class B shares will be added to that of the Tax-Free Bond Fund Class B
shares acquired in the Reorganization.
12
<PAGE>
Distribution and Service Fees. Both Funds have adopted distribution plans
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Under these plans, each Fund may pay fees to John
Hancock Funds, Inc. ("John Hancock Funds") to reimburse distribution and service
expenses incurred in connection with the Funds' Class A shares. With respect to
Managed Tax-Exempt Fund Class A shares, these fees are payable at an annual rate
of up to 0.30% of the average daily net assets of the Fund attributable to Class
A shares. With respect to Tax-Free Bond Fund Class A shares, these fees are
payable at an annual rate of up to 0.15% of the average daily net assets of the
Fund attributable to Class A shares. Of the fee payable by each Fund, up to
0.25% and 0.15%, respectively, of the net assets of Managed Tax-Exempt Fund and
Tax-Free Bond Fund attributable to Class A shares may be used for service
expenses and any remainder for distribution expenses. The fee with respect to
Tax-Free Bond Fund Class A shares will increase to 0.25% on December 23, 1996,
as approved by the shareholders of Tax-Free Bond Fund at their June 1996 special
meeting of shareholders.
In addition, under the plans, each Fund may pay fees to John Hancock Funds
to reimburse it for distribution and service expenses incurred in connection
with Class B shares. With respect to Managed Tax-Exempt Fund's Class B shares,
these fees are payable at an annual rate of up to 1.00% of the average daily net
assets of the Fund attributable to Class B shares. With respect to Tax-Free Bond
Fund Class B shares, these fees are also payable at an annual rate of up to
1.00% of the average daily net assets of the Fund attributable to Class B
shares; however, the Fund and John Hancock Funds have agreed to limit the
payment of expenses pursuant to the Tax-Free Bond Fund's Class B plan to 0.90%.
Of the fee payable by each Fund, up to 0.25% of the net assets of each Fund
attributable to Class B shares may be used for service expenses and the
remainder for distribution expenses. The agreement with John Hancock Funds to
limit the payment of Class B Rule 12b-1 fees to 0.90% will terminate on December
23, 1996, after which the fee with respect to Tax-Free Bond Fund Class B shares
will increase to 1.00%.
PURCHASES AND EXCHANGES
Shares of each Fund may be purchased through certain broker-dealers and
through John Hancock Funds at the public offering price, which is based on the
next determined net asset value per share, plus any applicable sales charge. The
minimum initial investment in shares of each Fund is $1,000 ($250 for group
investments and retirement plans). In anticipation of the Reorganization, after
the Record Date, no new accounts may be opened in Managed Tax-Exempt Fund,
except for participants in existing Qualified Retirement Plans. Existing
shareholders of Managed Tax-Exempt Fund may continue to acquire shares
13
<PAGE>
of the Fund after the Record Date by direct purchase, through a monthly
automatic accumulation plan or through the reinvestment of dividends and
distributions.
Shareholders of each Fund may exchange their shares at net asset value for
shares of the same class, if applicable, of other John Hancock funds. For this
purpose, the shares of John Hancock funds with only one class of shares are
treated as Class A shares whether or not they have been so designated. Shares of
any fund acquired by exchange that are subject to a CDSC will incur the CDSC
upon redemption. The rate of this charge will be the rate in effect for the
exchanged shares at the time of the exchange (except that exchanges into John
Hancock Short-Term Strategic Fund, John Hancock Limited Term Government Fund and
John Hancock Intermediate Maturity Government Fund will be subject to the
initial fund's CDSC). The exchange privilege is available only in states where
the exchange can be made legally.
MANAGEMENT FEES
Managed Tax-Exempt Fund pays management fees to the Adviser as follows:
Net Asset Value Annual Rate
--------------- -----------
First $250,000,000 0.60%
Next $500,000,000 0.50%
Amount over $750,000,000 0.45%
<PAGE>
During the fiscal year ended October 31, 1995, Managed Tax-Exempt Fund paid
investment management fees of $1,247,519 to the Adviser.
Tax-Free Bond Fund pays management fees to the Adviser 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%
During the fiscal year ended December 31, 1995, Tax-Free Bond Fund paid
investment management fees of $839,913 to the Adviser. After the Reorganization
is completed, the assets of Tax-Free Bond Fund attributable to Managed
Tax-Exempt Fund will be subject to a lower management fee rate, although the
Fund asset breakpoints will be higher. At the projected asset size of Tax-Free
Bond Fund after the Reorganization, the management fees attributable to Managed
Tax-Exempt Fund will be very slightly decreased.
14
<PAGE>
DISTRIBUTION PROCEDURES
It is the policy of both Funds to declare dividends daily and to pay
dividends monthly from net investment income. Each Fund also distributes
annually all of its other net income, including any net short-term and long-term
capital gains it has realized. Managed Tax-Exempt Fund will make, immediately
prior to the Closing Date (as defined below), a distribution of any net income
and net realized capital gains it has not yet distributed.
REINVESTMENT OPTIONS
Unless an election is made to receive cash, the shareholders of both Funds
automatically reinvest all of their respective dividends and capital gain
distributions in additional shares of the same class of the same Fund. These
reinvestments are made at the net asset value per share and are not subject to
any sales charge.
REDEMPTION PROCEDURES
Shares of both Funds may be redeemed on any business day at a price equal
to the net asset value of the shares next determined after receipt of a
redemption request in good order, less any applicable CDSC. Alternatively,
shareholders of both Funds may sell their shares through securities dealers, who
may charge a fee. Redemptions and repurchases of Class B shares and certain
Class A shares of each Fund are subject to the applicable CDSC, if any. Class A
and Class B shares of Managed Tax-Exempt Fund may be redeemed up to and
including the Closing Date (as defined below).
REORGANIZATION
Effect of the Reorganization. Pursuant to the terms of the Agreement, the
proposed Reorganization will consist of the acquisition by Tax-Free Bond Fund of
all the assets of Managed Tax-Exempt Fund in exchange solely for (i) the
assumption by Tax-Free Bond Fund of all the liabilities of Managed Tax-Exempt
Fund and (ii) the issuance of Tax-Free Bond Fund Class A and Class B Shares
equal to the value of these assets, less the amount of these liabilities, to
Managed Tax-Exempt Fund. As part of the liquidation process, Managed Tax-Exempt
Fund will immediately distribute to its shareholders these Tax-Free Bond Fund
Shares in exchange for their shares of Managed Tax-Exempt Fund. Consequently,
Class A shareholders of Managed Tax-Exempt Fund will become Class A shareholders
of Tax-Free Bond Fund and Class B shareholders of Managed Tax-Exempt Fund will
become Class B shareholders of Tax-Free Bond Fund. After completion of the
Reorganization, the existence of Managed Tax-Exempt Fund as a series of the
Trust will be terminated.
15
<PAGE>
The Reorganization will become effective as of 5:00 p.m. on the closing
date, scheduled for December 6, 1996, or another date on or before _____________
as authorized representatives of the Funds may agree (the "Closing Date"). The
Tax-Free Bond Fund Class A shares issued to Managed Tax-Exempt Fund for
distribution to Managed Tax-Exempt Fund's Class A shareholders will have an
aggregate net asset value equal to the aggregate net asset value of Managed
Tax-Exempt Fund's Class A shares. Similarly, the Tax-Free Bond Fund Class B
shares issued to Managed Tax-Exempt Fund for distribution to Managed Tax-Exempt
Fund's Class B shareholders will have an aggregate net asset value equal to the
aggregate net asset value of Managed Tax-Exempt Fund's Class B shares. For
purposes of the Reorganization, the Funds' respective asset values will be
determined as of the close of business (4:00 p.m. Eastern Time) on the Closing
Date.
The Board of Trustees of the Trust on behalf of Managed Tax-Exempt Fund,
including the trustees who are not "interested persons" of either Fund or the
Adviser (the "Independent Trustees"), approved the Reorganization, and
determined that it was in the best interests of Managed Tax-Exempt Fund and that
the interests of Managed Tax-Exempt Fund's shareholders would not be diluted as
a result of the Reorganization. Similarly, the Board of Trustees of Bond Trust,
on behalf of Tax-Free Bond Fund, including the Trustees not affiliated with
either Fund or the Adviser, approved the Reorganization, and determined that it
was in the best interests of Tax-Free Bond Fund and that the interests of
Tax-Free Bond Fund's shareholders would not be diluted as a result of the
Reorganization.
TAX CONSIDERATIONS
The consummation of the Reorganization is subject to the receipt of an
opinion of Hale and Dorr, counsel to the Funds, satisfactory to each Fund, which
will provide generally (as more specifically set forth in the Agreement) that
with respect to the transfers and exchanges comprising the Reorganization:
(a) The acquisition by Tax-Free Bond Fund of all of the assets of Managed
Tax-Exempt Fund will constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and
Managed Tax-Exempt Fund and Tax-Free Bond Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code;
(b) no gain or loss will be recognized by Managed Tax-Exempt Fund upon (i)
the transfer of all of its assets to Tax-Free Bond Fund and (ii) the
distribution by Managed Tax-Exempt Fund of the Tax-Free Bond Fund Shares
received in exchange for these assets to the shareholders of Managed Tax-Exempt
Fund;
16
<PAGE>
(c) no gain or loss will be recognized by Tax-Free Bond Fund upon the
receipt of Managed Tax-Exempt Fund's assets;
(d) the basis of the assets of Managed Tax-Exempt Fund acquired by Tax-Free
Bond Fund will remain the same as immediately prior to the transfer;
(e) the tax holding period of the assets of Managed Tax-Exempt Fund in the
hands of Tax-Free Bond Fund will include Managed Tax-Exempt Fund's tax holding
period for those assets;
(f) the shareholders of Managed Tax-Exempt Fund will not recognize gain or
loss upon the exchange of their shares of Managed Tax-Exempt Fund solely for
Tax-Free Bond Fund Shares in the Reorganization;
(g) the basis of the Tax-Free Bond Fund Shares received by Managed
Tax-Exempt Fund shareholders in the Reorganization will be the same as the basis
of their Managed Tax-Exempt Fund shares; and
(h) the tax holding period of the Tax-Free Bond Fund Shares received by
Managed Tax-Exempt Fund shareholders will include the tax holding period of
their Managed Tax-Exempt Fund shares that were held as capital assets.
THE MEETING
Time, Place and Date. The Meeting will be held on Thursday, November 14,
1996, at 101 Huntington Avenue, Boston, Massachusetts 02199, at 9:00 a.m.,
Boston time.
RECORD DATE
The Record Date for determining shareholders entitled to notice of and to
vote at the Meeting is September 20, 1996.
VOTE REQUIRED
Approval of the Agreement by the shareholders of Managed Tax-Exempt Fund
requires the affirmative vote of a majority of the shares of Managed Tax-Exempt
Fund outstanding and entitled to vote. For this purpose, a majority of the
outstanding shares of Managed Tax-Exempt Fund means the vote of the lesser of
(i) 67% or more of the shares present at the Meeting, if the holders of more
than 50% of the shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The Reorganization does not
require the approval of Tax-Free Bond Fund's shareholders. See "Proposal to
Approve the Agreement and Plan of Reorganization--Voting Rights and Required
Vote."
17
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please see the Tax-Free Bond Fund Prospectus and the Managed Tax-Exempt
Fund Prospectus for a more complete description of each Fund's investment
objectives and policies, as well as their risk factors. In deciding whether to
approve the Reorganization, you should consider the similarities and differences
between the Funds' investment objectives, policies and risk factors.
The investment objectives and policies of the Funds are substantially
similar. For this reason, the risks associated with an investment in the Funds
are substantially similar. Each Fund invests primarily in municipal bonds and
other securities whose interest is exempt from Federal income taxes. Under
normal circumstances, at least 80% of each Fund's total assets will be invested
in these securities.
At least 65% of Tax-Free Bond Fund's total assets will normally be invested
in municipal bonds rated at least investment grade by an NRSRO. Municipal notes
and municipal commercial paper must be similarly rated by an NRSRO. Up to 35% of
Tax-Free Bond Fund's total assets may be invested in municipal bonds rated B or
better by an NRSO. If the Fund's investments are unrated, the Adviser must
determine that they are of comparable credit quality to the ratings described
above. The Fund may retain any of these instruments if their ratings are
downgraded below permissible ratings until the Adviser determines that disposing
of them is in the Fund's best interests. Municipal bonds that are rated at the
lowest level of investment grade have some speculative characteristics and may
pose greater risks involving the issuer's ability to make interest and principal
payments than those associated with higher rated securities.
Under normal circumstances, at least 65% of Managed Tax-Exempt Fund's total
assets will be invested in (i) municipal securities rated at least investment
grade by an NRSRO or (ii) short-term municipal securities rated within the three
highest rating categories of an NRSRO. If these investments are unrated, the
Adviser must determine that they are of equivalent quality. Up to 35% of Managed
Tax-Exempt Fund's total assets may (subject to Trustee approval) be invested in
tax-exempt bonds rated B or better by an NRSRO.
18
<PAGE>
INFORMATION CONCERNING THE MEETING
SOLICITATION, REVOCATION AND USE OF PROXIES
A majority of Managed Tax-Exempt Fund's outstanding shares that are
entitled to vote will be considered a quorum for the transaction of business. A
Managed Tax-Exempt Fund shareholder executing and returning a proxy has the
power to revoke it at any time before it is exercised, by filing a written
notice of revocation with Managed Tax-Exempt Fund's transfer agent, Investor
Services, P.O. Box 9116, Boston, Massachusetts 02205-9116, or by returning a
duly executed proxy with a later date before the time of the Meeting. Any
shareholder who has executed a proxy but is present at the Meeting and wishes to
vote in person may revoke his or her proxy by notifying the Secretary of Managed
Tax-Exempt Fund (without complying with any formalities) at any time before it
is voted. Presence at the Meeting alone will not serve to revoke a previously
executed and returned proxy.
If a quorum is not present in person or by proxy at the time any session of
the Meeting is called to order, the persons named as proxies may vote those
proxies that have been received to adjourn the Meeting to a later date. If a
quorum is present but there are not sufficient votes in favor of the Proposal,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies with respect to the Proposal. Any
adjournment will require the affirmative vote of a majority of the shares of
Managed Tax-Exempt Fund, represented in person or by proxy, at the session of
the Meeting to be adjourned. If an adjournment of the Meeting is proposed
because there are not sufficient votes in favor of the Reorganization, the
persons named as proxies will vote those proxies in favor of the Reorganization
in favor of adjournment, and will vote those proxies against the Reorganization
against adjournment.
In addition to the solicitation of proxies by mail or in person, Managed
Tax-Exempt Fund may also arrange to have votes recorded by telephone by officers
and employees of the Fund or by personnel of the Adviser or Investor Services.
Investor Services may engage a proxy solicitation firm to assist in the
solicitation of votes. The telephone voting procedure is designed to
authenticate a shareholder's identity, to allow a shareholder to authorize the
voting of shares in accordance with the shareholder's instructions and to
confirm that the voting instructions have been properly recorded. If these
procedures were subject to a successful legal challenge, these telephone votes
would not be counted at the Meeting. The Fund has not sought to obtain an
opinion of counsel on this matter and is unaware of any challenge at this time.
A shareholder will be called on a recorded line at the telephone number in the
Fund's account records and will be asked the shareholder's Social Security
19
<PAGE>
number or other identifying information. The shareholder will then be given an
opportunity to authorize proxies to vote his or her shares at the Meeting in
accordance with the shareholder's instructions. To ensure that the shareholder's
instructions have been recorded correctly, the shareholder will also receive a
confirmation of the voting instructions in the mail. A special toll-free number
will be available in case the voting information contained in the confirmation
is incorrect. If the shareholder decides after voting by telephone to attend the
Meeting, the shareholder can revoke the proxy at that time and vote the shares
at the Meeting.
OUTSTANDING SHARES
At the close of business on September 20, 1996 ________ Class A and Class B
shares of beneficial interest of Managed Tax-Exempt Fund were outstanding and
entitled to vote. Only Managed Tax-Exempt Fund shareholders of record at the
close of business on September 20, 1996 (the "Record Date") are entitled to
notice of and to vote at the Meeting and any adjournment of the Meeting. As of
September 20, 1996, _______ Class A and Class B shares of beneficial interest of
Tax-Free Bond Fund were outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MANAGED
TAX-EXEMPT FUND AND TAX-FREE BOND FUND
To the knowledge of Managed Tax-Exempt Fund, as of September 20, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class A shares of beneficial interest of Managed Tax-Exempt Fund:
_____________________.
To the knowledge of Managed Tax-Exempt Fund, as of September 20, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class B shares of beneficial interest of Managed Tax-Exempt Fund:
____________________.
To the knowledge of Tax-Free Bond Fund, as of September 20, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class A shares of beneficial interest of Tax-Free Bond Fund:____ .
To the knowledge of Tax-Free Bond Fund, as of September 20, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class B shares of beneficial interest of Tax-Free Bond Fund:____ .
The percentage of the outstanding Class A and Class B shares of Tax-Free
Bond Fund owned by the above shareholders will not change as a result of the
Reorganization.
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<PAGE>
As of September 20, 1996, the Trustees and officers of Managed Tax-Exempt
Fund, as a group, owned in the aggregate less than 1% of the outstanding shares
of beneficial interest of Managed Tax-Exempt Fund. As of September 20, 1996, the
Trustees and officers of Tax-Free Bond Fund, as a group, owned in the aggregate
less than 1% of the outstanding Class A and Class B shares of beneficial
interest of Tax-Free Bond Fund.
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
GENERAL
The shareholders of Managed Tax-Exempt Fund are being asked to approve the
Agreement, a copy which is attached as EXHIBIT B. The Reorganization will
consist of: (a) the transfer of all of Managed Tax-Exempt Fund's assets to
Tax-Free Bond Fund, in exchange solely for the issuance of Tax-Free Bond Fund
Shares to Managed Tax-Exempt Fund and the assumption of Managed Tax-Exempt
Fund's liabilities by Tax-Free Bond Fund, (b) the subsequent distribution by
Managed Tax-Exempt Fund, as part of its liquidation, of the Tax-Free Bond Fund
Shares to Managed Tax-Exempt Fund's shareholders and (c) the termination of
Managed Tax-Exempt Fund's existence as a series of the Trust. The Tax-Free Bond
Fund Class A shares issued upon the consummation of the Reorganization will have
an aggregate net asset value equal to the aggregate net asset value of the
assets attributable to Managed Tax-Exempt Fund's Class A shares, less
liabilities attributable to Managed Tax-Exempt Fund's Class A shares. Similarly,
the Tax-Free Bond Fund Class B shares issued upon the consummation of the
Reorganization will have an aggregate net asset value equal to the aggregate net
asset value of the assets attributable to Managed Tax-Exempt Fund's Class B
shares, less liabilities attributable to Managed Tax-Exempt Fund's Class B
shares. As noted above, the asset values of Managed Tax-Exempt Fund and Tax-Free
Bond Fund will be determined at the close of business (4:00 p.m. Eastern Time)
on the Closing Date for purposes of the Reorganization. See "Description of
Agreement" below.
Pursuant to the Agreement, Managed Tax-Exempt Fund will liquidate and
distribute the Tax-Free Bond Fund Shares received, as described above, pro rata
to the shareholders of record of each class determined as of the close of
regular trading on the New York Stock Exchange on the Closing Date. The result
of the transfer of assets will be that Tax-Free Bond Fund will add to its
portfolio the net assets of Managed Tax-Exempt Fund. Class A shareholders of
Managed Tax-Exempt Fund will become Class A shareholders of Tax-Free Bond Fund,
and Class B shareholders of Managed Tax-Exempt Fund will become Class B
shareholders of Tax-Free Bond Fund.
21
<PAGE>
The Agreement and the Reorganization were approved by the Board of Trustees
of the Trust on behalf of Managed Tax-Exempt Fund at a meeting held on August
27, 1996. The Agreement and the Reorganization were approved by the Board of
Trustees of Bond Trust, on behalf of Tax-Free Bond Fund, at a meeting held on
September 10, 1996. In connection with their approval of the Reorganization, the
Boards of Trustees considered several matters described in greater detail below
under the caption "Reasons for the Proposed Reorganization."
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Trustees of the Trust on behalf of Managed Tax-Exempt Fund
believes that the proposed Reorganization will be advantageous to the
shareholders of Managed Tax-Exempt Fund in several respects. The Board of
Trustees considered the following matters, among others, in approving the
Proposal.
First, the Board of Trustees considered the fact that Tax-Free Bond Fund is
more widely recognized in the broker community as John Hancock's primary
national tax-exempt fund, making it increasingly difficult to attract assets to
Managed Tax-Exempt Fund.
Second, the Board of Trustees believes that it is not advantageous to
operate and market Managed Tax-Exempt Fund separately from Tax-Free Bond Fund
because their investment objectives and policies are substantially similar. By
being offered simultaneously, each Fund hinders the other Fund's potential for
asset growth. For a complete description of Tax-Free Bond Fund's investment
objectives and policies, see the Tax-Free Bond Fund Prospectus included as
EXHIBIT A.
Third, the Board of Trustees considered that shareholders may be better
served by a fund offering greater diversification. To the extent that the Funds'
assets are combined into a single portfolio and a larger asset base is created
as a result of the Reorganization, greater diversification of Tax-Free Bond
Fund's investment portfolio can be achieved than is currently possible in either
Fund. Greater diversification is expected to be beneficial to shareholders of
both Funds because it may reduce the negative effect which the adverse
performance of any one security may have on the performance of the entire
portfolio.
Fourth, the Board of Trustees believes that the Tax-Free Bond Fund Shares
received in the Reorganization will provide existing Managed Tax-Exempt Fund
shareholders with substantially the same investment advantages that they
currently enjoy at a comparable level of risk. The Board of Trustees also
considered the performance history of each Fund.
22
<PAGE>
Fifth, a combined fund offers economies of scale that should have a
positive effect on the expenses currently borne by Managed Tax-Exempt Fund, and
hence, indirectly, its shareholders. Both Funds incur substantial costs for
accounting, legal, transfer agency services, insurance, and custodial and
administrative services. However, the Board also noted that Managed Tax-Exempt
Fund has been unable recently to attract investors and this may result over time
in a decrease of economies of scale and an increase in the Fund's total
operating expenses. The Board of Trustees reasonably concluded that the
Reorganization may produce economies of scale for the surviving fund that could
result in a decrease over time in the expenses borne indirectly by all of
Managed Tax-Exempt Fund's shareholders. See expense information in "Summary--the
Funds' Expenses."
The Board of Trustees of Tax-Free Bond Fund considered the fact that, from
the perspective of Tax-Free Bond Fund, the Reorganization presents an excellent
opportunity to acquire assets without the obligation to pay commissions or other
similar costs that are normally associated with the purchase of securities. This
opportunity provides an economic benefit to Tax- Free Bond Fund and its
shareholders.
The Boards of Trustees of both Boards also considered the fact that the
Adviser and John Hancock Funds will receive certain benefits from the
Reorganization. The consolidated portfolio management effort might result in
time savings for the Adviser and the preparation of fewer prospectuses, reports
and regulatory filings. The Trustees, however, believe that this consideration
will not amount to a significant economic benefit.
CAPITAL LOSS CARRYOVERS
As of October 31, 1995, Managed Tax-Exempt Fund had no capital loss
carryovers.
UNREIMBURSED DISTRIBUTION AND SHAREHOLDER SERVICE EXPENSES
The Board of Trustees of Tax-Free Bond Fund has determined that, if the
Reorganization is consummated, distribution and shareholder service expenses
incurred in connection with shares of Managed Tax-Exempt Fund, and not
reimbursed under Managed Tax-Exempt Fund's Rule 12b-1 Plans or through CDSCs,
will be reimbursable expenses under Tax-Free Bond Fund's Rule 12b-1 Plans (the
"assumption"). However, the maximum aggregate amounts payable during any fiscal
year under Tax-Free Bond Fund's Rule 12b-1 Plans (0.25% of average daily net
assets attributable to Class A shares (0.15% until December 23, 1996)) and 1.00%
23
<PAGE>
of average daily net assets attributable to Class B shares (0.90% until December
23,1996)) will not be affected by the assumption.
With respect to Tax-Free Bond Fund's Class A and Class B shares, the
percentage of net assets on a pro forma combined basis that the unreimbursed
expenses represent will decrease as a result of the Reorganization and the
assumption. As of June 30, 1996 the unreimbursed distribution and shareholder
service expenses of Tax-Free Bond Fund attributable to Class A and Class B
shares were $774,023 (0.14%) of Tax-Free Bond Fund's net assets attributable to
Class A shares and $3,712,548 (4.58%) of Tax-Free Bond Fund's net assets
attributable to Class B shares. As of the same date, the unreimbursed
distribution and shareholder service expenses of Managed Tax-Exempt Fund
attributable to Class A and Class B shares were $58,226 (0.15%) of Managed
Tax-Exempt Fund's net assets attributable to Class A shares and $6,422,292
(4.03%) of Managed Tax-Exempt Fund's net assets attributable to Class B shares.
After the Reorganization on a pro forma combined basis, the unreimbursed
distribution and shareholder service expenses of Tax-Free Bond Fund attributable
to Class A and Class B shares will be $832,249 (0.14% of Tax-Free Bond Fund's
pro forma net assets attributable to Class A shares) and $10,134,840 (4.22% of
Tax-Free Bond Fund's pro forma net assets attributable to Class B shares),
respectively.
The assumption will have no immediate effect upon the payments made under
Tax-Free Bond Fund's Rule 12b-1 Plans. While John Hancock Funds hopes to recover
unreimbursed distribution and shareholder service expenses over an extended
period of time, Tax-Free Bond Fund is not obligated to assure that these amounts
are recouped by John Hancock Funds.
Unreimbursed distribution and shareholder service expenses do not currently
appear as an expense or liability in the financial statements of either Fund,
nor will they appear in the financial statements of Tax-Free Bond Fund after the
Reorganization until paid or accrued. Even in the event of termination or
noncontinuance of Tax-Free Bond Fund's Rule 12b-1 Plans, Tax- Free Bond Fund is
not legally committed, and is not required to commit, to the payment of any
unreimbursed distribution and shareholder service expenses. For this reason,
unreimbursed expenses do not enter into the calculation of a Fund's net asset
value or the formula for calculating Rule 12b-1 payments. The staff of the SEC
has not approved or disapproved the treatment of the unreimbursed distribution
and shareholder service expenses described in this Proxy Statement.
24
<PAGE>
BOARDS' EVALUATION AND RECOMMENDATION
On the basis of the factors described above and other factors, the Board of
Trustees of the Trust on behalf of Managed Tax-Exempt Fund, including a majority
of the Trustees who are not "interested persons" (as defined in the Investment
Company Act) of the Funds, determined that the Reorganization is in the best
interests of Managed Tax-Exempt Fund and that the interests of Managed
Tax-Exempt Fund's shareholders will not be diluted as a result of the
Reorganization. On the same basis, the Board of Trustees of Bond Trust, on
behalf of Tax-Free Bond Fund, including a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act) of the Funds,
determined that the Reorganization is in the best interests of Tax-Free Bond
Fund and that the interests of Tax-Free Bond Fund's shareholders will not be
diluted as a result of the Reorganization.
THE TRUSTEES OF JOHN HANCOCK MANAGED TAX-EXEMPT FUND RECOMMEND THAT THE
SHAREHOLDERS OF JOHN HANCOCK MANAGED TAX-EXEMPT FUND VOTE FOR THE PROPOSAL TO
APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
DESCRIPTION OF AGREEMENT
The following description of the Agreement is a summary, does not purport
to be complete, and is subject in all respects to the provisions of the
Agreement, and is qualified in its entirety by reference to the Agreement. A
copy of the Agreement is attached to this Proxy Statement and Prospectus as
EXHIBIT B and should be read in its entirety. Paragraph references are to
appropriate provisions of the Agreement.
Method of Carrying Out Reorganization. If Managed Tax-Exempt Fund
shareholders approve the Agreement, the Reorganization will be consummated
promptly after the various conditions to the obligations of each of the parties
are satisfied (see Agreement, paragraphs 1 through 3). The Reorganization will
be completed on the Closing Date (as defined above).
On the Closing Date, Managed Tax-Exempt Fund will transfer all of its
assets to Tax-Free Bond Fund in exchange for Tax-Free Bond Fund Shares with an
aggregate net asset value equal to the value of the assets delivered, less the
liabilities of Managed Tax-Exempt Fund assumed, as of the close of business on
the Closing Date (see Agreement, paragraphs 1 and 2).
The value of Managed Tax-Exempt Fund's assets and Tax-Free Bond Fund's net
asset values per Class A share and per Class B share will be determined
according to the valuation procedures set forth in the Trust's Declaration of
Trust and By-Laws and in the Tax-Free Bond Fund Prospectus, respectively (see
"Your Account; Transaction Policies--Valuation of Shares" in the Tax-Free Bond
25
<PAGE>
Fund Prospectus). No initial sales charge or CDSC will be imposed upon delivery
of the Tax-Free Bond Fund Shares in exchange for the assets of Managed
Tax-Exempt Fund.
Surrender of Share Certificates. Managed Tax-Exempt Fund shareholders whose
shares are represented by one or more share certificates should, prior to the
Closing Date, either surrender their certificates to Managed Tax-Exempt Fund or
deliver to Managed Tax-Exempt Fund an affidavit with respect to lost
certificates, in the form and accompanied by the surety bonds that Managed
Tax-Exempt Fund may require (collectively, an "Affidavit"). On the Closing Date,
all certificates which have not been surrendered will be deemed to be cancelled,
will no longer evidence ownership of Managed Tax-Exempt Fund's shares and will
evidence ownership of Tax-Free Bond Fund Shares. Shareholders may not redeem or
transfer Tax-Free Bond Fund Shares received in the Reorganization until they
have surrendered their Managed Tax-Exempt Fund share certificates or delivered
an Affidavit relating to them. Tax-Free Bond Fund will not issue share
certificates in the Reorganization.
Conditions Precedent to Closing. The obligation of Managed Tax-Exempt Fund
to consummate the Reorganization is subject to the satisfaction of certain
conditions precedent, including the performance by Tax-Free Bond Fund of all
acts and undertakings required under the Agreement and the receipt of all
consents, orders and permits necessary to consummate the Reorganization (see
Agreement, paragraph 3).
The obligation of Tax-Free Bond Fund to consummate the Reorganization is
subject to the satisfaction of certain conditions precedent, including Managed
Tax-Exempt Fund's performance of all acts and undertakings to be performed under
the Agreement, the receipt of certain documents and financial statements from
Managed Tax-Exempt Fund, and the receipt of all consents, orders and permits
necessary to consummate the Reorganization (see Agreement, paragraph 3).
The obligations of both parties are subject to the receipt of approval and
authorization of the Agreement by the requisite vote of the holders of the
outstanding shares of beneficial interest of Managed Tax-Exempt Fund in
accordance with the provisions of the Trust's Declaration of Trust, as amended,
and By-Laws and the receipt of a favorable opinion of Hale and Dorr as to the
federal income tax consequences of the Reorganization. (See Agreement, paragraph
3).
Termination of Agreement. Either the Board of Trustees of the Trust on
behalf of Managed Tax-Exempt Fund or the Board of Trustees of Bond Trust, on
behalf of Tax-Free Bond Fund may terminate the Agreement, notwithstanding
approval thereof by the shareholders of Managed Tax-Exempt Fund at any time
26
<PAGE>
prior to the Closing, if circumstances should develop that, in their judgment,
make proceeding with the Reorganization inadvisable.
Expenses of the Reorganization. Tax-Free Bond Fund and Managed Tax-Exempt
Fund will each be responsible for its own expenses incurred in connection with
entering into and carrying out the provisions of the Agreement, whether or not
the Reorganization is consummated.
Tax Considerations. The consummation of the Reorganization is subject to
the receipt of a favorable opinion of Hale and Dorr, counsel to the Funds,
satisfactory to Managed Tax-Exempt Fund and Tax-Free Bond Fund and described
above under the caption "Summary--Reorganization-Tax Considerations."
VOTING RIGHTS AND REQUIRED VOTE
Each Managed Tax-Exempt Fund share is entitled to one vote. Approval of the
Proposal requires the affirmative vote of a majority of the shares of Managed
Tax-Exempt Fund outstanding and entitled to vote. For this purpose, a majority
of the outstanding shares of Managed Tax-Exempt Fund means the vote of the
lesser of (i) 67% or more of the shares present at the Meeting, if the holders
of more than 50% of the shares of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Fund.
Shares of beneficial interest of Managed Tax-Exempt Fund represented in
person or by proxy, including shares which abstain or do not vote with respect
to the Proposal, will be counted for purposes of determining whether a quorum is
present at the Meeting. Accordingly, an abstention from voting has the same
effect as a vote against the Proposal. However, if a broker or nominee holding
shares in "street name" indicates on the proxy card that it does not have
discretionary authority to vote on the Proposal, those shares will not be
considered as present and entitled to vote with respect to the Proposal.
Accordingly, a "broker non-vote" has no effect on the voting in determining
whether the Proposal has been adopted pursuant to clause (i) in the immediately
preceding paragraph, provided that the holders of more than 50% of the
outstanding shares (excluding the "broker non-votes") are present or
represented. However, for purposes of determining whether the Agreement has been
adopted pursuant to clause (ii) in the immediately preceding paragraph, a
"broker non-vote" has the same effect as a vote against the Proposal because
shares represented by a "broker non-vote" are considered to be outstanding
shares.
If the requisite approval of shareholders is not obtained, Managed
Tax-Exempt Fund will continue to engage in business as a registered open-end
management investment company and the Board of Trustees will consider what
further action may be appropriate.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of each Fund as of June
30, 1996, and the pro forma combined capitalization of both Funds as if the
Reorganization had occurred on such date. The table reflects pro forma exchange
ratios of approximately 1.104 Class A Tax-Free Bond Fund Shares being issued for
each Class A share of Managed Tax-Exempt Fund and approximately 1.104 Class B
Tax-Free Bond Fund Shares being issued for each Class B share of Managed
Tax-Exempt Fund. If the Reorganization is consummated, the actual exchange
ratios on the Closing Date may vary from the exchange ratios indicated due to
changes in the market value of the portfolio securities of both Tax-Free Bond
Fund and Managed Tax-Exempt Fund between June 30, 1996 and the Closing Date,
changes in the amount of undistributed net investment income and net realized
capital gains of Tax-Free Bond Fund and Managed Tax-Exempt Fund during that
period resulting from income and distributions, and changes in the accrued
liabilities of Tax Free Bond Fund and Managed Tax-Exempt Fund during the same
period.
Managed Tax- Tax-Free Pro Forma
Exempt Fund Bond Fund Combined
----------- --------- --------
Net Assets $198,981,567 $650,489,968 $849,471,535
Net Asset Value
Per Share
---------
Class A $11.31 $10.24 $10.24
Class B $11.31 $10.24 $10.24
Shares
Outstanding
- -----------
Class A 3,518,903 55,582,256 59,466,944
Class B 14,072,611 7,918,992 23,458,462
If the Reorganization had taken place on June 30, 1996, Managed Tax-Exempt Fund
would have received 3,884,688 Class A shares and 15,539,470 Class B shares of
Tax-Free Bond Fund which would have been available for distribution to
shareholders of the applicable class of Managed Tax-Exempt Fund. No assurance
can be given as to the number of Class A shares or Class B shares of Tax-Free
Bond Fund that will be received by Managed Tax-Exempt Fund on the Closing Date.
The foregoing is merely an example of what Managed Tax-Exempt Fund would have
received and distributed had the Reorganization been consummated on June 30,
1996, and should not be relied upon to reflect the amount that will actually be
received on the Closing Date.
28
<PAGE>
COMPARATIVE PERFORMANCE INFORMATION
TOTAL RETURN
The average annual total return at public offering price on Managed
Tax-Exempt Fund's Class A shares for the one-year and life-of-class period ended
June 30, 1996 was 1.51% and 5.49%, respectively. The average annual total return
on Managed Tax-Exempt Fund's Class B shares for the one-year, 5-year and
life-of-class periods ended June 30, 1996 was 0.55%, 6.50% and 7.90%,
respectively. Total returns on Class B shares reflect the applicable contingent
deferred sales charge.
The average annual total return at public offering price on Tax-Free Bond
Fund's Class A shares for the one-year, five-year and life-of-class periods
ended June 30, 1996 was 2.92%, 7.28%, and 7.51%, respectively. The average
annual total return at public offering price on Tax-Free Bond Fund's Class B
shares for the one-year and life-of-class periods ended June 30, 1996 was 1.94%
and 6.19%, respectively. Total returns on Class B shares reflect the applicable
contingent deferred sales charge.
The average annual total return of each class of the Funds is determined by
multiplying a hypothetical initial investment of $1,000 in a class by the
average annual compound rate of return (including capital
appreciation/depreciation, and dividends and distributions paid and reinvested)
attributable to that class for the stated period and annualizing the result.
The table below indicates the total return (capital changes plus
reinvestment of all dividends and distributions ) on a hypothetical investment
of $1,000 in each class of each Fund covering the indicated periods ending June
30, 1996. The data below represent historical performance which should not be
considered indicative of future performance of either Fund. Each Fund's
performance and net asset value will fluctuate such that shares, when redeemed,
may be worth more or less than their original cost.
29
<PAGE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK MANAGED TAX-EXEMPT FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Value of
Investment on
June 30, 1996 Total Return Total Return
Investment Amount of Including Including Sales Charge Excluding Sales Charge
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
- ----------------- ---- ---------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares:
1 year ended
June 30, 1996 6/30/95 $1,000 $1,015.13 1.51% 1.51% 6.26% 6.26%
From inception (January 3, 1992)
to June 30, 1996 1/3/92 $1,000 $1,271.07 27.11% 5.49% 33.10% 6.57%
Class B Shares:
1 year ended
June 30, 1996 6/30/95 $1,000 $1,005.52 0.55% 0.55% 5.55% 5.55%
5 years ended
June 30, 1996 6/30/91 $1,000 $1,370.04 37.00% 6.50% 39.00% 6.81%
From inception (April 22, 1987)
to June 30, 1996 4/22/87 $1,000 $2,011.72 101.17% 7.90% 101.17% 7.90%
31
<PAGE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK TAX-FREE BOND FUND
(UNAUDITED)
Value of
Investment on
June 30, 1996 Total Return Total Return
Investment Amount of Including Including Sales Charge Excluding Sales Charge
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
- ----------------- ---- ---------- ------------ ---------- ---------- ---------- ----------
Class A Shares:
1 year ended
June 30, 1996 6/30/95 $1,000 $1,029.24 2.92% 2.92% 7.73% 7.73%
5 years ended
June 30, 1996 6/30/91 $1,000 $1,420.90 42.09% 7.28% 48.82% 8.28%
From inception (January 5, 1990)
to June 30, 1996 1/5/90 $1,000 $1,599.23 59.92% 7.51% 67.44% 8.27%
Class B Shares:
1 year ended
June 30, 1996 6/30/95 $1,000 $1,019.35 1.94% 1.94% 6.93% 6.93%
From inception (December 31, 1991)
to June 30, 1996 12/31/91 $1,000 $1,310.12 31.01% 6.19% 33.01% 6.54%
</TABLE>
32
<PAGE>
YIELD AND EFFECTIVE YIELD
The following table shows the average yield and tax equivalent yield
achieved assuming a federal income tax rate of 39.6% by each Fund for the thirty
day period ended June 30, 1996. These figures are computed in accordance with
the SEC's standard formula.
Average Yield Tax Equivalent Yield
Thirty Days Ended Thirty days Ended
Fund June 30, 1996 June 30, 1996
- ---- ----------------- ---------------
Managed Tax-Exempt Fund
Class A Shares 4.92% 8.15%
Class B Shares 4.45% 7.37%
Tax-Free
Bond Fund
Class A Shares 5.47% 9.06%
Class B Shares 4.99% 8.26%
BUSINESS OF MANAGED TAX-EXEMPT FUND
GENERAL
For a discussion of the organization and operation of Managed Tax-Exempt
Fund, see "Investment Objectives and Policies" and "Organization and Management
of the Fund" in the Managed Tax-Exempt Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Managed Tax-Exempt Fund's investment objective and
policies, see "Investment Objectives and Policies" in the Managed Tax-Exempt
Fund Prospectus.
TRUSTEES
For a discussion of the responsibilities of the Board of Trustees, see
"Organization and Management of the Fund" in the Managed Tax-Exempt Fund
Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding Managed Tax-Exempt Fund's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the Managed Tax-Exempt Fund Prospectus.
33
<PAGE>
EXPENSES
For a discussion of Managed Tax-Exempt Fund's expenses, see "Expense
Information" and "The Fund's Expenses" in the Managed Tax-Exempt Fund
Prospectus.
CUSTODIAN AND TRANSFER AGENT
Managed Tax-Exempt Fund's custodian is Investors Bank & Trust Company.
Managed Tax-Exempt Fund's transfer agent is John Hancock Investor Services
Corporation.
MANAGED TAX-EXEMPT FUND SHARES
For a discussion of Managed Tax-Exempt Fund's shares of beneficial
interest, see "Organization and Management of the Fund" in the Managed
Tax-Exempt Fund Prospectus.
PURCHASE OF MANAGED TAX-EXEMPT FUND SHARES
For a discussion of how Class A and Class B shares of Managed Tax-Exempt
Fund may be purchased or exchanged, see "How to Buy Shares" and "Additional
Services and Programs" in the Managed Tax-Exempt Fund Prospectus. In
anticipation of the Reorganization, after the Record Date, no new accounts may
be opened in Managed Tax-Exempt Fund. Existing shareholders of Managed
Tax-Exempt Fund may continue to acquire shares of the Fund after the Record Date
by direct purchase, through a monthly automatic accumulation plan and through
reinvestment of dividends and distributions.
REDEMPTION OF MANAGED TAX-EXEMPT FUND SHARES
For a discussion of how Class A and Class B shares of Managed Tax-Exempt
Fund may be redeemed (other than in the Reorganization), see "How to Redeem
Shares" in the Managed Tax-Exempt Fund Prospectus. Managed Tax-Exempt Fund
shareholders whose shares are represented by share certificates will be required
to surrender their certificates for cancellation or deliver an affidavit of loss
accompanied by an adequate surety bond to Investor Services in order to redeem
Tax-Free Bond Fund Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Managed Tax-Exempt Fund's policy with respect to
dividends, distributions and taxes, see "Dividends and Taxes" in the Managed
Tax-Exempt Fund Prospectus.
BUSINESS OF TAX-FREE BOND FUND
For a discussion of the organization and current operation of Tax-Free Bond
Fund, see "TAX FREE BOND FUND--Goal and Strategy" and "FUND DETAILS--Business
34
<PAGE>
Structure" in the Tax-Free Bond Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Tax-Free Bond Fund's investment objective and policies,
see "TAX FREE BOND FUND--Goal and Strategy" in the Tax-Free Bond Fund
Prospectus.
TRUSTEES
For a discussion of the responsibilities of the Board of Trustees, see
"FUND DETAILS--Business Structure" in the Tax-Free Bond Fund Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding Tax-Free Bond Fund's investment adviser and
distributor, see "FUND DETAILS--Business Structure," "YOUR ACCOUNT -- Buying
Shares" and "--Transaction Policies" in the Tax-Free Bond Fund Prospectus.
EXPENSES
For a discussion of Tax-Free Bond Fund's expenses, see "TAX FREE BOND
FUND--Investor Expenses" in the Tax-Free Bond Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
Tax-Free Bond Fund's custodian is Investors Bank & Trust Company. Tax-Free
Bond Fund's transfer agent is John Hancock Investor Services Corporation.
TAX-FREE BOND FUND SHARES
For a discussion of Tax-Free Bond Fund Shares, see "YOUR
ACCOUNT--Transaction Policies" in the Tax-Free Bond Fund Prospectus.
PURCHASE OF TAX-FREE BOND FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Free Bond Fund
may be purchased or exchanged, see "YOUR ACCOUNT--Buying Shares," "-- Dividends
and Account Policies" and "--Additional Investor Services" in the Tax-Free Bond
Fund Prospectus.
REDEMPTION OF TAX-FREE BOND FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Free Bond Fund
may be redeemed, see "YOUR ACCOUNT--Selling Shares" in the Tax-Free Bond Fund
Prospectus. Former shareholders of Managed Tax-Exempt Fund whose shares are
35
<PAGE>
represented by share certificates will be required to surrender their
certificates for cancellation or deliver an affidavit of loss accompanied by an
adequate surety bond to Investor Services in order to redeem Tax-Free Bond Fund
Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Tax-Free Bond Fund's policy with respect to dividends,
distributions and taxes, see "YOUR ACCOUNT--Dividends and Account Policies" in
the Tax-Free Bond Fund Prospectus.
EXPERTS
The financial statements and the financial highlights of Tax-Free Bond Fund
as of December 31, 1995 and Managed Tax-Exempt Fund as of October 31, 1995 and
for the years then ended, incorporated by reference into the Proxy Statement and
Prospectus, have been independently audited by Ernst & Young LLP and Price
Waterhouse LLP, respectively, as set forth in their respective reports thereon
appearing in the Statement of Additional Information, and are included in
reliance upon such reports of each firm given upon the authority of each firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act, and in accordance therewith
files reports, proxy statements and other information with the SEC. These
reports, proxy statements and other information filed by Managed Tax-Exempt Fund
and Tax-Free Bond Fund, can be inspected and copied (at prescribed rates) at the
public reference facilities of the SEC at 450 Fifth Street, N.W., Washington,
D.C., and at the following regional offices: Chicago (500 West Madison Street,
Suite 1400, Chicago, Illinois); and New York (7 World Trade Center, Suite 1300,
New York, New York). Copies of such material can also be obtained by mail from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
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EXHIBIT B
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 29th
day of August, 1996, by and between John Hancock Tax-Free Bond Fund (the
"Acquiring Fund"), a series of John Hancock Tax-Free Bond Trust, a Massachusetts
business trust (the "Trust II"), and John Hancock Managed Tax-Exempt Fund (the
"Acquired Fund"), a series of Freedom Investment Trust, a Massachusetts business
trust (the "Trust") each with their principal place of business at 101
Huntington Avenue, Boston, Massachusetts 02199. The Acquiring Fund and the
Acquired Fund are sometimes referred to collectively herein as the "Funds" and
individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization,"
as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization will consist of the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the
issuance of Class A and Class B shares of beneficial interest of the Acquiring
Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by
the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by
the distribution by the Acquired Fund, on or promptly after the Closing Date
hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation and termination of the Acquired Fund as provided
herein, all upon the terms and conditions set forth in this Agreement.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and interest
receivables, cash and other assets), as set forth in the statement of
assets and liabilities referred to in Paragraph 7.2 hereof (the "Statement
of Assets and Liabilities"), to the Acquiring Fund free and clear of all
liens and encumbrances, except as otherwise provided herein, in exchange
for (i) the assumption by the Acquiring Fund of the known and unknown
liabilities of the Acquired Fund, including the liabilities set forth in
the Statement of Assets and Liabilities (the "Acquired Fund Liabilities"),
which shall be assigned and transferred to the Acquiring Fund by the
Acquired Fund and assumed by the Acquiring Fund, and (ii) delivery by the
Acquiring Fund to the Acquired Fund, for distribution pro rata by the
Acquired Fund to its shareholders in proportion to their respective
ownership of Class A and/or Class B shares of beneficial interest of the
Acquired Fund, as of the close of business on December 6, 1996 (the
"Closing Date"), of a number of the Acquiring Fund Shares having an
aggregate net asset value equal, in the case of each class of Acquiring
Fund Shares, to the value of the assets, less such liabilities (herein
<PAGE>
referred to as the "net value of the assets") attributable to the
applicable class, assumed, assigned and delivered, all determined as
provided in Paragraph 2.1 hereof and as of a date and time as specified
therein. Such transactions shall take place at the closing provided for in
Paragraph 3.1 hereof (the "Closing"). All computations shall be provided by
Investors Bank & Trust Company (the "Custodian"), as custodian and pricing
agent for the Acquiring Fund and the Acquired Fund.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of
execution of this Agreement. The Acquired Fund reserves the right to sell
any of these securities (except to the extent sales may be limited by
representations made in connection with issuance of the tax opinion
provided for in paragraph 8.6 hereof) but will not, without the prior
approval of the Acquiring Fund, acquire any additional securities other
than securities of the type in which the Acquiring Fund is permitted to
invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses
in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record (the "Acquired Fund shareholders"),
determined as of the close of regular trading on the New York Stock
Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund, to open accounts on the share records of the Acquiring
Fund in the names of the Acquired Fund shareholders and representing the
respective pro rata number and class of Acquiring Fund Shares due such
shareholders. Acquired Fund shareholders who own Class A shares of the
Acquired Fund will receive Class A Acquiring Fund Shares and Acquired Fund
shareholders who own Class B shares of the Acquired Fund will receive Class
B Acquiring Fund Shares. The Acquiring Fund shall not issue certificates
representing Acquiring Fund Shares in connection with such exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the
Acquired Fund may require (collectively, an "Affidavit"), to John Hancock
Investor Services Corporation prior to the Closing Date. Any Acquired Fund
share certificate which remains outstanding on the Closing Date shall be
deemed to be canceled, shall no longer evidence ownership of shares of
beneficial interest of the Acquired Fund and shall evidence ownership of
Acquiring Fund Shares. Unless and until any such certificate shall be so
surrendered or an Affidavit relating thereto shall be delivered, dividends
and other distributions payable by the Acquiring Fund subsequent to the
Liquidation Date with respect to Acquiring Fund Shares shall be paid to the
holder of such certificate(s), but such shareholders may not redeem or
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transfer Acquiring Fund Shares received in the Reorganization. The
Acquiring Fund will not issue share certificates in the Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a name
other than the registered holder of the Acquired Fund Shares on the books
of the Acquired Fund as of that time shall, as a condition of such issuance
and transfer, be paid by the person to whom such Acquiring Fund Shares are
to be issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Trust, including, but not limited to,
the responsibility for filing of regulatory reports, tax returns, or other
documents with the Securities and Exchange Commission (the "Commission"),
any state securities commissions, and any federal, state or local tax
authorities or any other relevant regulatory authority, is and shall remain
the responsibility of the Trust.
2. VALUATION
2.1 The net asset values of the Class A and Class B Acquiring Fund Shares and
the net values of the assets and liabilities of the Acquired Fund
attributable to its Class A and Class B shares to be transferred shall, in
each case, be determined as of the close of business (4:00 p.m. Boston
time) on the Closing Date. The net asset values of the Class A and Class B
Acquiring Fund Shares shall be computed by the Custodian in the manner set
forth in the Acquiring Fund's Declaration of Trust as amended and restated
(the "Declaration"), or By-Laws and the Acquiring Fund's then-current
prospectus and statement of additional information and shall be computed in
each case to not fewer than four decimal places. The net values of the
assets of the Acquired Fund attributable to its Class A and Class B shares
to be transferred shall be computed by the Custodian by calculating the
value of the assets of each class transferred by the Acquired Fund and by
subtracting therefrom the amount of the liabilities of each class assigned
and transferred to and assumed by the Acquiring Fund on the Closing Date,
said assets and liabilities to be valued in the manner set forth in the
Acquired Fund's then current prospectus and statement of additional
information and shall be computed in each case to not fewer than four
decimal places.
2.2 The number of shares of each class of Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's
assets shall be determined by dividing the value of the Acquired Fund's
assets attributable to a class, less the liabilities attributable to that
class assumed by the Acquiring Fund, by the Acquiring Fund's net asset
value per share of the same class, all as determined in accordance with
Paragraph 2.1 hereof.
2.3 All computations of value shall be made by the Custodian in accordance with
its regular practice as pricing agent for the Funds.
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3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be December 6, 1996 or such other date on or before
June 30, 1997 as the parties may agree. The Closing shall be held as of
5:00 p.m. at the offices of the Trust II and the Trust, 101 Huntington
Avenue, Boston, Massachusetts 02199, or at such other time and/or place as
the parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name of
the Custodian as record holder for the Acquired Fund shall be presented by
the Acquired Fund to the Custodian for examination no later than three
business days preceding the Closing Date. Portfolio securities which are
not held in book-entry form shall be delivered by the Acquired Fund to the
Custodian for the account of the Acquiring Fund on the Closing Date, duly
endorsed in proper form for transfer, in such condition as to constitute
good delivery thereof in accordance with the custom of brokers, and shall
be accompanied by all necessary federal and state stock transfer stamps or
a check for the appropriate purchase price thereof. Portfolio securities
held of record by the Custodian in book-entry form on behalf of the
Acquired Fund shall be delivered to the Acquiring Fund by the Custodian by
recording the transfer of beneficial ownership thereof on its records. The
cash delivered shall be in the form of currency or by the Custodian
crediting the Acquiring Fund's account maintained with the Custodian with
immediately available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange shall
be closed to trading or trading thereon shall be restricted or (b) trading
or the reporting of trading on said Exchange or elsewhere shall be
disrupted so that accurate appraisal of the value of the net assets of the
Acquiring Fund or the Acquired Fund is impracticable, the Closing Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored;
provided that if trading shall not be fully resumed and reporting restored
on or before June 30, 1997, this Agreement may be terminated by the
Acquiring Fund or by the Acquired Fund upon the giving of written notice to
the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding
and nonresident alien withholding status of the Acquired Fund shareholders
and the number of outstanding shares of each class of beneficial interest
of the Acquired Fund owned by each such shareholder, all as of the close of
business on the Closing Date, certified by its Treasurer, Secretary or
other authorized officer (the "Shareholder List"). The Acquiring Fund shall
issue and deliver to the Acquired Fund a confirmation evidencing the
Acquiring Fund Shares to be credited on the Closing Date, or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares
have been credited to the Acquired Fund's account on the books of the
Acquiring Fund. At the Closing, each party shall deliver to the other such
bills of sale, checks, assignments, stock certificates, receipts or other
documents as such other party or its counsel may reasonably request.
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4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of the Acquired Fund represents, warrants and covenants
to the Acquiring Fund as follows:
(a) The Trust is a business trust, duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the Trust nor the
Acquired Fund is required to qualify to do business in any
jurisdiction in which it is not so qualified or where failure to
qualify would subject it to any material liability or disability. The
Trust has all necessary federal, state and local authorizations to own
all of its properties and assets and to carry on its business as now
being conducted;
(b) The Trust is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), is in full force and effect. The Acquired
Fund is a diversified series of the Trust;
(c) The Trust and the Acquired Fund are not, and the execution, delivery
and performance of their obligations under this Agreement will not
result, in violation of any provision of the Trust's Declaration of
Trust, as amended and restated (the "Trust's Declaration") or By-Laws
or of any agreement, indenture, instrument, contract, lease or other
undertaking to which the Trust or the Acquired Fund is a party or by
which it is bound;
(d) Except as otherwise disclosed in writing and accepted by the Acquiring
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust or the Acquired Fund or any of
the Acquired Fund's properties or assets. The Trust knows of no facts
which might form the basis for the institution of such proceedings,
and neither the Trust nor the Acquired Fund is a party to or subject
to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects the Acquired
Fund's business or its ability to consummate the transactions herein
contemplated;
(e) The Acquired Fund has no material contracts or other commitments
(other than this Agreement or agreements for the purchase of
securities entered into in the ordinary course of business and
consistent with its obligations under this Agreement) which will not
be terminated without liability to the Acquired Fund at or prior to
the Closing Date;
(f) The unaudited statement of assets and liabilities, including the
schedule of investments, of the Acquired Fund as of April 30, 1996 and
the related statement of operations (copies of which have been
furnished to the Acquiring Fund) present fairly in all material
respects the financial condition of the Acquired Fund as of April 30,
1996 and the results of its operations for the period then ended in
accordance with generally accepted accounting principles consistently
5
<PAGE>
applied, and there were no known actual or contingent liabilities of
the Acquired Fund as of the respective dates thereof not disclosed
therein;
(g) Since April 30, 1996, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquired Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund;
(h) At the date hereof and by the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge no such
return is currently under audit and no assessment has been asserted
with respect to such returns or reports;
(i) The Acquired Fund has elected to be treated as a regulated investment
company for federal income tax purposes, has qualified as such for
each taxable year of its operation and will qualify as such as of the
Closing Date with respect to its final taxable year ending on the
Closing Date;
(j) The authorized capital of the Acquired Fund consists of an unlimited
number of shares of beneficial interest, no par value. All issued and
outstanding shares of beneficial interest of the Acquired Fund are,
and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Trust. All of the
issued and outstanding shares of beneficial interest of the Acquired
Fund will, at the time of Closing, be held by the persons and in the
amounts and classes set forth in the Shareholder List submitted to the
Acquiring Fund pursuant to Paragraph 3.4 hereof. The Acquired Fund
does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares of beneficial interest,
nor is there outstanding any security convertible into any of its
shares of beneficial interest;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the assets to be transferred to the Acquiring Fund pursuant
to Paragraph 1.1 hereof, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the
Securities Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of the Trust on
behalf of the Acquired Fund, and this Agreement constitutes a valid
and binding obligation of the Trust and the Acquired Fund enforceable
in accordance with its terms, subject to the approval of the Acquired
Fund's shareholders;
6
<PAGE>
(m) The information to be furnished by the Acquired Fund to the Acquiring
Fund for use in applications for orders, registration statements,
proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate
and complete and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable
thereto;
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in Paragraph 5.7
hereof (other than written information furnished by the Acquiring Fund
for inclusion therein, as covered by the Acquiring Fund's warranty in
Paragraph 4.2(m) hereof), on the effective date of the Registration
Statement, on the date of the meeting of the Acquired Fund
shareholders and on the Closing Date, shall not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of the
Acquired Fund have been offered for sale and sold in conformity with
all applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated March 1, 1996 (the
"Acquired Fund Prospectus"), previously furnished to the Acquiring
Fund, does not contain any untrue statements of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
4.2 The Trust II on behalf of the Acquiring Fund represents, warrants and
covenants to the Acquired Fund as follows:
(a) The Trust II is a business trust duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts
and has the power to own all of its properties and assets and to carry
out the Agreement. Neither the Trust II nor the Acquiring Fund is
required to qualify to do business in any jurisdiction in which it is
not so qualified or where failure to qualify would subject it to any
material liability or disability. The Trust II has all necessary
federal, state and local authorizations to own all of its properties
and assets and to carry on its business as now being conducted;
(b) The Trust II is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect. The
Acquiring Fund is a non-diversified series of the Trust II;
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<PAGE>
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A and Class B shares of the Acquiring
Fund, each dated September 30, 1996, and any amendments or supplements
thereto on or prior to the Closing Date, and the Registration
Statement on Form N-14 to be filed in connection with this Agreement
(the "Registration Statement") (other than written information
furnished by the Acquired Fund for inclusion therein, as covered by
the Acquired Fund's warranty in Paragraph 4.1(m) hereof) will conform
in all material respects to the applicable requirements of the 1933
Act and the 1940 Act and the rules and regulations of the Commission
thereunder, the Acquiring Fund Prospectus does not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and the Registration Statement will not include any untrue
statement of material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(d) At the Closing Date, the Trust II on behalf of the Acquiring Fund will
have good and marketable title to the assets of the Acquiring Fund;
(e) The Trust II and the Acquiring Fund are not, and the execution,
delivery and performance of their obligations under this Agreement
will not result, in violation of any provisions of the Trust II's
Declaration, or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Trust II or the
Acquiring Fund is a party or by which the Trust II or the Acquiring
Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the Acquired
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust II or the Acquiring Fund or
any of the Acquiring Fund's properties or assets. The Trust II knows
of no facts which might form the basis for the institution of such
proceedings, and neither the Trust II nor the Acquiring Fund is a
party to or subject to the provisions of any order, decree or judgment
of any court or governmental body which materially and adversely
affects the Acquiring Fund's business or its ability to consummate the
transactions herein contemplated;
(g) The unaudited statement of assets and liabilities, including the
schedule of investments, of the Acquiring Fund as of June 30, 1996 and
the related statement of operations (copies of which have been
furnished to the Acquired Fund), present fairly in all material
respects the financial condition of the Acquiring Fund as of June 30,
1996 and the results of its operations for the period then ended in
accordance with generally accepted accounting principles consistently
applied, and there were no known actual or contingent liabilities of
the Acquiring Fund as of the respective dates thereof not disclosed
herein;
(h) Since June 30, 1996, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Trust II on behalf of the Acquiring
8
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Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as disclosed to and accepted by the
Acquired Fund;
(i) The Acquiring Fund has elected to be treated as a regulated investment
company for federal income tax purposes, has qualified as such for
each taxable year of its operation and will qualify as such as of the
Closing Date;
(j) The authorized capital of the Trust II consists of an unlimited number
of shares of beneficial interest, no par value per share. All issued
and outstanding shares of beneficial interest of the Acquiring Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Trust II. The
Acquiring Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares of
beneficial interest, nor is there outstanding any security convertible
into any of its shares of beneficial interest;
(k) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action on the part of the Trust II on
behalf of the Acquiring Fund, and this Agreement constitutes a valid
and binding obligation of the Acquiring Fund enforceable in accordance
with its terms;
(l) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial
interest of the Acquiring Fund and will be fully paid and
nonassessable by the Trust II;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and
other laws and regulations applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated by the Agreement,
except for the registration of the Acquiring Fund Shares under the
1933 Act, the 1940 Act and under state securities laws.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Trust on
behalf of the Acquired Fund and the Trust II on behalf of Acquiring Fund,
will operate their respective businesses in the ordinary course between the
date hereof and the Closing Date, it being understood that such ordinary
course of business will include customary dividends and distributions and
any other distributions necessary or desirable to avoid federal income or
excise taxes.
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5.2 The Trust will call a meeting of the Acquired Fund shareholders to consider
and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution thereof other than in accordance with the terms of
this Agreement.
5.4 The Trust on behalf of the Acquired Fund will provide such information
within its possession or reasonably obtainable as the Trust II on behalf of
the Acquiring Fund requests concerning the beneficial ownership of the
Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate the transactions contemplated by this Agreement.
5.6 The Trust on behalf of the Acquired Fund shall furnish to the Trust II on
behalf of the Acquiring Fund on the Closing Date the Statement of Assets
and Liabilities of the Acquired Fund as of the Closing Date, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by the
Acquired Fund's Treasurer or Assistant Treasurer. As promptly as
practicable but in any case within 60 days after the Closing Date, the
Acquired Fund shall furnish to the Acquiring Fund, in such form as is
reasonably satisfactory to the Trust II, a statement of the earnings and
profits of the Acquired Fund for federal income tax purposes and of any
capital loss carryovers and other items that will be carried over to the
Acquiring Fund as a result of Section 381 of the Code, and which statement
will be certified by the President of the Acquired Fund.
5.7 The Trust II on behalf of the Acquiring Fund will prepare and file with the
Commission the Registration Statement in compliance with the 1933 Act and
the 1940 Act in connection with the issuance of the Acquiring Fund Shares
as contemplated herein.
5.8 The Trust on behalf of the Acquired Fund will prepare a Proxy Statement, to
be included in the Registration Statement in compliance with the 1933 Act,
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
1940 Act and the rules and regulations thereunder (collectively, the
"Acts") in connection with the special meeting of shareholders of the
Acquired Fund to consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF THE ACQUIRED
FUND
The obligations of the Trust on behalf of the Acquired Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Trust II on behalf of the Acquiring Fund of all the
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obligations to be performed by it hereunder on or before the Closing Date, and,
in addition thereto, the following further conditions:
6.1 All representations and warranties of the Trust II on behalf of the
Acquiring Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected
by the transactions contemplated by this Agreement, as of the Closing Date
with the same force and effect as if made on and as of the Closing Date;
and
6.2 The Trust II on behalf of the Acquiring Fund shall have delivered to the
Acquired Fund a certificate executed in its name by the Trust II's
President or Vice President and its Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquired Fund and dated as of the
Closing Date, to the effect that the representations and warranties of the
Trust II on behalf of the Acquiring Fund made in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other
matters as the Trust on behalf of the Acquired Fund shall reasonably
request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE
ACQUIRING FUND
The obligations of the Trust II on behalf of the Acquiring Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Acquired Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1 All representations and warranties of the Acquired Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as
if made on and as of the Closing Date;
7.2 The Trust on behalf of the Acquired Fund shall have delivered to the Trust
II on behalf of the Acquiring Fund the Statement of Assets and Liabilities
of the Acquired Fund, together with a list of its portfolio securities
showing the federal income tax bases and holding periods of such
securities, as of the Closing Date, certified by the Treasurer or Assistant
Treasurer of the Trust;
7.3 The Trust on behalf of the Acquired Fund shall have delivered to the Trust
II on behalf of the Acquiring Fund on the Closing Date a certificate
executed in the name of the Acquired Fund by a President or Vice President
and a Treasurer or Assistant Treasurer of the Trust, in form and substance
satisfactory to the Trust II on behalf of the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and warranties
of the Acquired Fund in this Agreement are true and correct at and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Trust
II on behalf of the Acquiring Fund shall reasonably request; and
11
<PAGE>
7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser, or
an affiliate thereof, shall have made all payments, or applied all credits,
to the Acquired Fund required by any applicable contractual or
state-imposed expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST AND THE TRUST II
The obligations hereunder of the Trust II on behalf of the Acquiring Fund and
the Trust on behalf of the Acquired Fund are each subject to the further
conditions that on or before the Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Acquired Fund in accordance with the provisions
of the Trust's Declaration and By-Laws, and certified copies of the
resolutions evidencing such approval by the Acquired Fund's shareholders
shall have been delivered by the Acquired Fund to the Trust II on behalf of
the Acquiring Fund;
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain
or prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits of
federal, state and local regulatory authorities (including those of the
Commission and of state Blue Sky and securities authorities, including
"no-action" positions of such federal or state authorities) deemed
necessary by the Trust or the Trust II to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or permit
would not involve a risk of a material adverse effect on the assets or
properties of the Acquiring Fund or the Acquired Fund, provided that either
party hereto may waive any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933 Act
and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or
be pending, threatened or contemplated under the 1933 Act or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its shareholders all of its
investment company taxable income (as defined in Section 852(b)(2) of the
Code) for its taxable year ending on the Closing Date, all of the excess of
(i) its interest income excludable from gross income under Section 103(a)
of the Code over (ii) its deductions disallowed under Sections 265 and
171(a)(2) of the Code for its taxable year ending on the Closing Date, and
all of its net capital gain (as such term is used in Section 852(b)(3)(C)
of the Code), after reduction by any available capital loss carryforward,
for its taxable year ending on the Closing Date; and
12
<PAGE>
8.6 The parties shall have received an opinion of Messrs. Hale and Dorr,
satisfactory to the Trust on behalf of the Acquired Fund and the Trust II
on behalf of the Acquiring Fund, substantially to the effect that for
federal income tax purposes:
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund
Shares to the Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by the Acquiring Fund, followed by the distribution
by the Acquired Fund, in liquidation of the Acquired Fund, of
Acquiring Fund Shares to the shareholders of the Acquired Fund in
exchange for their shares of beneficial interest of the Acquired Fund
and the termination of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a) of the Code, and
the Acquired Fund and the Acquiring Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon (i) the
transfer of all of its assets to the Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund; and (ii) the distribution by the Acquired Fund of such Acquiring
Fund Shares to the shareholders of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
issuance of the Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund;
(d) The basis of the assets of the Acquired Fund acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets
in the hands of the Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the Acquired Fund in the hands
of the Acquiring Fund will, in each instance, include the Acquired
Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize gain or loss
upon the exchange of all of their shares of beneficial interest of the
Acquired Fund solely for Acquiring Fund Shares as part of the
transaction;
(g) The basis of the Acquiring Fund Shares received by the Acquired Fund
shareholders in the transaction will be the same as the basis of the
shares of beneficial interest of the Acquired Fund surrendered in
exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares received by the
Acquired Fund shareholders will include, for each shareholder, the tax
holding period for the shares of the Acquired Fund surrendered in
exchange therefor, provided that the Acquired Fund shares were held as
capital assets on the date of the exchange.
13
<PAGE>
The Trust II and the Trust agree to make and provide representations with
respect to the Acquiring Fund and the Acquired Fund, respectively, which are
reasonably necessary to enable Hale and Dorr to deliver an opinion substantially
as set forth in this Paragraph 8.6. Notwithstanding anything herein to the
contrary, neither the Trust nor the Trust II may waive the conditions set forth
in this Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of
the Acquired Fund, each represent and warrant to the other, that there are
no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for
its own expenses incurred in connection with entering into and carrying out
the provisions of this Agreement whether or not the transactions
contemplated hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of
the Acquired Fund agree that neither party has made any representation,
warranty or covenant not set forth herein or referred to in Paragraph 4
hereof and that this Agreement constitutes the entire agreement between the
parties.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Trust II,
on behalf of the Acquiring Fund, and the Trust on behalf of the Acquired
Fund. In addition, either party may at its option terminate this Agreement
at or prior to the Closing Date:
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed at or
prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and which
reasonably appears will not or cannot be met;
(c) by resolution of the Trust II's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interests of the
Acquiring Fund's shareholders; or
14
<PAGE>
(d) by resolution of the Trust's Board of Trustees if circumstances should
develop that, in the good faith opinion of such Board, make proceeding
with the Agreement not in the best interests of the Acquired Fund's
shareholders.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Trust II, the Acquiring Fund, the Trust, or
the Acquired Fund, or the Trustees or officers of the Trust II or the
Trust, but each party shall bear the expenses incurred by it incidental
to the preparation and carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust and the Trust II.
However, following the meeting of shareholders of the Acquired Fund held
pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions regarding the method for determining the
number of Acquiring Fund Shares to be received by the Acquired Fund shareholders
under this Agreement to the detriment of such shareholders without their further
approval; provided that nothing contained in this Article 12 shall be construed
to prohibit the parties from amending this Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the Acquiring Fund or to the Acquired
Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
President, and, in either case, with copies to Hale and Dorr, 60 State Street,
Boston, Massachusetts 02109, Attention: Pamela J.
Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any party
without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
15
<PAGE>
14.5 All persons dealing with the Trust or the Trust II must look solely to the
property of the Trust or the Trust II, respectively, for the enforcement of
any claims against the Trust or the Trust II as the Trustees, officers,
agents and shareholders of the Trust or the Trust II assume no personal
liability for obligations entered into on behalf of the Trust or the Trust
II, respectively. None of the other series of the Trust or the Trust II
shall be responsible for any obligations assumed by on or behalf of the
Acquired Fund or the Acquiring Fund, respectively, under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed as of the date first set forth above by its President or Vice President
and has caused its corporate seal to be affixed hereto.
JOHN HANCOCK TAX-FREE BOND TRUST on behalf of
JOHN HANCOCK TAX-FREE BOND FUND
By: /s/ Anne c. Hodsdon
---------------------------
Anne C. Hodsdon
President
FREEDOM INVESTMENT TRUST on behalf of
JOHN HANCOCK MANAGED TAX-EXEMPT FUND
By: /s/ Susan S. Newton
---------------------------
Susan S. Newton
Vice President and Secretary
16
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
JOHN HANCOCK
TAX-FREE
INCOME FUNDS
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE,
A DIAMOND, TRIANGLE AND A DIAMOND.]
- --------------------------------------------------------------------------------
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:
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their goal(s)
High Yield Tax-Free Fund may invest up to 100% 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.
CALIFORNIA TAX-FREE INCOME FUND
HIGH YIELD TAX-FREE FUND
MANAGED TAX-EXEMPT FUND
MASSACHUSETTS TAX-FREE
INCOME FUND
NEW YORK TAX-FREE INCOME FUND
TAX-FREE BOND FUND
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE,
A DIAMOND, TRIANGLE AND A DIAMOND.]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
CONTENTS
- --------------------------------------------------------------------------------
A fund-by-fund look at goals, strategies, risks, expenses and financial history.
Policies and instructions for opening, maintaining and closing an account in any
tax-free income fund.
Details that apply to the tax-free income funds as a group.
CALIFORNIA TAX-FREE INCOME FUND 4
HIGH YIELD TAX-FREE FUND 6
MANAGED TAX-EXEMPT FUND 8
MASSACHUSETTS TAX-FREE INCOME FUND 10
NEW YORK TAX-FREE INCOME FUND 12
TAX-FREE BOND FUND 14
YOUR ACCOUNT
Choosing a share class 16
How sales charges are calculated 16
Sales charge reductions and waivers 17
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
FUND DETAILS
Business structure 23
Sales compensation 24
More about risk 26
FOR MORE INFORMATION BACK COVER
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
OVERVIEW
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
GOAL AND STRATEGY The fund's particular investment goals and the strategies it
intends to use in pursuing those goals.
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
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.
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
RISK FACTORS The major risk factors associated with the fund.
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
PORTFOLIO MANAGEMENT The individual or group designated by the investment
adviser to handle the fund's day-to-day management.
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
EXPENSES The overall costs borne by an investor in the fund, including sales
charges and annual expenses.
[[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
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.
GOAL OF THE TAX-FREE INCOME FUNDS
John Hancock tax-free income funds seek to offer regular income that is exempt
from federal and, in some cases, state and local income tax. Each fund employs
its own strategy and has 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:
- - are in higher income brackets
- - desire regular monthly income
- - are interested in lowering their income tax burden
- - live in California, Massachusetts or New York (for state- specific funds)
Tax-free income funds may NOT be appropriate if you:
- - are seeking an investment for a tax-deferred retirement account
- - are not subject to a high level of state or federal income taxes
- - are investing for maximum return over a long time horizon
- - 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.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
CALIFORNIA TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
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 California municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
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 California municipal securities, particularly bonds. At the time
of investment the fund's debt securities must be rated at least BB/Ba, or if
unrated, be of equivalent quality. No more than 20% of assets may be invested in
municipal securities rated BB/Ba (junk bonds), and 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
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
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
bonds).
Although the fund is diversified, because it concentrates in securities of
California issuers its performance is largely dependent on factors that may
disproportionately affect California issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - state constitutional limits on tax increases
- - changes in the ratings assigned to the state's municipal issuers
- - the legacy of past 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 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Dianne Sales-Singer, 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
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
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
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.40% 0.40%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses (after expense limitation)(3) 0.20% 0.20%
Total fund operating expenses(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 0.90% for Class A and 1.75% 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>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
_______________________.
VOLATILITY, AS INDICATED BY CLASS A [BAR CHART]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1990 1991 1992 1993 1994(1) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28
Net investment income (loss) 0.74 0.69 0.66(2) 0.62 0.58 0.57(2)
Net realized and unrealized gain (loss) on investments (0.16) 0.47 0.25 0.76 (1.57) 1.41
Total from investment operations 0.58 1.16 0.91 1.38 (0.99) 1.98
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62) (0.58) (0.57)
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) (0.57)
Net asset value, end of period $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 6.13 12.26 9.15 13.60 (9.31) 21.88
Total adjusted investment return at net asset value(3,4)(%) 5.29 11.86 8.90 13.42 (9.45) 21.73
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)($) 80,200 163,693 217,014 279,692 241,583 309,305
Ratio of expenses to average net assets (%) 0.00 0.40 0.58 0.69 0.75 0.75
Ratio of adjusted expenses to average net assets(5)(%) 0.84 0.80 0.83 0.87 0.89 0.90
Ratio of net investment income (loss) to average net assets(%) 7.11 6.75 6.36 5.69 5.85 5.76
Ratio of adjusted net investment income (loss) to average net
assets(5)(%) 6.27 6.35 6.11 5.51 5.71 5.61
Portfolio turnover rate(%) 62 45 34 51 62 37(6)
Fee reduction per share($) 0.09 0.04 0.03(2) 0.02 0.01 0.01(2)
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1992 1993 1994(1) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.32 $ 10.41 $ 10.85 $ 9.28
Net investment income (loss) 0.58(2) 0.54 0.51 0.50(2)
Net realized and unrealized gain (loss) on investments 0.25 0.76 (1.57) 1.40
Total from investment operations 0.83 1.30 (1.06) 1.90
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50)
Distributions from net realized gain on investments sold (0.15) (0.32) -- --
Total distributions (0.74) (0.86) (0.51) (0.50)
Net asset value, end of period $ 10.41 $ 10.85 $ 9.28 $ 10.68
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3)(%) 8.35 12.76 (9.99) 20.87
Total adjusted investment return at net asset value(3,4)(%) 8.10 12.58 (10.13) 20.72
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)($) 26,595 65,437 77,365 84,673
Ratio of expenses to average net assets(%) 1.35 1.44 1.50 1.50
Ratio of adjusted expenses to average net assets(5)(%) 1.60 1.62 1.64 1.65
Ratio of net investment income (loss) to average net assets(%) 5.43 4.82 5.10 4.97
Ratio of adjusted net investment income (loss) to average net assets(5)(%) 5.18 4.64 4.96 4.82
Portfolio turnover rate(%) 34 51 62 37(6)
Fee reduction per share($) 0.03(2) 0.02 0.01 0.01(2)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover excludes merger activity.
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
HIGH YIELD TAX-FREE FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE TRUST
TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
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
medium-grade municipal debt securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
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 that at the time of investment are rated at least
BB/Ba, or if unrated, of equivalent quality. Up to 5% of assets may be invested
in bonds rated below BB/Ba, or equivalent. 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
and tax-free 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 other investments, including various derivative
securities used in the fund's capital preservation strategies, and may engage in
other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
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
bonds). Investors should expect greater fluctuations in share price, yield and
total return compared to less aggressive tax-free bond funds. These
fluctuations, whether positive or negative, may be sharp and unanticipated.
Issuers of medium-grade bonds are typically in weaker financial health than
issuers of high quality bonds, and their ability to pay interest and principal
is less certain. Medium-grade issuers are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. As a result, markets for medium-grade bonds 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 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, 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
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
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
<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>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's
independent auditors, _________________________.
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1994(1) 1995(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.85 $ 8.82
Net investment income (loss) 0.48(3) 0.57
Net realized and unrealized gain (loss) on investments sold
and financial futures contracts (0.94) 0.70
Total from investment operations (0.46) 1.27
Less distributions:
Dividends from net investment income (0.48) (0.58)
Distributions in excess of net investment income (0.09) (0.04)
Total distributions (0.57) (0.62)
Net asset value, end of period $8.82 $9.47
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 4.96(5) 14.85
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 15,401 14,225
Ratio of expenses to average net assets (%) 1.15(6) 1.06
Ratio of net investment income (loss) to average net assets (%) 6.08(6) 6.36
Portfolio turnover rate (%) 62 64
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(7) 1987(8) 1988 1989 1990 1991(1) 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 (loss) 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 capitol 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(4)(%) 0.12(5) (5.13)(5) 15.88 7.54 4.60 10.07 7.89
Total adjusted investment return at net asset
value(4,9) (%) (0.39)(5) (5.34)(5) -- -- -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 15,753 15,026 24,278 29,841 35,820 51,467 65,933
Ratio of expenses to average net assets (%) 0.56(5) 0.61(5) 2.05 2.32 2.20 2.36 2.17
Ratio of adjusted expenses to average net
assets(10) (%) 1.07(5) 0.82(5) -- -- -- -- --
Ratio of adjusted net investment income to
average net assets (%) 4.96(5) 4.05(5) 6.66 5.79 5.96 5.61 5.78
Ratio of net investment income (loss) to
average net assets(10) (%) 4.45(5) 3.84(5) -- -- -- -- --
Portfolio turnover rate (%) 153 42 82 29 41 83 40
Fee reduction per share ($) 0.05 0.02 -- -- -- -- --
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995(2)
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.39 $ 9.98 $ 8.82
Net investment income (loss) 0.53 0.48 0.51
Net realized and unrealized gain (loss) on
investments sold
and financial futures contracts 0.72 (0.90) 0.69
Total from investment operations 1.25 (0.42) 1.20
Less distributions:
Dividends from net investment income (0.56) (0.48) (0.51)
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 capitol paid-in -- -- --
Total distributions (0.66) (0.74) (0.55)
Net asset value, end of period $ 9.98 $ 8.82 $ 9.47
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4)(%) 13.69 (4.44) 13.99
Total adjusted investment return at net asset
value(4,9) (%) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 113,442 151,069 155,234
Ratio of expenses to average net assets (%) 2.06 1.85 1.79
Ratio of adjusted expenses to average net
assets(10) (%) -- -- --
Ratio of adjusted net investment income to
average net assets (%) 5.23 5.36 5.61
Ratio of net investment income (loss) to
average net assets(10) (%) -- -- --
Portfolio turnover rate (%) 100 62 64
Fee reduction per share ($) -- -- --
</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) 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) Annualized.
(7) For the period August 25, 1986 to April 30, 1987.
(8) For the period May 1, 1987 to October 31, 1987.
(9) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during periods shown.
(10) Unreimbursed, without fee reduction.
HIGH YIELD TAX-FREE FUND 7
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
MANAGED TAX-EXEMPT FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: FMTAX CLASS B: FMTEX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks as high a level of current income exempt from Federal income tax
as is consistent with preservation of capital. To pursue this goal, the fund
ordinarily invests at least 80% of assets in a diversified portfolio of
municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. The fund's municipal securities must be investment grade at the
time of investment.
The fund generally does not invest more than 25% of assets in any one industry,
but reserves the right to invest more than 25% in the securities of a given
sector of the municipals market, in industrial revenue bonds, in securities of a
given state, or in U.S. Government and agency securities.
For defensive purposes, the fund may increase its holdings of investment-grade
short-term municipal securities, and may invest in taxable investment-grade
short-term securities. The fund also may invest in certain other investments,
and may engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income investments, 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
bonds). Economic and policy factors can also affect performance. To the extent
that the fund concentrates in the securities of a given issuer, sector, region,
type or rating, it increases its exposure to the risks of that category of
security. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since 1993,
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
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
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
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (net of reduction)(3) 0.55% 0.55%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.21% 0.21%
Total fund operating expenses (net of reduction)(3) 1.06% 1.76%
</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 $55 $77 $101 $169
Class B shares
Assuming redemption
at end of period $68 $85 $115 $189
Assuming no redemption $18 $55 $ 95 $189
</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) Without reduction, the management fee would be 0.60% for each class and
total fund operating expenses would be 1.11% for Class A and 1.81% 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 MANAGED TAX-EXEMPT FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) (1.31)(3) 18.98 8.25 5.66 12.55 6.39 15.51 (5.85) 12.63
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1992(1) 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.25 $ 11.12 $ 12.13 $ 10.79
Net investment income (loss) 0.55 0.70 0.64 0.63
Net realized and unrealized gain (loss) on investments (0.11) 1.05 (1.25) 0.77
Total from investment operations 0.44 1.75 (0.61) 1.40
Less distributions:
Dividends from net investment income (0.53) (0.70) (0.64) (0.63)
Distributions from net realized gain on investments sold (0.04) (0.04) (0.09) --
Total distributions (0.57) (0.74) (0.73) (0.63)
Net asset value, end of period $11.12 $ 12.13 $ 10.79 $ 11.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 4.74(3) 16.10 (5.22) 13.30
Total adjusted investment return at net asset value(2,4) (%) 4.51(3) 15.77 (5.29) 13.25
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 9,589 14,244 20,968 42,384
Ratio of expenses to average net assets (%) 0.78(3) 0.70 0.95 1.06
Ratio of adjusted expenses to average net assets(5) (%) 1.01(3) 1.03 1.02 1.11
Ratio of net investment income (loss) to average net assets (%) 6.24(3) 5.98 5.52 5.53
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 6.01(3) 5.65 5.42 5.48
Portfolio turnover rate (%) 23 23 59 104
Fee reduction per share ($) 0.02 0.04 0.01 0.01
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(7) 1988 1989 1990 1991 1992
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $ 9.69 $ 10.73 $ 10.78 $ 10.61 $ 11.12
Net investment income (loss) 0.27 0.74 0.74 0.73 0.68 0.66
Net realized and unrealized gain (loss) on investments (0.31) 1.04 0.12 (0.14) 0.61 0.04
Total from investment operations (0.04) 1.78 0.86 0.59 1.29 0.70
Less distributions:
Dividends from net investment income (0.27) (0.74) (0.74) (0.72) (0.72) (0.64)
Distributions from net realized gain on investments sold -- -- (0.07) (0.04) (0.06) (0.06)
Total distributions (0.27) (0.74) (0.81) (0.76) (0.78) (0.70)
Net asset value, end of period $ 9.69 $ 10.73 $ 10.78 $ 10.61 $ 11.12 $ 11.12
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) (1.31)(3) 18.98 8.25 5.66 12.55 6.39
Total adjusted investment return at net asset value(2,4)(%) (2.49)(3) 18.00 7.66 5.10 12.24 6.20
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 8,220 46,329 106,107 140,803 199,955 226,943
Ratio of expenses to average net assets (%) 1.40(3) 0.74 0.93 0.95 1.19 1.35
Ratio of adjusted expenses to average net assets(5) (%) 2.58(3) 1.72 1.52 1.51 1.50 1.54
Ratio of net investment income (loss) to average net assets (%) 6.11(3) 6.90 6.81 6.74 6.19 5.74
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 4.93(3) 5.92 6.22 6.18 5.88 5.55
Portfolio turnover rate (%) 174 186 94 54 30 23
Fee Reduction per share ($) 0.05(3) 0.10 0.06 0.06 0.04 0.02
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 11.12 $ 12.13 $ 10.79
Net investment income (loss) 0.64 0.56 0.55
Net realized and unrealized gain (loss) on investments 1.05 (1.25) 0.78
Total from investment operations 1.69 (0.69) 1.33
Less distributions:
Dividends from net investment income (0.64) (0.56) (0.55)
Distributions from net realized gain on investments sold (0.04) (0.09) --
Total distributions (0.68) (0.65) (0.55)
Net asset value, end of period $ 12.13 $ 10.79 $ 11.57
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 15.51 (5.85) 12.63
Total adjusted investment return at net asset value(2,4)(%) 15.18 (5.92) 12.61
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 256,342 217,066 178,002
Ratio of expenses to average net assets (%) 1.23 1.62 1.73
Ratio of adjusted expenses to average net assets(5) (%) 1.56 1.69 1.78
Ratio of net investment income (loss) to average net assets (%) 5.49 4.84 4.92
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 5.16 4.77 4.87
Portfolio turnover rate (%) 23 59 104
Fee Reduction per share ($) 0.04 0.01 0.01
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1992 and April
22, 1987, respectively.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Annualized.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
MANAGED TAX-EXEMPT FUND 9
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
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 Massachusetts municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
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 municipal securities. Up to 33.3% of assets may be invested in
municipal securities rated A or lower, or if unrated, of equivalent quality. The
balance of the fund's investments must be rated, at the time of investment, in
the top two rating categories or be of equivalent quality. 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
and tax-free investment-grade short-term municipal securities. For defensive
purposes, it may invest more assets in these securities. The fund also may
invest in certain other investments, including private activity bonds, and may
engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
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
bonds).
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 Massachusetts issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - state constitutional limits on tax increases
- - 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 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Dianne Sales-Singer, 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
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
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
<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 expense 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.
10 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.63 $10.94 $ 10.63 $ 11.15 $ 11.75 $ 12.43
Net investment income (loss) 0.65 0.70 0.69 0.73 0.71 0.67 0.63
Net realized and unrealized gain (loss) on investments 0.63 0.31 (0.31) 0.53 0.60 0.82 (0.75)
Total from investment operations 1.28 1.01 0.38 1.26 1.31 1.49 (0.12)
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71) (0.67) (0.63)
Distributions from net realized gain on investments sold -- -- -- (0.01) -- (0.14) (0.12)
Total distributions (0.65) (0.70) (0.69) (0.74) (0.71) (0.81) (0.75)
Net asset value, end of period $10.63 $10.94 $10.63 $ 11.15 $ 11.75 $ 12.43 $ 11.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 13.13(4) 9.67 3.49 12.10 12.11 13.29 (0.97)
Total adjusted investment return at net asset value(3,6) (%) 10.38(4) 9.16 2.72 10.66 10.93 12.38 (1.50)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 4,757 9,138 9,968 15,015 29,113 50,019 54,122
Ratio of expenses to average net assets (%) 1.00(4) 1.00 1.00 0.60 0.60 0.67 0.70
Ratio of adjusted expenses to average net assets(7) (%) 3.75(4) 1.51 1.77 2.04 1.78 1.58 1.23
Ratio of net investment income (loss) to average net assets (%) 6.28(4) 6.35 6.31 6.64 6.18 5.61 5.28
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.53(4) 5.84 5.54 5.20 5.00 4.70 4.75
Portfolio turnover rate (%) 20 2 2 29 56 79 29
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14 0.11 0.06
<CAPTION>
CLASS A - YEAR ENDED AUGUST 31, 1995 1996(2)
- -------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 11.56 $ 11.76
Net investment income (loss) 0.65 0.32
Net realized and unrealized gain (loss) on investments 0.20 0.23
Total from investment operations 0.85 0.55
Less distributions:
Dividends from net investment income (0.65) (0.32)
Distributions from net realized gain on investments sold -- --
Total distributions (0.65) (0.32)
Net asset value, end of period $ 11.76 $ 11.99
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.66 4.76(5)
Total adjusted investment return at net asset value(3,6) (%) 7.21 4.37(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 54,416 56,852
Ratio of expenses to average net assets (%) 0.70 0.76(4,8)
Ratio of adjusted expenses to average net assets(7) (%) 1.15 1.15(4)
Ratio of net investment income (loss) to average net assets (%) 5.67 5.42(4)
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 5.22 5.04(4)
Portfolio turnover rate (%) 24 24
Fee reduction per share ($) 0.05 0.04(4)
</TABLE>
(1) Class A shares commenced operations on September 3, 1987.
(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.
(8) The ration does not reflect the application of fee credits, had the credits
been taken into consideration, the ratio would have been 0.70%.
MASSACHUSETTS TAX-FREE INCOME FUND 11
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
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 New York municipal
securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
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 municipal securities. Up to 33.3% of assets may be invested in
municipal securities rated A or lower, or if unrated, of equivalent quality. The
balance of the fund's investments must be rated, at the time of investment, in
the top two rating categories or be of equivalent quality. 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
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
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
bonds).
Because the fund is not diversified and because it concentrates in securities of
New York issuers, its performance is largely dependent on factors that may
disproportionately affect New York issuers. These 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 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, 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
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
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
<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 expense 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.
12 NEW YORK TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992 1993 1994 1995 1996(2)
- -------------------------------- ------- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.48 $ 11.01 $ 10.74 $ 11.29 $ 11.90 $ 12.63 $ 11.73 $ 11.88
Net investment income (loss) 0.61 0.68 0.67 0.72 0.72 0.68 0.64 0.65 0.33
Net realized and unrealized gain (loss)
on investments 0.48 0.55 (0.25) 0.55 0.63 0.87 (0.77) 0.15 0.30
Total from investment operations 1.09 1.23 0.42 1.27 1.35 1.55 (0.13) 0.80 0.63
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72) (0.68) (0.64) (0.65) (0.33)
Distributions from net realized gain
on investments sold -- (0.02) (0.02) -- (0.02) (0.14) (0.13) -- --
Total distributions (0.61) (0.70) (0.69) (0.72) (0.74) (0.82) (0.77) (0.65) (0.33)
Net asset value, end of period $10.48 $11.01 $ 10.74 $ 11.29 $ 11.90 $ 12.63 $ 11.73 $ 11.88 $ 12.18
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) 11.40(4) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.37(5)
Total adjusted investment return at net
asset value(3,6) (%) 7.56(4) 11.22 3.05 11.02 11.09 12.83 (1.58) 6.74 4.97(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted) ($) 4,306 8,795 13,357 20,878 33,806 52,444 55,690 55,753 57,770
Ratio of expenses to average net assets
(%) 1.00(4) 1.00 1.00 0.60 0.60 0.67 0.70 0.70 0.73(4,8)
Ratio of adjusted expenses to average
net assets(7) (%) 4.84(4) 1.65 1.69 1.82 1.68 1.54 1.23 1.15 1.13(4)
Ratio of net investment income (loss) to
average net assets (%) 6.11(4) 6.30 6.17 6.57 6.22 5.63 5.28 5.67 5.47(4)
Ratio of adjusted net investment income
(loss) to average net assets(7) (%) 2.27(4) 5.65 5.48 5.35 5.14 4.76 4.75 5.22 5.07(4)
Portfolio turnover rate (%) 16 10 10 12 48 56 23 70 30
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13 0.11 0.06 0.05 0.05(4)
</TABLE>
(1) Class A shares commenced operations on September 11, 1987.
(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.
(8) The ration does not reflect the application of fee credits, had the credits
been taken into consideration, the ration would have been 0.70%.
NEW YORK TAX-FREE INCOME FUND 13
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
TAX-FREE BOND FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks as high a level of current 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
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal bonds may include investment-grade bonds, notes and
commercial paper. Less than 35% of assets may be invested in municipal bonds
rated BB/Ba or B (junk bonds). The fund may not invest more than 25% of assets
in industrial development or pollution control bonds that are directly or
indirectly dependent on the revenues or credit of private entities in any one
industry.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income investments, 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 fixed income securities (including
municipal bonds). 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 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Thomas C. Goggins has been leader of the fund's portfolio management team
since joining the adviser in April 1995. A senior vice president of the adviser,
Mr. Goggins has been in the investment business since 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
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
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------
<S> <C> <C>
Management fee 0.55% 0.55%
12b-1 fee(4) 0.25% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses(4) 1.09% 1.84%
</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 $172
Class B shares
Assuming redemption
at end of period $69 $88 $120 $196
Assuming no redemption $19 $58 $100 $196
</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.
(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.
14 TAX-FREE BOND FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
__________________________.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED DECEMBER 31, 1990(1) 1991 1992 1993 1994(2) 1995
------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39
Net investment income (loss) 0.71 0.69 0.67 0.62 0.58 0.57(3)
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93 (1.58) 1.28
Total from investment operations 0.58 1.41 1.09 1.55 (1.00) 1.85
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62) (0.57) (0.57)
Distributions from net realized gain on investments sold -- (0.39) (0.18) (0.44) -- --
Total distributions (0.68) (1.07) (0.86) (1.06) (0.57) (0.57)
Net asset value, end of period $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 6.04(5) 14.78 10.97 15.15 (9.28) 20.20
Total adjusted investment return at net asset value(4,6) (%) 5.18(5) 14.40 10.67 14.98 (9.39) 20.08
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 45,437 73,393 99,523 136,521 114,539 118,797
Ratio of expenses to average net assets (%) 0.40(5) 0.60 0.66 0.78 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 1.26(5) 0.98 0.96 0.95 0.96 0.97
Ratio of net investment income (loss) to average net assets (%) 7.09(5) 6.86 6.46 5.57 5.72 5.67
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 6.29(5) 6.48 6.16 5.40 5.61 5.55
Portfolio turnover rate (%) 64 123 79 116 107 113
Fee reduction per share ($) 0.08 0.04 0.03 0.02 0.01 0.01(3)
<CAPTION>
CLASS B -- YEAR ENDED DECEMBER 31, 1992 1993 1994(2) 1995
---- ---- ------- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.24 $ 10.47 $ 10.96 $ 9.38
Net investment income (loss) 0.59(3) 0.54 0.50 0.50(3)
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28
Total from investment operations 1.01 1.47 (1.08) 1.78
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49)
Distributions from net realized gain on investments sold (0.18) (0.44) -- --
Total distributions (0.78) (0.98) (0.50) (0.49)
Net asset value, end of period $ 10.47 $ 10.96 $ 9.38 $ 10.67
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 10.15 14.30 (10.05) 19.41
Total adjusted investment return at net asset value(4,6) (%) 9.85 14.13 (10.16) 19.29
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 18,272 56,384 70,243 76,824
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60
Ratio of adjusted expenses to average net assets(7) (%) 1.73 1.70 1.71 1.72
Ratio of net investment income (loss) to average net assets (%) 5.57 4.66 4.97 4.90
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 5.27 4.49 4.86 4.78
Portfolio turnover rate (%) 79 116 107 113
Fee reduction per share (%) 0.03(3) 0.02 0.01 0.01(3)
</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) 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) Unreimbursed, without fee reduction.
TAX-FREE BOND FUND 15
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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
- - Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
- - Lower annual expenses than Class B shares.
CLASS B
- - No front-end sales charge; all your money goes to work for you right away.
- - Higher annual expenses than Class A 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:
<TABLE>
<CAPTION>
CLASS A SALES CHARGES
- ---------------------
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:
<TABLE>
<CAPTION>
CDSC ON $1 MILLION+ INVESTMENTS
- -------------------------------
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:
<TABLE>
<CAPTION>
CLASS B DEFERRED CHARGES
- ------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
<S> <C>
1st year 5.00%
2nd year 4.00%
3rd or 4th years 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.
16 YOUR ACCOUNT
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
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 to an
existing account (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 In general, the CDSC for either share class may be waived on
shares you sell for the following reasons:
- - to make payments through certain systematic withdrawal plans
- - to make certain distributions from a retirement plan
- - because of shareholder death or disability
To utilize: 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 applies)
- - participants in certain 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
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 tax-free income 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 17
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
BUYING SHARES
OPENING AN ACCOUNT
BY CHECK
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A BLANK CHECK.]
- Make out a check for the investment amount, payable to "John Hancock
Investor Services Corporation."
- Deliver the check and your completed application to your financial
representative, or mail them to Investor Services (address on next page).
ADDING TO AN ACCOUNT
- Make out a check for the investment amount payable to "John Hancock
Investor Services Corporation."
- Fill out the detachable investment slip from an account statement. If no
slip is available, include a note 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).
OPENING AN ACCOUNT
BY EXCHANGE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WHITE ARROW OUTLINED IN BLACK THAT POINTS TO THE RIGHT
ABOVE A BLACK THAT POINTS TO THE LEFT.]
- Call your financial representative or Investor Services to request an
exchange.
ADDING TO AN ACCOUNT
- Call Investor Services to request an exchange.
OPENING AN ACCOUNT
BY WIRE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE ARROW OUTLINED IN BLACK THAT POINTS UPWARDS
AT A 45 DEGREE ANGLE.]
- Deliver your completed application to your financial representative, or
mail it to Investor Services.
- Obtain your account number by calling your financial representative or
Investor Services.
- 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.
ADDING TO AN ACCOUNT
- Instruct your bank to wire the amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your share class, your account number and the
name(s) in which the account is registered. Your bank may charge a fee to
wire funds.
OPENING AN ACCOUNT
BY PHONE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.]
See "By wire" and "By exchange."
ADDING TO AN ACCOUNT
- 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."
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
SELLING SHARES
DESIGNED FOR
BY LETTER
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE.]
- Accounts of any type.
- Sales of any amount.
TO SELL SOME OR ALL OF YOUR SHARES
- Write a letter of instruction or complete a stock power indicating the
fund name, your share class, your account number, the name(s) in which
the account is registered and the dollar value or number of shares you
wish to sell.
- 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.
DESIGNED FOR
BY PHONE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.]
- Most accounts.
- Sales of up to $100,000.
TO SELL SOME OR ALL OF YOUR SHARES
- For automated service 24 hours a day using your touch-tone phone, call
the John Hancock Funds 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.
DESIGNED FOR
BY WIRE OR ELECTRONIC FUNDS TRANSFER (EFT)
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE ARROW OUTLINED IN BLACK THAT POINTS UPWARDS
AT A 45 DEGREE ANGLE.]
- Requests by letter to sell any amount (accounts of any type).
- Requests by phone to sell up to $100,000 (accounts with telephone
redemption privileges).
TO SELL SOME OR ALL OF YOUR SHARES
- Fill out the "Telephone Redemption" section of your new account
application.
- To verify that the telephone 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.
DESIGNED FOR
BY EXCHANGE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WHITE ARROW OUTLINED IN BLACK THAT POINTS TO THE RIGHT
ABOVE A BLACK THAT POINTS TO THE LEFT.]
- Accounts of any type.
- Sales of any amount.
TO SELL SOME OR ALL OF YOUR SHARES
- Obtain a current prospectus for the fund into which you are 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 19
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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.
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE]
<TABLE>
<CAPTION>
SELLER REQUIREMENTS FOR WRITTEN REQUESTS
- ----------------------------------------------------------------------------------------
<S> <C>
Owners of individual, joint, sole - Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general partner - On the letter, the signatures and
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 accounts. - Letter of instruction.
- 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
co-tenants are deceased. - Letter of instruction signed by
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,
guardians and other sellers or account
types not listed above. - Call 1-800-225-5291 for instructions.
</TABLE>
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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 - 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 one 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 21
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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 its
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, SARSEPs, 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.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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 which 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 that 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").
[A flow chart that contains 7 rectangular-shaped boxes and illustrates the
hierachy of how the funds are organized. Within the flowchart, there are 5
tiers. The tiers are connected by shaded lines.]
[Shareholders represent the first tier. There is a shaded vertical arrow on the
left-hand side of the page. The arrow has arrowheads on both ends and is
contained within two horizontal, shaded lines. This is meant to highlight tiers
two and three which focus on Distribution and Shareholder Services.]
[Financial Services Firms and their Representatives are shown on the second
tier. Principal Distributor and Transfer Agent are shown on the third tier.]
[A shaded vertical arrow on the right-hand side of the page denotes those
entities involved in the Asset Management. The arrow has arrowheads on both ends
and is contained within two horizontal, shaded lines. This fourth tier includes
the Investment Advisor and the Custodian.]
[The fifth tier contains the Trustees/Directors.]
YOUR ACCOUNT 23
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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 California Tax-Free Income Fund, High
Yield Tax-Free Fund and Tax-Free Bond Fund, each fund's investment goal is
non-fundamental and may be changed without shareholder approval. Except for
Managed Tax Exempt Fund, each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. High Yield Fund's 80% credit policy is also fundamental.
DIVERSIFICATION All of the tax-free funds are diversified, except the
Massachusetts and New York Tax-Free Income funds. Because they are not
diversified, these two funds can invest more than 5% of assets in the securities
of a single issuer.
- --------------------------------------------------------------------------------
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 fund in 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' respective boards. 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.
<TABLE>
<CAPTION>
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES(1)
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%
Managed Tax-Exempt $6,993,452 3.51%
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.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
<TABLE>
<CAPTION>
CLASS A INVESTMENTS
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 -- 1.00% 0.25% 1.24%
Next $1 - $5M above that -- 0.50% 0.25% 0.74%
Next $1 and more above that -- 0.25% 0.25% 0.49%
WAIVER INVESTMENTS(2) -- 0.00% 0.25% 0.25%
<CAPTION>
CLASS B INVESTMENTS
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 fund commission
payments when there is no initial sales charge.
FUND DETAILS 25
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
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.
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 which 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.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in other investments.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
HIGHER RISK SECURITIES AND PRACTICES
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.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
- - No policy limitation on usage; fund may be using currently
+ Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
California
Tax-Free High Yield Managed Massachusetts New York
Income Tax-Free Tax-Exempt Tax-Free Income Tax-Free Income Tax-Free Bond
------ -------- ---------- --------------- --------------- -------------
<S> <C> <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) 10 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. - - - - - -
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. - - - - - -
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. - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
RESTRICTED AND ILLIQUID SECURITIES
Securities not traded on the open
market. May include illiquid Rule 144A
securities. Liquidity, market risks. 10 10 15 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. - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
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. + + + + + +
- ---Options on securities and indices.
Interest rate, market, hedged or
speculative leverage, correlation,
liquidity, credit, opportunity risks. 10(2) 10(2) + + + 10(2)
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.
10 - 10 10 10 10
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. + + + + + +
</TABLE>
(1) Applies to reverse repurchase agreements. Other borrowings are limited to
15% of total assets.
(2) Applies to purchased options only.
FUND DETAILS 27
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
<TABLE>
<CAPTION>
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS
INVESTMENT-GRADE BONDS
QUALITY RATING
(S&P/MOODY'S)(1) HIGH YIELD TAX-FREE FUND TAX-FREE BOND FUND
- ---------------- ------------------------ ------------------
<S> <C> <C>
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%
D/D 0.00% 0.00%
% of portfolio in bonds 100.0 99.6
</TABLE>
- - Rated by S&P or Moody's
- - Rated by the adviser
(1) 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.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
tax-free income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
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 into this prospectus (is legally a part of this
prospectus).
To request a free copy of the current annual/semi-annual report or SAI, please
write or call:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[John Hancock's graphic logo. A circle, a diamond, triangle and a diamond.]
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[John Hancock's script logo.]
<PAGE>
John Hancock Funds
- --------------------------------------------------------------------------------
TAX-FREE
BOND
FUND
ANNUAL REPORT
December 31, 1995
<PAGE>
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
CHARLES L. LADNER*
LEO E. LINBECK*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders -- technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place -- slow economic growth, muted inflation and decent corporate earnings --
it would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John Hancock
Funds, we never stop working to find ways to sustain and improve the quality of
information and the level of assistance we provide you. Our commitment to this
task is no less than John Hancock's loyalty was to his fledgling country when he
is said to have uttered, "if it does the public good, burn Boston." We won't go
that far, of course, but we share our namesake's dedication to putting the
public before all else.
In our case, that public is you, our shareholders. We take very seriously
the role you have entrusted to us, that of helping you achieve your financial
goals. Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
BY THOMAS C. GOGGINS
FOR THE PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK
TAX-FREE BOND FUND
"SOFT LANDING" HELPED BOOST MUNICIPAL PRICES IN 1995
Slowing economic growth and easing inflationary pressures provided the backdrop
for an unexpectedly strong bond market rally in 1995. The year got off to an
impressive start as more investors came to accept that the Federal Reserve Board
could actually engineer a "soft landing" -- in which economic growth is slow but
steady and inflation remains low. The first quarter was particularly strong for
municipal bonds, which outpaced Treasury, mortgage and corporate bonds alike.
[A 2 1/4" x 3" photo of Thomas C. Goggins at bottom right. Caption reads:
"Thomas C. Goggins".]
However, various tax-reform proposals grabbed the headlines in the second
quarter and stymied the rise of municipals. At issue was the notion that some
proposals, particularly the flat-tax proposal, could eliminate any need for
investors to own tax-exempt securities. But by the fall, municipals started to
regain some steam. Two interest-rate cuts in the last two quarters of the year,
coupled with rising demand for municipals from some institutional investors,
ignited another round of strength. By the end of 1995, municipals had turned in
their best performance since 1986.
A LOOK AT PERFORMANCE
John Hancock Tax-Free Bond Fund performed well, not only in absolute terms, but
also compared to its competitors. For the year ended December 31, 1995, the
Fund's Class A and Class B shares posted total returns of 20.20% and 19.41%,
respectively, at net asset value. Those returns outpaced the average general
municipal bond fund's return of 16.84% for the same period, according to Lipper
Analytical Services.(1)
There were several factors contributing to the Fund's better-than-average
performance. First was duration, which measures how sensitive
[CAPTION]
"BY THE END OF 1995, MUNICIPALS HAD TURNED IN THEIR
BEST PERFORMANCE SINCE 1986."
3
<PAGE>
John Hancock Funds - Tax-Free Bond Fund
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) Transportation 21%; 2) Electric Utilities 18%; 3) Health
18%; 4) General Obligation Bonds 11%; 5) Pollution Control 10%. Footnote below
reads: "As a percentage of net assets on December 31, 1995."]
the Fund's share price is to changes in interest rates. In the first quarter of
the year, the Fund's duration was relatively long, which benefited its
performance when interest rates were falling. In the second quarter we reduced
our duration by replacing some longer-term bonds with shorter-term bonds. We did
that because there wasn't much difference in yield between short- and long-term
bonds. In other words, we did not give up a great amount of yield to own the
less volatile, shorter-term bonds. That strategy also paid off because the
second quarter was a particularly volatile period for municipal bonds. By the
fall, however, we felt that interest rates could resume their decline, so we
made the Fund more interest-rate sensitive by lengthening our duration again.
Having a longer duration during the second half of the year also helped our
performance.
Our continued focus on non-callable bonds was also an advantage for the
Fund. Non-callable bonds are so-called because they can't be redeemed by their
issuer before their scheduled maturity dates. They tended to benefit more fully
from the bond market rally than callable bonds. A bond with a call will trade
under the assumption that the issuer will call the bond -- or pay it off -- on
the call provision date, which is the first date it can be redeemed by its
issuer. As the call date approaches, callable bonds are less likely to
participate fully in a rally. Non-callable bonds also offer another advantage:
they provide a predictable and steady stream of income. If interest rates
decline further, our non-callable bonds can't be redeemed early, so we won't be
forced to put the proceeds from calls back to work in the market at lower
interest rates.
Finally, we focused on buying discount bonds, which sell below par (face)
value. During periods when interest rates are declining, discount bonds tend to
appreciate more than par bonds, and more than premium bonds, which trade above
par value.
FOCUS ON SECTORS
Transportation bonds made up the Fund's largest sector concentration at about
21% of net assets at the end of 1995. During the period we added several
industrial development bonds in the airline sector, which our team of analysts
identified as having good prospects for appreciation. Dallas/Fort Worth issued
bonds to construct additional gates for American Airlines at the airport.
Indianapolis issued bonds for a United Airlines maintenance facility. These
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Category"' the header for the right column is "Trend...and what's
driving it." The first listing is "Dallas/Fort Worth/American Airlines" followed
by an up arrow and the phrase "Improving profitability for airline". The second
listing is "Indianapolis/United Airlines" followed by an up arrow and the phrase
"Better earnings for UAL". The third listing is "Housing bonds" followed by a
flat arrow and the phrase "Rising risk of prepayments". Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."]
[CAPTION]
"...FOCUS ON NON-CALLABLE BONDS WAS ALSO AN ADVANTAGE FOR THE FUND."
4
<PAGE>
John Hancock Funds - Tax-Free Bond Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 25% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
20.20% total return for John Hancock Tax-Free Bond Fund: Class A. The second
represents the 19.41% total return for John Hancock Tax-Free Bond Fund: Class B.
The third represents the 16.84% total return of the average general municipal
bond fund. A footnote below states: "Total returns for John Hancock Tax-Free
Bond Fund are at net asset value with all distributions reinvested. The average
general municipal bond fund is tracked by Lipper Analytical Services. See
following page for historical performance information."]
were two of the Fund's largest holdings and best performers for the year.
Housing bonds, which posted weak gains during 1995, were the municipal
market's laggards. These bonds were held back by the perception that mortgages
underlying these housing bonds would be refinanced as interest rates fall.
However, we've maintained a core holding in high-quality, high-yielding housing
bonds that we think are less vulnerable to early payment.
The Fund's Trustees recently voted to give the Fund the flexibility to
invest as much as one-third of its assets in high-yielding bonds that carry
below investment-grade ratings. We plan to be selective in adding these bonds,
buying them only when we think that they offer enough reward to justify the risk
taken.
OUTLOOK
Political haggling over various tax-reform proposals could continue to draw
headlines in 1996. If that is the case, the municipal bond market could
experience further volatility in the months to come. We think it's unlikely that
any significant tax reform will be enacted within the next two years. And we're
not convinced that the flat tax is viable. So in our view, the market has
overreacted. We believe that the tax-reform scare has actually created an
opportunity. At the end of 1995, municipals were priced attractively compared to
Treasuries. In fact, there was only one other time in recent history that
municipals were this cheap relative to Treasuries. In our experience, it is in
times like these that municipals offer good value for investors seeking
after-tax income.
It may be difficult for municipals to achieve the same exceptional gains
they made in 1995. However, there are several reasons why we're optimistic about
1996. We believe economic growth will continue to slow, inflation will remain
subdued and, as a result, interest rates could continue to fall. Since bond
prices generally move in the opposite direction of interest rates, that could be
good news for bonds. What's more, the supply of new municipals issued should
remain relatively weak. And if demand stays constant or improves, that too could
be a positive.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is lower.
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
[CAPTION]
"...THE TAX-REFORM SCARE HAS ACTUALLY CREATED AN OPPORTUNITY."
5
<PAGE>
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Free Bond Fund. Total return is a
performance measure that equals the sum of all dividends and capital gains,
assuming reinvestment of these distributions and the change in the price of the
Fund's average net assets. Performance figures included the maximum applicable
sales charge of 4.50% for Class A shares. The effect of the maximum contingent
deferred sales charge for Class B shares (maximum 5% and declining to 0% over
six years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will perform in
the future. Also, keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may be worth
more or less than their original cost, depending on when you sell them.
Note: A portion of the Fund's income may be subject to taxes. Some investors may
be subject to the Alternative Minimum Tax. Capital gains are taxable.
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A 14.79% 52.69% 62.00%(1)
Tax-Free Bond Fund: Class B 14.42% N/A 32.24%(2)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A(3) 14.79% 8.84% 8.39%(1)
Tax-Free Bond Fund: Class B(3) 14.42% N/A 7.24%(2)
</TABLE>
YIELDS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
-----
<S> <C>
Tax-Free Bond Fund: Class A 5.11%
Tax-Free Bond Fund: Class B 4.61%
</TABLE>
NOTES TO PERFORMANCE
(1) Class A shares started on January 5, 1990.
(2) Class B shares started on December 31, 1991.
(3) The Adviser has agreed to limit the Fund's expenses, including the
management fee (but not including the 12b-1 fee), to 0.70% of the Fund's
average daily net assets. Without the limitation of expenses, the average
annualized total returns for the one-year and five-year periods and since
inception for Class A shares would have been 14.67%, 8.62%, and 8.06%,
respectively. The average annualized total returns for the one-year period
and since inception for Class B shares would have been 14.30% and 7.07%,
respectively.
6
<PAGE>
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Free Bond Fund would be worth on December 31, 1995, assuming you have been
invested since the day each class of shares started and reinvested all
distributions. For comparison, we've shown the same $10,000 investment in the
Lehman Brothers Municipal Bond Index -- an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
[Tax Free Bond Fund
Class A shares
Line chart with the heading Tax Free Bond Fund: Class A, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Tax Free Bond Fund on January 5, 1990, before sales charge, and is equal
to $16,961 as of December 31, 1995. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $16,374 as of December 31,
1995. The third line represents the Tax Free Bond Fund after sales charge and is
equal to $16,200 as of December 31, 1995.
Tax Free Bond Fund
Class B shares
Line chart with the heading Tax Free Bond Fund: Class B, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $13,609 as of December 31, 1995. The second line represents the
value of the hypothetical $10,000 investment made in the Tax Free Bond Fund on
December 31, 1991, before contingent deferred sales charge, and is equal to
$13,524 as of December 31, 1995. The third line represents the Tax Free Bond
Fund after contingent deferred sales charge and is equal to $13,224 as of
December 31, 1995.]
7
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds
(cost - $190,204,887)....................................... $205,442,483
------------
Receivable for investments sold................................ 12,238,500
Receivable for shares sold..................................... 7,615
Interest receivable............................................ 3,387,852
Receivable from John Hancock Advisers, Inc. -
Note B........................................................ 27,926
Miscellaneous assets........................................... 27,437
------------
Total Assets................................. 221,131,813
------------------------------------------------------------
LIABILITIES:
Temporary overdraft of cash.................................... 3,533,358
Payable for investments purchased.............................. 21,760,596
Payable for shares repurchased................................. 8,787
Dividend payable............................................... 25,227
Payable for variation margin................................... 23,438
Payable to John Hancock Advisers, Inc.
and affiliates - Note B....................................... 108,251
Accounts payable and accrued expenses.......................... 51,085
------------
Total Liabilities............................ 25,510,742
------------------------------------------------------------
NET ASSETS:
Capital paid-in................................................ 195,035,479
Accumulated net realized loss on investments
and financial futures contracts............................... (14,389,504)
Net unrealized appreciation of investments
and financial futures contracts............................... 14,975,096
------------
Net Assets................................... $195,621,071
============================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with $0.01 per share par value, respectively)
Class A - $118,797,313/11,137,117.............................. $ 10.67
================================================================================
Class B - $76,823,758/7,202,812................................ $ 10.67
================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($10.67 x 104.71%)................................... $ 11.17
================================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
</TABLE>
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
<TABLE>
STATEMENT OF OPERATIONS
Year ended December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................ $12,440,385
-----------
Expenses:
Investment management fee - Note B............................. 1,048,120
Distribution/service fee - Note B
Class A...................................................... 175,342
Class B...................................................... 663,054
Transfer agent fee............................................. 209,850
Registration and filing fees................................... 63,679
Custodian fee.................................................. 48,214
Auditing fee................................................... 47,989
Printing....................................................... 46,995
Legal fees..................................................... 30,747
Trustees' fees................................................. 29,411
Miscellaneous.................................................. 26,802
Advisory board fee............................................. 19,730
Less Management Fee Reduction - Note B (208,207)
-----------
Total Expenses................................ 2,201,726
Less Expense Reduction
by John Hancock Advisers,
Inc. - Note B................................. (24,419)
------------------------------------------------------------
Net Expenses.................................. 2,177,307
------------------------------------------------------------
Net Investment Income......................... 10,263,078
------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FINANCIAL FUTURES CONTRACTS
Net realized loss on investments sold........................... (4,728,195)
Net realized loss on financial futures contracts................ (2,308,339)
Change in net unrealized appreciation/depreciation
of investments................................................. 31,679,568
Change in net unrealized appreciation/depreciation
on financial futures contracts................................. (262,500)
-----------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts................... 24,380,534
------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations..................... $34,643,612
============================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................................... $ 10,263,078 $ 11,284,980
Net realized loss on investments sold and financial futures contracts............................... (7,036,534) (7,349,795)
Change in net unrealized appreciation/depreciation of investments and financial futures contracts... 31,417,068 (25,666,689)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations.................................... 34,643,612 (21,731,504)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A - ($0.5699 and $0.5730 per share, respectively)............................................ (6,647,931) (7,588,474)
Class B - ($0.4927 and $0.4973 per share, respectively)............................................ (3,620,138) (3,611,510)
------------ ------------
Total Distributions to Shareholders.............................................................. (10,268,069) (11,199,984)
------------ ------------
FROM FUND SHARE TRANSACTIONS-- NET*................................................................... (13,536,114) 24,808,198
------------ ------------
NET ASSETS:
Beginning of period................................................................................. 184,781,642 192,904,932
------------ ------------
End of period (including undistributed net investment income of $83,180 and $84,996, respectively).. $195,621,071 $184,781,642
============ ============
</TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold...................................................... 990,678 $ 10,001,197 2,973,332 $ 31,232,536
Shares issued to shareholders in reinvestment of distributions... 365,927 3,709,354 430,837 4,303,072
---------- ------------ ---------- ------------
1,356,605 13,710,551 3,404,169 35,535,608
Less shares repurchased.......................................... (2,422,945) (24,445,738) (3,655,146) (36,242,204)
---------- ------------ ---------- ------------
Net decrease..................................................... (1,066,340) $(10,735,187) (250,977) $ (706,596)
========== ============ ========== ============
CLASS B
Shares sold...................................................... 722,057 $ 7,261,875 3,736,809 $ 39,155,237
Shares issued to shareholders in reinvestment of distributions... 202,597 2,054,192 212,691 2,116,235
---------- ------------ ---------- ------------
924,654 9,316,067 3,949,500 41,271,472
Less shares repurchased.......................................... (1,207,168) (12,116,994) (1,608,678) (15,756,678)
---------- ------------ ---------- ------------
Net increase (decrease).......................................... (282,514) $ (2,800,927) 2,340,822 $ 25,514,794
========== ============ ========== ============
</TABLE>
THE STATEMENT OF CHANGES IN NET ASSETS SHOWS HOW THE VALUE OF THE FUND'S NET
ASSETS HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD. THE DIFFERENCE REFLECTS
EARNINGS LESS EXPENSES, ANY INVESTMENT GAINS AND LOSSES, DISTRIBUTIONS PAID TO
SHAREHOLDERS, AND ANY INCREASE OR DECREASE IN MONEY SHAREHOLDERS INVESTED IN THE
FUND. THE FOOTNOTE ILLUSTRATES THE NUMBER OF FUND SHARES SOLD, REINVESTED AND
REDEEMED DURING THE LAST TWO PERIODS, ALONG WITH THE CORRESPONDING DOLLAR
VALUES.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios, and supplemental data are as
follows:
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994(c) 1993 1992 1991
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period............................... $ 9.39 $ 10.96 $ 10.47 $ 10.24 $ 9.90
-------- -------- -------- ------- -------
Net Investment Income.............................................. 0.57(b) 0.58 0.62 0.67 0.69
Net Realized and Unrealized Gain (Loss) on Investments............. 1.28 (1.58) 0.93 0.42 0.72
-------- -------- -------- ------- -------
Total from Investment Operations.................................. 1.85 (1.00) 1.55 1.09 1.41
-------- -------- -------- ------- -------
Less Distributions:
Dividends from Net Investment Income............................... (0.57) (0.57) (0.62) (0.68) (0.68)
Distributions from Net Realized Gains on Investments Sold.......... -- -- (0.44) (0.18) (0.39)
-------- -------- -------- ------- -------
Total Distributions............................................... (0.57) (0.57) (1.06) (0.86) (1.07)
-------- -------- -------- ------- -------
Net Asset Value, End of Period..................................... $ 10.67 $ 9.39 $ 10.96 $ 10.47 $ 10.24
======== ======== ======== ======= =======
Total Investment Return at Net Asset Value (d)..................... 20.20% (9.28%) 15.15% 10.97% 14.78%
Total Adjusted Investment Return at Net Asset Value (a)............ 20.08% (9.39%) 14.98% 10.67% 14.40%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).......................... $118,797 $114,539 $136,521 $99,523 $73,393
Ratio of Expenses to Average Net Assets............................ 0.85% 0.85% 0.78% 0.66% 0.60%
Ratio of Adjusted Expenses to Average Net Assets (a)............... 0.97% 0.96% 0.95% 0.96% 0.98%
Ratio of Net Investment Income to Average Net Assets............... 5.67% 5.72% 5.57% 6.46% 6.86%
Ratio of Adjusted Net Investment Income to Average Net Assets (a).. 5.55% 5.61% 5.40% 6.16% 6.48%
Portfolio Turnover Rate............................................ 113% 107% 116% 79% 123%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: NET INVESTMENT INCOME, GAINS (LOSSES),
DIVIDENDS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET
ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD.
ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE
FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994(c) 1993 1992
------- ------- ------- -------
<S> <C> <C> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period......................................... $ 9.38 $ 10.96 $ 10.47 $ 10.24
------- ------- ------- -------
Net Investment Income........................................................ 0.50(b) 0.50 0.54 0.59(b)
Net Realized and Unrealized Gain (Loss) on Investments....................... 1.28 (1.58) 0.93 0.42
------- ------- ------- -------
Total from Investment Operations............................................ 1.78 (1.08) 1.47 1.01
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income......................................... (0.49) (0.50) (0.54) (0.60)
Distributions from Net Realized Gains on Investments Sold.................... -- -- (0.44) (0.18)
------- ------- ------- -------
Total Distributions......................................................... (0.49) (0.50) (0.98) (0.78)
------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 10.67 $ 9.38 $ 10.96 $ 10.47
======= ======= ======= =======
Total Investment Return at Net Asset Value (d)............................... 19.41% (10.05%) 14.30% 10.15%
Total Adjusted Investment Return at Net Asset Value (a)...................... 19.29% (10.16%) 14.13% 9.85%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).................................... $76,824 $70,243 $56,384 $18,272
Ratio of Expenses to Average Net Assets...................................... 1.60% 1.60% 1.53% 1.43%
Ratio of Adjusted Expenses to Average Net Assets (a)......................... 1.72% 1.71% 1.70% 1.73%
Ratio of Net Investment Income to Average Net Assets......................... 4.90% 4.97% 4.66% 5.57%
Ratio of Adjusted Net Investment Income to Average Net Assets (a)............ 4.78% 4.86% 4.49% 5.27%
Portfolio Turnover Rate...................................................... 113% 107% 116% 79%
</TABLE>
(a) On an unreimbursed basis.
(b) On average month end shares outstanding.
(c) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(d) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
SCHEDULE OF INVESTMENTS
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY TAX-FREE BOND FUND ON DECEMBER 31, 1995. IT HAS
ONE MAIN CATEGORY: TAX-EXEMPT LONG-TERM BONDS. THE TAX-EXEMPT LONG-TERM BONDS ARE BROKEN DOWN BY STATE. UNDER EACH STATE
IS A LIST OF THE SECURITIES OWNED BY THE FUND.
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ARIZONA (1.19%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj............. 8.200% 06/01/21 BBB $ 2,150 $ 2,328,794 7.57%
-----------
CALIFORNIA (9.20%)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc....... 5.875 05/01/20 A *4,000 4,009,600 5.86
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj.......................... 6.350 10/01/07 AAA *2,000 2,187,680 5.81
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center.. 8.400 04/01/15 B*** 500 478,750 8.77
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/24 BBB- *675 114,696 6.43
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/27 BBB- *1,000 140,540 6.43
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/28 BBB- *7,915 1,044,147 6.43
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.000 01/01/16 BBB- *2,000 2,007,520 5.98
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.500 01/01/32 BBB- *1,950 2,030,906 6.24
Sacramento Municipal Utility District,
Elec Rev Ref Ser A...................................... 6.250 08/15/10 AAA *1,280 1,431,066 5.59
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A........ 7.750 09/01/16 BBB*** 2,000 2,086,280 7.43
San Jose Financing Auth,
Rev Ser B Community Facil Proj.......................... 5.625 11/15/18 A+ *2,500 2,463,450 5.71
-----------
17,994,635
-----------
COLORADO (5.67%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470........................... 6.950 08/31/20 BAA*** *5,000 5,416,750 6.42
Denver, City and County of,
Airport Sys Rev Ser 1992A............................... 7.250 11/15/25 BBB 2,000 2,204,960 6.58
Airport Sys Rev Ser 1994A............................... 7.500 11/15/23 BBB 3,100 3,464,467 6.71
-----------
11,086,177
-----------
FLORIDA (7.83%)
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A.................................... 5.250 10/01/28 AA 9,000 8,765,910 5.39
Orange County Health Facilities Auth,
Rev Adventist Hlth Sys Hosp............................. 5.250 11/15/20 AAA *5,000 4,904,400 5.35
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA (CONTINUED)
Tampa Sports Auth,
Sales Tax Rev Tampa Bay Arena Proj...................... 5.750% 10/01/25 AAA $*1,500 $ 1,643,430 5.25%
-----------
15,313,740
-----------
GEORGIA (10.57%)
Georgia Municipal Electric Auth,
Pwr Rev Ser C........................................... 5.700 01/01/19 AAA 5,000 5,291,550 5.39
Pwr Rev Ser EE.......................................... 7.250 01/01/24 AAA 2,000 2,579,880 5.62
Pwr Rev Ser Z........................................... 5.500 01/01/20 AAA 5,840 6,021,741 5.33
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj. 6.800 01/01/12 A+ 1,000 1,165,240 5.84
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj......................... 7.000 01/01/23 BBB+ 5,470 5,616,760 6.82
-----------
20,675,171
-----------
ILLINOIS (3.25%)
Chicago, City of,
Skyway Toll Bridge Rev Ref Ser 1994..................... 6.750 01/01/17 BBB- 2,000 2,099,340 6.43
Illinois Development Finance Auth,
Rev Ref Ser A Columbus Cuneo Cabrini Proj............... 8.500 02/01/15 BBB+ 2,150 2,518,639 7.26
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg........................ 6.750 12/01/08 A-*** 1,640 1,739,663 6.36
-----------
6,357,642
-----------
INDIANA (3.66%)
Indianapolis Airport Auth,
Spec Facil Rev Ser A United Airlines Proj............... 6.500 11/15/31 BB *7,000 7,156,310 6.36
-----------
LOUISIANA (1.06%)
West Feliciana, Parish of,
Variable Rate Demand Poll Control Rev Ser 1985C
Gulf States Util Co Proj.............................. 7.000 11/01/15 BB+ 2,000 2,076,020 6.74
-----------
MICHIGAN (2.68%)
Michigan State Hospital Finance Auth,
Rev Ref 1990 Ser A Bay Medical Center Hosp.............. 8.250 07/01/12 BAA1*** 2,250 2,449,192 7.58
Williamston Community School District,
GO Ser 1996**........................................... 5.500 05/01/25 AAA *2,725 2,803,807 5.35
-----------
5,252,999
-----------
MISSISSIPPI (4.84%)
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc........... 7.300 05/01/25 BBB- *4,000 4,186,800 6.97
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj.... 7.000 04/01/22 BAA3*** 5,000 5,291,800 6.61
-----------
9,478,600
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
NEVADA (5.19%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj........ 6.500% 12/01/33 BBB- $ 10,000 $10,160,000 6.40%
-----------
NEW HAMPSHIRE (2.05%)
New Hampshire Higher Educational and Health Facilities Auth,
Hosp Rev Wentworth Douglass Hosp........................... 5.375 01/01/15 AAA 1,300 1,325,675 5.27
New Hampshire Industrial Development Auth,
Rev Ref Poll Control Central Maine Pwr..................... 7.375 05/01/14 BB *2,500 2,680,325 6.88
-----------
4,006,000
-----------
NEW JERSEY (2.97%)
New Jersey Economic Development Auth,
Rev Poll Control General Motors Corp Proj.................. 5.350 04/01/09 A- *1,500 1,488,630 5.39
Rev Ref Ser J Holt Hauling Proj............................ 8.500 11/01/23 BBB*** *2,500 2,574,775 8.25
New Jersey Turnpike Auth,
Ser 1991 C................................................. 6.500 01/01/16 AAA *1,500 1,748,955 5.57
-----------
5,812,360
-----------
NEW YORK (6.98%)
New York State Dormitory Auth,
City Univ Sys Cons Rev Ser 1995A........................... 5.625 07/01/16 BBB *2,000 2,013,340 5.59
New York, City of,
GO Fiscal 1996 Ser F**..................................... 5.750 02/01/19 BBB+ *6,000 5,842,680 5.90
GO Fiscal 1996 Ser G**..................................... 5.750 02/01/20 BBB+ *5,950 5,790,956 5.91
-----------
13,646,976
-----------
NORTH CAROLINA (1.05%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1993B.................................. 6.000 01/01/22 A- 2,000 2,064,300 5.81
-----------
OHIO (0.75%)
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan................. 8.875 08/01/08 BBB-*** 1,420 1,461,720 8.62
-----------
OKLAHOMA (1.31%)
Tulsa Municipal Airport Auth,
Rev American Airlines Proj................................. 6.250 06/01/20 BB+ *2,500 2,556,175 6.11
-----------
OREGON (2.56%)
Oregon Health Sciences University,
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/14 AAA *1,750 656,372 5.37
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/15 AAA *2,220 786,546 5.39
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/16 AAA *10,700 3,558,820 5.44
-----------
5,001,738
-----------
PENNSYLVANIA (10.56%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj.......... 6.700 12/01/20 BB+ 5,000 5,201,200 6.44
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Beaver County Industrial Development Auth,
Poll Control Rev Ref Ser A Ohio Edison Proj................ 7.750% 09/01/24 BB+ $*1,400 $ 1,499,162 7.24%
Keystone Oaks School District,
Variable Rate Ser D........................................ 7.318# 09/01/16 AAA *2,950 3,071,687 7.03
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj...... 8.625 07/01/21 BB*** 2,700 2,848,203 8.18
Hosp Rev 1992 Ser A Childrens Seashore House Proj.......... 7.000 08/15/12 A- 1,250 1,351,437 6.47
Philadelphia, City of,
Wtr & Swr Rev 16th Ser..................................... 7.500 08/01/10 AAA 3,000 3,524,490 6.38
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj......... 7.600 07/15/20 BBB-*** 3,000 3,157,650 7.22
-----------
20,653,829
-----------
PUERTO RICO (5.59%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico............................................... 6.000# 07/01/11 AAA *200 220,474 5.44
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico............................................... 8.220# 07/01/11 AAA *5,500 6,620,625 6.83
Puerto Rico, Commonwealth of,
GO Pub Imp Ref Inverse Floater Ser 1992A................... 7.534# 07/01/08 AAA *2,700 3,000,375 6.78
University of Puerto Rico,
Univ Rev Ser M............................................. 5.250 06/01/25 AAA *1,100 1,088,560 5.31
-----------
10,930,034
-----------
SOUTH CAROLINA (3.28%)
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys............................ 5.375 01/01/25 AAA *6,305 6,421,706 5.28
-----------
TEXAS (9.19%)
Dallas-Fort Worth International Airport Facility
Improvement Corp, Rev American Airlines Inc................ 7.250 11/01/30 BB+ 10,250 11,083,735 6.70
Ector County Hospital District,
Hosp Rev 1992.............................................. 7.300 04/15/12 A- 4,000 4,393,800 6.65
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj...................... 7.750 03/01/12 B 1,410 1,456,192 7.50
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp
Proj....................................................... 6.625 02/01/24 BBB+ 1,000 1,046,800 6.33
-----------
17,980,527
-----------
UTAH (0.54%)
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon
Development Corp.......................................... 9.000 07/01/12 BBB-*** 1,000 1,068,190 8.43
-----------
VIRGINIA (2.52%)
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil..................................... 7.550 01/01/19 BB*** 4,500 4,923,810 6.90
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
WASHINGTON (0.53%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj... 9.125% 01/01/26 BB-*** $ *1,000 $ 1,035,030 8.82%
------------
TOTAL TAX EXEMPT LONG-TERM BONDS
(Cost $190,204,887) (105.02%) $205,442,483
========= ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities other than short-term investments, newly added to the portfolio,
during the period ended December 31, 1995.
** These securities having an aggregate value of $19,439,181 or 9.94% of the
Fund's net asset value, have been purchased as forward commitments that is,
the Fund has agreed on the trade date, to take delivery of and make payment
for such securities on a delayed basis subsequent to the date of this
schedule. The purchase price and interest rate of such securities is fixed
at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with the current value at least equal to the
amount of its forward commitment. Accordingly, the market values of
$5,082,809 of Savannah Hospital Auth, Rev Ref & Imp Candler Hosp Proj,
7.000%, 01-01-20, $1,136,036 of El Paso International Airport, Rev Ref Spec
Facil Marriot Corp Proj, 7.750%, 03-01-12, $1,904,958 of Georgia Municipal
Electric Auth, Pwr Rev Ser C, 5.700%, 01-01-19, $8,751,300 of Jacksonville
Electric Auth, Elec Sys Rev 3-A, 5.250%, 10-01-28, and $3,773,899 of
Georgia Municipal Electric Auth, Pwr Rev Ser Z, 5.500%, 01-01-20, has been
segregated to cover the forward commitments.
*** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
**** Credit ratings are unaudited.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities Exchange Commission and is unaudited. Zero coupon
yields are at yield to maturity.
# Represents rate in effect on December 31, 1995.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PORTFOLIO CONCENTRATION
- --------------------------------------------------------------------------------
THE TAX-FREE BOND FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE VARIOUS
STATES AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF THE FUND IS
CLOSELY TIED TO ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATES AND THE
FINANCIAL CONDITION OF THE STATES AND THEIR AGENCIES AND MUNICIPALITIES. THE
CONCENTRATION OF INVESTMENTS BY STATES AND CREDIT RATINGS FOR INDIVIDUAL
SECURITIES HELD BY THE FUND ARE SHOWN IN THE SCHEDULE OF INVESTMENTS. IN
ADDITION, THE CONCENTRATION OF INVESTMENTS CAN BE AGGREGATED BY VARIOUS SECTOR
CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation............................. 11.14%
Revenue Bonds - Certificate of Participation... 2.89
Revenue Bonds - Education...................... 8.96
Revenue Bonds - Electric Power................. 17.97
Revenue Bonds - Health......................... 17.91
Revenue Bonds - Housing........................ --
Revenue Bonds - Industrial Development Bond.... 5.95
Revenue Bonds - Other.......................... 1.78
Revenue Bonds - Pollution Control Facilities... 9.94
Revenue Bonds - Transportation................. 20.99
Revenue Bonds - Water & Sewer.................. 7.49
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 105.02%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Free Bond Fund (the "Fund") is a diversified open-end
investment management company registered under the Investment Company Act of
1940.
The investment objective of the Fund is to obtain as high a level of interest
income exempt from federal income taxes as is consistent with preservation of
capital by investing primarily in municipal bonds, notes and commercial paper,
the interest on which is exempt from federal income taxes.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemption, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission. Shareholders of a class which bears distribution/service
expenses under the terms of a distribution plan, have exclusive voting rights
regarding such distribution plan. Class A shares are subject to an initial sales
charge of up to 4.50% and a 12b-1 distribution plan. Prior to May 15, 1995, the
maximum sales charge was 4.75%. Class B shares are subject to a contingent
deferred sales charge and a separate 12b-1 distribution plan. Significant
accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $12,505,428 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gain distributions will be made. The carryforwards expire as follows:
December 31, 2002 -- $7,349,795, December 31, 2003 -- $5,155,633. Expired
capital loss carryforwards are reclassified to capital paid-in, in the year of
expiration.
DIVIDENDS, DISTRIBUTIONS, AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees, if any, are calculated daily at the class level based
on the appropriate
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
net assets of each class and the specific expense rate(s) applicable of each
class.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. 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", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price of the
board of trade or U.S. commodities exchange. 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. Daily variation
margin adjustments, arising from this "mark to market", are recorded by the Fund
as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening, or realizing the benefits of closing
out, futures positions because of position limits or limits on daily price
fluctuations imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures transactions.
At December 31, 1995, open positions in financial futures contracts were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MARCH 1996 75 MUNI BOND INDEX SHORT ($262,500)
=========
</TABLE>
At December 31, 1995, the Fund has deposited in a segregated account $895,000
par value of Clark County, Nevada Industrial Development Revenue Bond, 6.50%,
12/01/33 to cover margin requirements on open financial futures contracts.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the time of disposition.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program at an annual
rate of 0.55% of the Fund's average daily net asset value.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the 12b-1 fee), to 0.70% of the Fund's average daily net
assets. Accordingly, the reduction in the Adviser's fee amounted to $208,207 for
the period ended December 31, 1995. This reduction may be discontinued at any
time. Furthermore, $24,419 of custodian fees have been reduced by balance
credits applied during the period ended December 31, 1995.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended December
31, 1995, JH Funds received net sales charges
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
on sales of Class A shares of the Fund in the amount of $158,248. Out of this
amount, $14,871 was retained and used for printing prospectuses, advertising,
sales literature and other purposes, $68,756 was paid as sales commissions and
service fees to unrelated broker-dealers and $74,621 was paid as sales
commissions and service fees to sales personnel of John Hancock Distributors,
Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro
& Co., Inc. ("Sutro"), all of which are broker-dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from CDSC are paid to JH Funds and are used in whole or in part to defray its
expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended December 31,
1995, contingent deferred sales charges received by JH Funds amounted to
$222,466.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses at an annual rate not to exceed
0.15% of Class A average daily net assets and 0.90% of Class B average daily net
assets to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.15% of these payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Board of Trustees approved a shareholder servicing agreement between the
Fund and John Hancock Investor Services Corporation ("Investor Services"), a
wholly-owned subsidiary of The Berkeley Financial Group, for the period between
December 22, 1994 and May 12, 1995, inclusive under which Investor Services
processed telephone transactions on behalf of the Fund. For the period May 15,
1995 through September 30, 1995, the Fund entered into a full service transfer
agent agreement with Investor Services whereby Class A and Class B shares paid
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses. Prior to May 15, 1995 The Shareholder Services Group was
the transfer agent. Effective October 1, 1995 transfer agent expense is a fund
expense.
Messrs. Edward J. Boudreau, Jr. and Richard S. Scipione are directors and/or
officers of the Adviser, and/or its affiliates as well as Trustees of the Fund.
The compensation of unaffiliated Trustees is borne by the Fund.
Effective with the fees paid for 1995, the unaffiliated Trustees may elect to
defer for tax purposes their receipt of this compensation under the John Hancock
Group of Funds Deferred Compensation Plan. The Fund makes investments into other
John Hancock funds, as applicable, to cover its liability with regard to the
deferred compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The deferred
compensation liability is marked to market on a periodic basis and income earned
by the investment is recorded on the Fund's books.
The Fund has an independent advisory board composed of certain members of the
former Transamerica Board of Trustees who provide advice to the current Trustees
in order to facilitate a smooth management transition. The Fund pays the
advisory board and its counsel a fee.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended December 31, 1995, aggregated $211,980,373 and $211,965,175, respectively.
There were no purchases or sales of long-term obligations of the U.S. government
and its agencies during the period ended December 31, 1995.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
The cost of investments owned at December 31, 1995 for Federal income tax
purposes was $190,204,887. Gross unrealized appreciation and depreciation of
investments aggregated $15,264,006 and $26,410, respectively, resulting in net
unrealized appreciation of $15,237,596.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1995, the Fund has reclassified $80,005 from
undistributed net investment income and $63,964 from accumulated net realized
loss on investments and financial futures contracts to capital paid-in. This
represents the cumulative amounts necessary to report these balances on a tax
basis, excluding certain temporary differences, as of December 31, 1995.
Additional adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the Fund, are
primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
PLAN OF REORGANIZATION
On November 28, 1995, the Board of Trustees of the Fund approved a plan of
reorganization between the Fund and the John Hancock Tax-Exempt Income Fund
("Income Fund") providing for the transfer of substantially all of the assets
and liabilities of the Income Fund to the Fund in exchange solely for Class A
and Class B shares of the Fund to be distributed to Income Fund's Class A and
Class B shareholders, respectively.
21
<PAGE>
John Hancock Funds - Tax-Free Bond Fund
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Tax-Free Bond Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the John Hancock Tax-Free Bond (the "Fund"), as
of December 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers, or other
appropriate auditing procedures when replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
John Hancock Tax-Free Bond Fund at December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
January 31, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1995.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 98.8% tax-exempt. Approximately 20% of the 1995 income
dividends are subject to the alternative minimum tax. None of the income was
derived from U.S. Treasury obligations, or qualify for the corporate dividends
received deductions.
22
<PAGE>
NOTES
John Hancock Funds - Tax-Free Bond Fund
23
<PAGE>
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A GLOBAL INVESTMENT MANAGEMENT FIRM U.S. Postage
101 Huntington Avenue Boston, MA 02199-7603 PAID
Brockton, MA
Permit No. 582
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Tax-Free Bond Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
<PAGE>
================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
Tax-Free
Bond
Fund
SEMI-ANNUAL REPORT
June 30, 1996
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
ANNE C. HODSDON
CHARLES L. LADNER*
LEO E. LINBECK*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in the
mutual fund industry. At that time, Securities and Exchange Commission Chairman
Arthur Levitt called on fund companies to make their prospectuses more
user-friendly. He noted that prospectuses are often overloaded with technical
detail and are hard for most investors to understand. Many industry observers
agreed, and rightly so.
So it is my pleasure to let you know that John Hancock Funds has introduced
the first in a series of new prospectuses. Covering the John Hancock growth
funds, the new prospectus made its debut on July 1 after being under development
for a year. It is simplified, using shorter, clearer language with a streamlined
design, and consolidated, incorporating several funds with similar investment
objectives into one document. We are excited about our new prospectus because we
believe it is a bold but sensible step forward. And while it is easier to read,
it still complies with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page spread
highlighting each fund's goals and investment strategy, the types of securities
it buys, its portfolio management and risk factors, all in plainer language.
Fund expenses and financial highlights are now found here, too, as is a new bar
chart that shows year-to-year volatility for each fund. Other features include a
better presentation of fund services, a new glossary of investment risks and a
discussion about how funds are organized, including a diagram showing the
connection of the various players that provide services to your Hancock fund(s).
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
In the coming months, we will introduce similar prospectuses for our growth
and income, income, tax-free income, international/global and money market
funds. We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in the end, we
did it for you, our shareholders.
Sincerely,
/S/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY THOMAS C. GOGGINS, PORTFOLIO MANAGER
John Hancock
Tax-Free Bond Fund
Inflationary fears cause bond market to stumble in first
half of 1996; munis outperform Treasuries
In the spring, shareholders of John Hancock Tax-Exempt Income Fund approved the
merger of their fund with John Hancock Tax-Free Bond Fund. The merger was
effective May 3, 1996.
After enjoying impressive returns in 1995, bonds faltered in the first half of
1996 at the hands of increasing inflation worries. With enough evidence of a
healthier-than-expected economy, bond prices fell and yields went higher.
Inflation, of course, is the bogeyman for bond holders since it can eat away at
the value of their bond holdings.
Despite the pressure on the bond market, municipals performed well compared
to Treasuries. Having spent most of 1995 lagging the returns of Treasuries
because of worries over various flat-tax proposals, municipals entered 1996 with
cheap prices relative to Treasuries. As those flat-tax fears waned and investors
recognized the value in municipals, they began to outperform Treasuries. In
addition, positive supply/demand factors helped the municipal market. The total
outstanding supply of municipals shrunk while demand rose as municipal yields
topped the 6% level.
A look at performance
The specter of inflation hovering over the bond market affected all municipal
bond funds. For the six months ended June 30, 1996, the Fund's Class A and Class
B shares posted total returns of -1.27% and -1.63%, respectively, at net asset
value. For the same six-month period, the average general municipal bond fund
returned
"... bonds
faltered in
the first half
of 1996..."
[A 2 1/4" x 3" photo of the Fund management team at bottom right. Caption reads:
"Thomas C. Goggins (seated) and Fund management team members Frank Lucibella and
Dianne Sales-Singer".]
<PAGE>
================================================================================
John Hancock Funds -- Tax-Free Bond Fund
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) Transportation 22%; 2) Electric Utilities 17%; 3) Health
17%; 4) Pollution Control 15%; 5) Industrial Revenue 8%. Footnote below reads:
"As a percentage of net assets on June 30, 1996."]
- --------------------------------------------------------------------------------
"...we sought
to provide
the Fund
with a higher
and more
stable level
of income."
- -1.38%, according to Lipper Analytical Services.(1) Please see pages six
and seven for longer-term Fund performance information.
Strategy
Beginning in February when the bond market reacted negatively to the news that
the economy had created 700,000 new jobs (a fact that investors feared would
ignite inflation), the bond market became much more volatile than it had been
last year. As a result of this volatility, we became more cautious. We did this
by shortening the Fund's duration. Duration measures how sensitive a bond's
price (and therefore the Fund's share price) is to changes in interest rates.
The longer the duration the more sensitive; the shorter, the less sensitive. As
interest rates rose, the Fund's lessened interest-rate sensitivity -- or shorter
duration -- made it less susceptible to rising interest rates and declining bond
prices.
[Table with heading "Scorecard" at bottom of left hand column. The header for
the left hand column is "Category"; the header for the right hand column is
"Trend...and what's driving it." The first listing is "California Bonds"
followed by an up arrow and the phrase: "Improving state economy." The second
listing is "Airline bonds" followed by a flat arrow and the phrase "Cost
cutting, increased capacity." The third listing is "Long-term bonds" followed by
a down arrow and the phrase "High interest-rate sensitivity hurts returns." A
footnote below reads: "See "Schedule of Investments." Investment holdings are
subject to change."]
Boosting and stabilizing income
The total return of a bond fund is made up of two components: the income it
receives from its holdings and the price appreciation -- or depreciation -- of
those holdings. As a way to offset declining bond prices, we sought to provide
the Fund with a higher and more stable level of income.
One way we boosted income was to buy higher-quality securities. That may
sound counter-intuitive since generally speaking, lower-quality bonds offer
higher yields than higher-quality bonds. However, the demand for municipals was
fairly strong over the past six months, and credit spreads (or the difference in
yields between low- and high-quality bonds) remained quite narrow, or small.
That meant that investors were getting very little additional yield for buying
lower-quality bonds. Because yields were rising during the period, we were able
to sell some of our older, lower-rated bonds at a time when current yields on
AAA-rated and insured bonds exceeded the yields offered by those older bonds. In
effect, the exchange of lower-quality for higher-quality bonds allowed us to
increase the Fund's distribution yields -- the amounts of income paid to
shareholders -- and improve its overall credit quality. That type of opportunity
is pretty rare.
To further boost income, we selectively added some lower-quality
industrial development bonds which are issued by a municipality on behalf of a
private entity. For example, we bought a bond from Maury County, Tennessee for
General Motor's Saturn plant. However, with the market so volatile, we avoided
putting too much emphasis on any one lower-rated security.
4
<PAGE>
================================================================================
John Hancock Funds -- Tax-Free Bond Fund
- --------------------------------------------------------------------------------
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the six months ended June 30, 1996." The chart is
scaled in increments of 1% from bottom to top, with 0% at the top and -2% at the
bottom. Within the chart there are three solid bars. The first represents the
- -1.27% total return for John Hancock Tax-Free Bond Fund: Class A. The second
represents the -1.63% total return for John Hancock Tax-Free Bond Fund: Class B.
The third represents the -1.38% total return of the average general municipal
bond fund. A footnote below states: "Total returns for John Hancock Tax-Free
Bond Fund are at net asset value with all distributions reinvested. The average
general municipal bond fund is tracked by Lipper Analytical Services(1). See
following page for historical performance information."]
- --------------------------------------------------------------------------------
Instead, we broadly diversified among a number of bonds to ensure that the Fund
wasn't susceptible to negative credit developments for any one security.
To help make the Fund's distribution income more stable, we worked to
improve its call protection. Call protection refers to the length of time during
which a security cannot be redeemed by its issuer. When a bond is called, it is
redeemed by its issuer before maturity. The bondholder is often forced to
reinvest the proceeds at prevailing interest rates which are often much lower.
We wanted to avoid that so we concentrated on adding more non-callable bonds
which can't be redeemed by their issuer before maturity - and bonds with good
call protection, or those with a reasonably long period of time before they
could be redeemed. What's more, non-callable bonds have shown good performance
characteristics. When interest rates are rising, they typically do n't perform
any worse than callable bonds; yet when interest rates are falling, they tend to
do better than callable bonds. This helps make non-callable bonds quite
valuable.
"...for now,
we intend
to remain
cautious..."
What's ahead
In our view, the Federal Reserve Board is likely to raise interest rates in the
second half of this year. If this happens it should be enough to slow the
economy's growth to a slow but steady pace by 1997. At that point, we think
conditions could once again be favorable and we could see lower interest rates.
But for now, we intend to remain cautious by keeping the Fund's duration
fairly short. We will, however, remain flexible and actively manage our duration
so we can be responsive to changes in the economic outlook. Further market
volatility could provide the opportunity to add higher-yielding securities and
those with good structure (call protection and other characteristics) at
attractive prices.
From a fundamental standpoint, the outlook for municipals is quite
positive. There aren't enough new bonds being issued to replace those being
called away or maturing. And from a historical perspective, municipals still
offer an attractive value relative to Treasuries. Those factors could bode well
for the municipal market.
- ----------
(1) Figures from Lipper Analytical Services include invested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
5
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Free Bond Fund. Total return is a
performance measure that equals the sum of all income and capital gain
distributions, assuming reinvestment of these distributions and the change in
the price of the Fund's net asset value per share. Performance figures included
the maximum applic able sales charge of 4.50% for Class A shares. The effect of
the maximum contingent deferred sales charge for Class B shares (maximum 5% and
declining to 0% over six years) is included in Class B performance. Remember
that all figures represent past performance and are no guarantee of how the Fund
will perform in the future. Also, keep in mind that the total return and share
price of the Fund's investments will fluctuate. As a result, your Fund's shares
may be worth more or less than their original cost, depending on when you sell
them.
A portion of the Fund's income may be subject to taxes. Some investors may be
subject to the Alternative Minimum Tax. Capital gains are taxable.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A(1) 2.92% 42.09% 59.92%
John Hancock Tax-Free Bond Fund: Class B(2) 1.94% N/A 31.01%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A(1,3) 2.92% 7.28% 7.51%
John Hancock Tax-Free Bond Fund: Class B(2,3) 1.94% N/A 6.19%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of June 30, 1996
SEC 30-DAY
YIELD
-----
John Hancock Tax-Free Bond Fund: Class A 5.47%
John Hancock Tax-Free Bond Fund: Class B 4.99%
Notes to Performance
(1) Class A shares started on January 5, 1990.
(2) Class B shares started on December 31, 1991.
(3) The Adviser has agreed to limit the Fund's expenses, including the
management fee (but not including the 12b-1 fee), to 0.70% of the Fund's
average daily net assets. Without the limitation of expenses, the average
annualized total returns for the one-year and five-year periods and since
inception for Class A shares would have been 2.72%, 7.09%, and 7.20%,
respectively. The average annualized total returns for the one-year period
and since inception for Class B shares would have been 1.74% and 6.02%,
respectively.
6
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Free Bond Fund would be worth on June 30, 1996, assuming you had been
invested and have reinvested all distributions for the entire time periods
presented. For comparison, we've shown the same $10,000 investment in the Lehman
Brothers Municipal Bond Index -- an unmanaged index that includes approximately
15,000 bonds and is commonly used as a measure of bond performance.
[Line chart with the heading Tax-Free Bond Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Tax-Free Bond Fund on January 5, 1990, before sales charge, and is equal
to $16,744 as of June 30, 1996. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $16,300 as of June 30,
1996. The third line represents the Tax-Free Bond Fund after sales charge and is
equal to $15,992 as of June 30, 1996.]
[Line chart with the heading Tax-Free Bond Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $13,548 as of June 30, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the Tax-Free Bond Fund on
December 31, 1991, before contingent deferred sales charge, and is equal to
$13,301 as of June 30, 1996. The third line represents the Tax-Free Bond Fund
after contingent deferred sales charge and is equal to $13,101 as of June 30,
1996.]
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement of Assets and Liabilities
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $633,152,241) ............................... $ 659,724,715
Options (cost - $363,901) ................................. 842,188
-------------
660,566,903
Receivable for investments sold ............................ 11,184,869
Receivable for shares sold ................................. 76,883
Interest receivable ........................................ 14,414,845
Receivable from John Hancock Advisers, Inc. -
Note B .................................................... 421,202
Miscellaneous assets ....................................... 54,277
-------------
Total Assets ................................. 686,718,979
----------------------------------------------------------------
Liabilities:
Temporary overdraft of cash ................................ 4,215,975
Payable for investments purchased .......................... 29,751,854
Payable for shares repurchased ............................. 538,433
Dividend payable ........................................... 103,970
Payable for variation margin ............................... 1,012,500
Payable to John Hancock Advisers, Inc. and
affiliates - Note B ....................................... 319,420
Accounts payable and accrued expenses ...................... 286,859
-------------
Total Liabilities ............................ 36,229,011
----------------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 638,629,747
Accumulated net realized loss on investments
and financial futures contracts ........................... (12,821,223)
Net unrealized appreciation of investments
and financial futures contracts ........................... 24,735,701
Distributions in excess of net investment income ........... (54,257)
-------------
Net Assets ................................... $ 650,489,968
================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with $0.01 per share par value, respectively)
Class A - $569,366,932/55,582,256 .......................... $ 10.24
==============================================================================
Class B - $81,123,036/7,918,992 ............................ $ 10.24
==============================================================================
Maximum Offering Price Per Share*
Class A - ($10.24 x 104.71%) ............................... $ 10.72
==============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on June 30, 1996. You'll also
find the net asset value and maximum offering price per share as of that date.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................. $ 10,757,125
------------
Expenses:
Investment management fee - Note B ....................... 890,936
Distribution/service fee - Note B
Class A ................................................. 188,540
Class B ................................................. 343,030
Transfer agent fee ....................................... 386,481
Custodian fee ............................................ 89,793
Auditing fee ............................................. 28,864
Printing ................................................. 25,684
Trustees' fees ........................................... 17,376
Advisory board fee ....................................... 12,473
Registration and filing fees ............................. 11,132
Legal fees ............................................... 4,848
Miscellaneous ............................................ 541
Less Management Fee Reduction - Note B ................... (319,925)
------------
Total Expenses .............................. 1,679,773
Less Expense Reduction
by John Hancock Advisers,
Inc. - Note B ............................... (11,818)
----------------------------------------------------------------
Net Expenses ................................ 1,667,955
----------------------------------------------------------------
Net Investment Income ....................... 9,089,170
----------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts
Net realized loss on investments sold ..................... (797,256)
Net realized gain on financial futures contracts .......... 2,365,537
Change in net unrealized appreciation/depreciation
of investments ........................................... (2,381,167)
Change in net unrealized appreciation/depreciation
on financial futures contracts ........................... (2,801,094)
------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ................. (3,613,980)
----------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................... $ 5,475,190
================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement Of Changes In Net Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
------------ ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .................................... $ 10,263,078 $ 9,089,170
Net realized gain (loss) on investments sold and financial
futures contracts ...................................... (7,036,534) 1,568,281
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts ............ 31,417,068 (5,182,261)
------------- -------------
Net Increase in Net Assets Resulting from Operations . 34,643,612 5,475,190
------------- -------------
Distributions to Shareholders:
Dividends from net investment income:
Class A - ($0.5699 and $0.2933 per share, respectively) (6,647,931) (7,259,808)
Class B - ($0.4927 and $0.2548 per share, respectively) (3,620,138) (1,883,619)
------------- -------------
Total Distributions to Shareholders .................. (10,268,069) (9,143,427)
------------- -------------
From Fund Share Transactions -- Net* ....................... (13,536,114) 458,537,134
------------- -------------
Net Assets:
Beginning of period ...................................... 184,781,642 195,621,071
------------- -------------
End of period (including distributions in excess of net
investment income of none and $54,257, respectively) ... $ 195,621,071 $ 650,489,968
============= =============
* Analysis of Fund Share Transactions:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ................................. 990,678 $ 10,001,197 2,370,215 $ 24,285,597
Shares issued in reorganization - Note D .... -- -- 45,353,943 460,732,563
Shares issued to shareholders in reinvestment
of distributions ........................... 365,927 3,709,354 485,583 4,985,686
----------- ------------ ------------ -------------
1,356,605 13,710,551 48,209,741 490,003,846
Less shares repurchased ..................... (2,422,945) (24,445,738) (3,764,602) (38,681,267)
----------- ------------ ------------ -------------
Net increase (decrease) ..................... (1,066,340) $(10,735,187) 44,445,139 $ 451,322,579
=========== ============ ============ =============
CLASS B
Shares sold ................................. 722,057 $ 7,261,875 462,752 $ 4,770,820
Shares issued in reorganization - Note D .... -- -- 903,108 9,174,769
Shares issued to shareholders in reinvestment
of distributions .......................... 202,597 2,054,192 103,884 1,076,077
----------- ------------ ------------ -------------
924,654 9,316,067 1,469,744 15,021,666
Less shares repurchased ..................... (1,207,168) (12,116,994) (753,564) (7,807,111)
----------- ------------ ------------ -------------
Net increase (decrease) ..................... (282,514) $ (2,800,927) 716,180 $ 7,214,555
=========== ============ ============ =============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
redeemed during the last two periods, along with the corresponding dollar
values.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights
Selected data for each share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios, and supplemental data are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------------------------- JUNE 30, 1996
1991 1992 1993 1994(1) 1995 (UNAUDITED)
-------- -------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........... $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67
-------- -------- --------- --------- --------- ---------
Net Investment Income .......................... 0.69 0.67 0.62 0.58 0.57(2) 0.31(2)
Net Realized and Unrealized Gain (Loss) on
Investments .................................. 0.72 0.42 0.93 (1.58) 1.28 (0.45)
-------- -------- --------- --------- --------- ---------
Total from Investment Operations ............. 1.41 1.09 1.55 (1.00) 1.85 (0.14)
-------- -------- --------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ........... (0.68) (0.68) (0.62) (0.57) (0.57) (0.29)
Distributions from Net Realized Gains on
Investments Sold ............................. (0.39) (0.18) (0.44) -- -- --
-------- -------- --------- --------- --------- ---------
Total Distributions .......................... (1.07) (0.86) (1.06) (0.57) (0.57) (0.29)
-------- -------- --------- --------- --------- ---------
Net Asset Value, End of Period ................. $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67 $ 10.24
======== ======== ========= ========= ========= =========
Total Investment Return at Net Asset Value (3) . 14.78% 10.97% 15.15% (9.28%) 20.20% (1.27%)(4)
Total Adjusted Investment Return at Net Asset
Value (3,5)................................... 14.40% 10.67% 14.98% (9.39%) 20.08% (1.37%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ...... $ 73,393 $ 99,523 $ 136,521 $ 114,539 $ 118,797 $ 569,367
Ratio of Expenses to Average Net Assets ........ 0.60% 0.66% 0.78% 0.85% 0.85% 0.85%(7)
Ratio of Adjusted Expenses to Average Net
Assets (6) ................................... 0.98% 0.96% 0.95% 0.96% 0.97% 1.05%(7)
Ratio of Net Investment Income to Average
Net Assets ................................... 6.86% 6.46% 5.57% 5.72% 5.67% 5.81%(7)
Ratio of Adjusted Net Investment Income to
Average Net Assets (6) ....................... 6.48% 6.16% 5.40% 5.61% 5.55% 5.61%(7)
Portfolio Turnover Rate ........................ 123% 79% 116% 107% 113% 80%
Fee Reduction Per Share ........................ $ 0.04 $ 0.03 $ 0.02 $ 0.01 $ 0.01(2) $ 0.01(2)
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------------- JUNE 30, 1996
1992 1993 1994(1) 1995 (UNAUDITED)
-------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
CLASS B
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(2) 0.54 0.50 0.50(2) 0.25(2)
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 Gains 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 (3) ........... 10.15% 14.30% (10.05%) 19.41% (1.63%)(4)
Total Adjusted Investment Return at Net Asset Value (3,5) 9.85% 14.13% (10.16%) 19.29% (1.73%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's 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%(7)
Ratio of Adjusted Expenses to Average Net Assets (6) ..... 1.73% 1.70% 1.71% 1.72% 1.80%(7)
Ratio of Net Investment Income to Average Net Assets ..... 5.57% 4.66% 4.97% 4.90% 4.94%(7)
Ratio of Adjusted Net Investment Income to Average Net
Assets (6) 5.27% 4.49% 4.86% 4.78% 4.74%(7)
Portfolio Turnover Rate .................................. 79% 116% 107% 113% 80%
Fee Reduction per Share .................................. $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2) $ 0.01(2)
</TABLE>
(1) On December 22, 1994 John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Schedule of Investments
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Tax-Free Bond Fund on June 30, 1996. It has two main categories: Tax-Exempt
Long-Term Bonds and options. The tax-exempt long-term bonds are broken down by
state. Under each state is a list of the securities owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
Alabama (0.84%)
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj 1995 .... 6.950% 01-01-20 BBB- $ 5,250 $ 5,462,310 6.68%
-----------
Alaska (0.16%)
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser ................................... 7.750 12-01-14 A+ 1,000 1,028,020 7.54
-----------
Arizona (3.13%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj ................. 8.200 06-01-21 BBB 2,150 2,310,906 7.63
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public Service Co Palo Verde Proj 6.375 08-15-23 BB 8,550 7,988,949 6.82
Salt River Project Agricultural Improvement and Power District,
Salt River Proj Elec Sys Rev Ref Ser 1993C .................. 5.250 01-01-19 AA 3,000 2,741,340 5.75
Scottsdale Industrial Development Auth,
Hosp Rev Ref Ser 1997A Scottsdale Memorial Hosps* ........... 6.000 09-01-12 AAA 4,000 3,897,520 6.16
Hosp Rev Ref Ser 1997A Scottsdale Memorial Hosps* ........... 6.125 09-01-17 AAA 3,520 3,432,493 6.28
-----------
20,371,208
-----------
California (14.21%)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc ........... 5.875 05-01-20 A 4,000 3,805,440 6.18
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj .............................. 6.350 10-01-07 AAA 4,090 4,379,286 5.93
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice Gen Proj Ser 1993 .......... 6.200 07-01-20 BBB- 5,000 4,914,200 6.31
Fontana, County of,
Spec Tax of Community Facil Dist No. 90-3 Empire Center ..... 8.400 04-01-15 B** 470 417,713 9.45
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A ................. Zero 01-01-19 BBB- 36,600 8,195,838 6.76
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A ................. Zero 01-01-20 BBB- 10,000 2,090,500 6.86
Toll Rd Rev Fixed Rate Current Int Ser 1995A ................ 6.000 01-01-16 BBB- 21,500 20,945,945 6.16
Long Beach Aquarium of the Pacific,
Rev 1995 Ser A Aquarium of the Pacific Proj ................. 6.125 07-01-23 BBB 7,500 6,938,550 6.62
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant Proj 8.000 06-01-10 A 1,000 1,088,430 7.35
Madera, County of,
Cert of Part Valley Children's Hosp Proj .................... 6.500 03-15-15 AAA 13,185 14,339,742 5.98
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Orange, County of,
Cert of Part 1996 Ser A ..................................... 5.875% 07-01-19 AAA $ 5,000 $ 4,916,400 5.97%
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A ............ 7.750 09-01-16 BBB 2,000 2,123,760 7.30
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj ............... 5.500 08-01-17 A- 9,130 8,352,946 6.01
Cert of Part Ser 1994 Medical Center Fin Proj ............... 5.500 08-01-22 A- 2,500 2,271,975 6.05
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec .............................. Zero 01-01-10 BBB** 6,250 2,342,000 8.75
Toll Rd Rev Sr Lien Cap Apprec .............................. Zero 01-01-17 BBB** 4,900 1,273,363 6.68
Toll Rd Rev Sr Lien Cap Apprec .............................. Zero 01-01-19 BBB** 5,510 1,250,109 6.73
Toll Rd Rev Sr Lien Cap Apprec .............................. Zero 01-01-20 BBB** 2,000 423,840 7.00
San Jose Financing Auth,
Rev Ser B Community Facil Proj .............................. 5.625 11-15-18 A+ 2,500 2,350,075 5.98
-----------
92,420,112
-----------
Colorado (3.17%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 ............................... 6.950 08-31-20 Baa** 9,000 9,366,660 6.68
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref ............................ 7.250 11-15-25 AAA 1,980 2,250,725 6.38
Airport Sys Rev Ser 1992A Unref Bal ......................... 7.250 11-15-25 BBB 5,020 5,575,212 6.53
Airport Sys Rev Ser 1994A ................................... 7.500 11-15-23 BBB 3,100 3,410,031 6.82
-----------
20,602,628
-----------
Delaware (0.74%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj ................ 6.750 05-01-19 AAA 4,500 4,824,225 6.30
-----------
Florida (4.04%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P. South Proj 7.950 12-01-08 A 4,445 4,907,413 7.20
Florida, State of,
Sunshine Skyway Rev Ser of 1984 ............................. 10.250 06-01-10 AAA 1,250 1,348,150 9.50
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co ............................ 8.500 12-01-14 BBB-** 1,000 1,091,120 7.79
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport ....................... 6.000 10-01-17 AAA 5,880 6,080,449 5.80
Hillsborough, County of,
Ref Util Rev Ser 1991A ...................................... 7.000 08-01-14 BBB+ 1,245 1,333,706 6.53
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A ........................................ 5.250 10-01-28 AA 9,000 8,041,230 5.88
Nassau, County of,
Poll Control Rev Ref ITT Rayonier Inc Proj .................. 6.200 07-01-15 BBB 1,000 980,540 6.32
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D ................................ 6.750 10-01-17 AA- 2,200 2,499,992 5.94
-----------
26,282,600
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Georgia (3.67%)
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB .......................................... 5.700% 01-01-19 A $ 1,000 $ 964,400 5.91%
Pwr Rev Ser C ............................................... 5.700 01-01-19 AAA 5,000 4,912,900 5.80
Pwr Rev Ser EE .............................................. 7.250 01-01-24 AAA 2,000 2,393,120 6.06
Pwr Rev Ser M ............................................... 8.375 01-01-20 A 1,000 1,040,000 8.05
Pwr Rev Ser Z ............................................... 5.500 01-01-20 AAA 5,840 5,609,437 5.73
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj ..... 6.800 01-01-12 A+ 1,000 1,074,770 6.33
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1 ............................. 6.500 01-01-17 AAA 3,500 3,827,110 5.94
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj ............................. 7.000 01-01-23 BBB+ 4,000 4,040,720 6.93
-----------
23,862,457
-----------
Illinois (3.89%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A ..... 7.500 01-01-16 A+ 2,000 2,115,020 7.09
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev Ser 1992 6.750 01-01-12 AAA 3,000 3,162,150 6.40
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A American
Airlines Proj ............................................... 7.875 11-01-25 BB+ 3,000 3,213,300 7.35
Skyway Toll Bridge Rev Ref Ser 1994 ......................... 6.750 01-01-17 BBB- 2,000 2,036,460 6.63
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj ............ 5.850 01-15-14 BBB 3,000 2,791,590 6.29
Rev Ref Ser A Columbus Cuneo Cabrini Proj ................... 8.500 02-01-15 BBB+ 2,150 2,444,163 7.48
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg ............................ 6.750 12-01-08 A-** 1,640 1,683,132 6.58
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj ........... 7.000 01-01-07 A- 1,500 1,586,820 6.62
Metropolitan Pier and Exposition Auth,
Hosp Facil Rev Ser 1996A McCormick Place Convention Complex . 7.000 07-01-26 BBB- 5,000 5,326,100 6.57
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners ........ 9.250 10-15-14 B-** 1,000 967,500 9.56
-----------
25,326,235
-----------
Indiana (0.31%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj ............ 7.500 06-01-26 B** 2,000 2,012,180 7.45
-----------
Kansas (0.35%)
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984 ........................................ 10.500 12-01-08 AAA 2,000 2,281,540 9.20
-----------
Kentucky (0.97%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A ................ 6.750 02-01-02 BB 2,000 2,078,100 6.50
Rev Spec Facil Delta Airlines Proj Ser 1992A ................ 7.500 02-01-12 BB 2,000 2,128,260 7.05
Rev Spec Facil Delta Airlines Proj Ser 1992A ................ 7.125 02-01-21 BB 2,000 2,071,620 6.88
-----------
6,277,980
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Louisiana (1.96%)
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States Util Co Proj ...... 6.750% 10-01-12 BB+ $ 2,975 $ 2,983,389 6.73%
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj ................ 6.500 05-15-22 AAA 3,405 3,518,999 6.29
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj ..... 7.500 06-01-21 BBB 4,000 4,213,120 7.12
West Feliciana, Parish of,
Variable Rate Demand Poll Control Rev Ser 1985C
Gulf States Util Co Proj .................................. 7.000 11-01-15 BB+ 2,000 2,011,580 6.96
-----------
12,727,088
-----------
Maryland (0.27%)
Maryland State Energy Financing Administration,
Solid Waste Disp Rev Ltd Oblig Recycling Hagerstown Proj .... 9.000 10-15-16 BB** 1,900 1,757,595 9.73
-----------
Massachusetts (5.60%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B .................................... 7.875 03-01-21 AAA 2,000 2,297,560 6.86
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D ........................ 6.750 07-01-24 A+ 2,450 2,543,933 6.50
Rev Lowell Gen Hosp Iss Ser A ............................... 8.400 06-01-11 Baa1** 1,100 1,197,031 7.72
Rev New England Deaconess Hosp Iss Ser D .................... 6.625 04-01-12 A 3,500 3,620,540 6.40
Rev New England Deaconess Hosp Iss Ser D .................... 6.875 04-01-22 A 7,960 8,325,762 6.57
Rev New England Medical Center Hosp Iss Ser E ............... 7.875 07-01-11 A- 1,950 2,119,357 7.25
Rev Worcester Polytechnic Institute Ser E ................... 6.750 09-01-11 A+ 2,000 2,155,620 6.26
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A .................................. 6.900 11-15-24 AAA 2,700 2,805,948 6.64
Single Family Hsg Ser 8 ..................................... 7.700 06-01-17 A+ 1,500 1,585,080 7.29
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the
Commonwealth of Mass ...................................... 6.750 07-01-17 BBB+ 4,405 4,730,662 6.29
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B .................................. 6.000 08-01-14 A+ 2,000 2,027,060 5.92
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj .. 7.000 04-01-22 A- 2,750 3,029,400 6.35
-----------
36,437,953
-----------
Michigan (2.06%)
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj ......... 8.250 07-01-12 Baa1** 2,250 2,406,195 7.71
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group ......... 8.100 10-01-13 BBB 4,250 4,611,887 7.46
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines Facil 6.750 12-01-15 BB+** 6,355 6,388,682 6.71
-----------
13,406,764
-----------
Mississippi (1.78%)
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc ............... 7.300 05-01-25 BBB- 4,000 4,117,240 7.09
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A .......................... 9.250 03-01-12 AAA 120 129,478 8.57
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Mississippi (continued)
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Medical Foundation Proj ...................... 8.750% 01-01-16 Baa** $ 2,000 $ 2,185,360 8.01%
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj ........ 7.000 04-01-22 Baa3** 5,000 5,145,150 6.80
-----------
11,577,228
-----------
Nebraska (0.20%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B ..................................... 6.200 02-01-17 AA 1,200 1,288,788 5.77
-----------
Nevada (1.93%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj ......... 6.500 12-01-33 BBB- 10,000 9,532,000 6.82
North Las Vegas, City of,
Local Imp Spec Improvement District No. 707* ................ 7.100 06-01-16 BB+** 3,000 3,000,000 7.10
-----------
12,532,000
-----------
New Jersey (2.26%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj ............. 9.875 01-01-21 BB+** 1,100 1,099,978 9.88
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens ........................ 8.500 11-01-16 BB+** 3,630 3,610,543 8.55
Rev Poll Control General Motors Corp Proj ................... 5.350 04-01-09 A- 1,500 1,448,760 5.54
Rev Ref Ind'l Development Newark Airport Marriott Hotel Proj 7.000 10-01-14 BB** 4,000 3,986,760 7.02
Rev Ref Ser J Holt Hauling Proj ............................. 8.500 11-01-23 BBB** 2,500 2,501,850 8.49
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 ....................................... 10.375 01-01-03 AAA 1,740 2,082,797 8.67
-----------
14,730,688
-----------
New York (11.80%)
Islip Community Development Agency
Dev Rev NY Institute of Technology Proj ..................... 7.500 03-01-26 BB-** 2,500 2,504,225 7.49
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1 ...................... 8.500 07-01-17 AAA 1,000 1,067,150 7.97
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj ........ 7.950 01-01-28 BB** 3,250 3,348,767 7.72
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp ................................. 6.875 04-01-19 A 8,700 9,573,132 6.25
New York State Dormitory Auth,
City Univ Ref Iss 1988B ..................................... 8.125 07-01-08 BBB 1,000 1,088,160 7.47
Cornell Univ Rev Ser 1990A .................................. 7.375 07-01-30 AA 1,000 1,109,420 6.65
State Univ Ed Facil Rev Iss Ser 1990B ....................... 7.500 05-15-11 BBB+ 500 576,845 6.50
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj ...... 7.150 06-01-20 BB+ 6,000 5,902,380 7.27
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj ... 7.500 01-01-26 A+ 2,000 2,142,040 7.00
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A ........ 7.500 06-15-12 A 3,770 4,147,264 6.82
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
New York (continued)
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A ...................... 8.000% 05-01-11 AAA $ 2,000 $ 2,435,700 6.57%
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B ................... 7.875 08-15-08 BBB+ 500 558,575 7.05
Mental Hlth Serv Facil Imp Rev 1990 Ser B ................... 7.875 08-15-20 BBB+ 460 514,068 7.05
Mental Hlth Serv Facil Imp Rev 1991 Ser A ................... 7.750 08-15-11 BBB+ 540 602,122 6.95
Mental Hlth Serv Facil Imp Rev 1991 Ser A ................... 7.750 08-15-11 AAA 1,460 1,670,094 6.78
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2 .................................. 7.950 10-01-15 AA** 1,135 1,193,294 7.56
New York State Power Auth,
Gen Purpose Ser V ........................................... 7.875 01-01-13 AAA 2,400 2,585,664 7.31
Gen Purpose Ser V ........................................... 8.000 01-01-17 AA 1,850 1,995,040 7.42
New York, City of,
GO Fiscal 1991 Ser D ........................................ 8.000 08-01-04 BBB+ 250 277,782 7.20
GO Fiscal 1991 Ser F ........................................ 8.200 11-15-03 BBB+ 1,250 1,406,175 7.29
GO Fiscal 1992 Ser A ........................................ 7.750 08-15-12 BBB+ 2,000 2,209,040 7.02
GO Fiscal 1992 Ser D ........................................ 7.700 02-01-09 BBB+ 1,000 1,109,050 6.94
GO Fiscal 1992 Ser H ........................................ 7.000 02-01-08 BBB+ 2,000 2,135,860 6.55
GO Fiscal 1995 Ser B ........................................ 7.000 08-15-16 BBB+ 3,000 3,138,150 6.69
GO Fiscal 1996 Ser A* ....................................... 6.250 08-01-09 BBB 3,150 3,124,800 6.30
GO Fiscal 1996 Ser A* ....................................... 6.250 08-01-10 BBB+ 2,000 1,974,100 6.33
GO Rev Ref Ad Valorem Property Tax Ser D .................... 5.750 08-15-13 BBB+ 3,170 2,941,665 6.20
Port Auth of New York and New Jersey,
Spec Proj Ser 4 5th Installment KIAC Partners Proj .......... 6.750 10-01-19 BBB** 9,350 9,303,063 6.78
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L ....................................... 8.125 01-01-12 A+ 1,750 1,877,698 7.57
Gen Purpose Rev Ser R ....................................... 7.375 01-01-16 AAA 1,600 1,764,992 6.69
Spec Oblig Ref Ser 1991B .................................... 6.875 01-01-15 A- 2,300 2,504,079 6.31
-----------
76,780,394
-----------
North Carolina (3.36%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A ................................... 5.750 01-01-19 BBB+ 4,000 3,665,880 6.27
Pwr Sys Rev Ref Ser 1993B ................................... 6.000 01-01-22 BBB+ 2,000 1,909,700 6.28
Pwr Sys Rev Ref Ser 1993C ................................... 5.000 01-01-21 BBB+ 5,000 4,193,850 5.96
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 ................................... 5.750 01-01-15 AAA 7,410 7,335,085 5.81
Catawba Elec Rev Ser 1993 ................................... 5.000 01-01-15 AAA 5,220 4,744,354 5.50
-----------
21,848,869
-----------
Ohio (4.08%)
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A .................................. 7.000 11-15-24 AAA 6,200 6,847,404 6.34
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United
Methodist Hosp Proj ....................................... 7.600 05-15-20 AAA 1,000 1,117,570 6.80
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Ohio (continued)
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj .................... 8.625% 02-01-22 BBB- $ 3,600 $ 3,899,844 7.96%
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj ......................... 6.250 12-01-20 Baa2** 4,500 4,459,140 6.31
Rev Coll Ser A Cleveland Elec Illum Proj .................... 7.000 09-01-09 BB 1,975 1,914,091 7.22
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1989A Ohio Edison Co Proj .... 7.625 07-01-23 BB+ 2,500 2,621,300 7.27
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co Proj .. 7.700 08-01-25 BB 2,800 2,837,576 7.60
Ohio, State of,
Solid Waste Rev Republic Engineered Steels Inc .............. 9.000 06-01-21 B** 1,500 1,514,970 8.91
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan .................. 8.875 08-01-08 BBB-** 1,305 1,325,358 8.74
-----------
26,537,253
-----------
Oklahoma (0.62%)
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 ............................ 7.875 01-01-21 A+ 1,745 1,913,986 7.18
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc .......................... 7.375 12-01-20 BB+ 2,000 2,103,640 7.01
-----------
4,017,626
-----------
Oregon (0.76%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj ...................... 7.125 01-01-21 BB-** 4,800 4,912,944 6.96
-----------
Pennsylvania (7.83%)
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt ....................... 7.000 06-01-22 BBB 1,500 1,513,470 6.94
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj ........... 6.700 12-01-20 BB+ 10,000 10,114,800 6.62
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A Toledo Edison Co
Beaver Valley Proj ........................................ 7.750 05-01-20 BB 2,200 2,246,574 7.59
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co Proj ... 7.375 04-01-21 BBB+ 6,095 6,456,616 6.96
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A ........................................... 6.700 09-01-14 BBB- 4,950 5,245,317 6.32
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj ................. 7.125 12-01-15 BBB- 7,000 7,348,670 6.79
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N .......................................... 6.500 12-01-13 AAA 2,840 2,960,132 6.24
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj ....... 8.625 07-01-21 BB** 2,700 2,789,181 8.35
Hosp Rev 1992 Ser A Childrens Sea Shore House Proj .......... 7.000 08-15-12 A- 1,250 1,320,338 6.63
Philadelphia Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia
Airport Hotel Proj ........................................ 7.750 12-01-17 B+** 3,250 3,379,935 7.45
Philadelphia, City of,
Wtr & Swr Rev 16th Ser ...................................... 7.500 08-01-10 AAA 3,000 3,414,840 6.59
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania (continued)
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj .......... 7.600% 07-15-20 BBB- $ 3,000 $ 3,075,990 7.41%
York County Solid Waste And Refuse Auth,
Adj Tender Ind'l Dev Rev Ser of 1985 Resource Recovery Proj . 8.200 12-01-14 AA- 1,000 1,064,650 7.70
-----------
50,930,513
-----------
Puerto Rico (5.98%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico ............................................... 6.000 07-01-11 AAA 200 209,080 5.74
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico ............................................... 8.220# 07-01-11 AAA 5,500 5,995,000 7.54
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Floater Ser 1992A ........................ 7.784# 07-01-08 AAA 2,700 2,821,500 7.45
GO Pub Imp Inverse Floater Ser 1996 ......................... 8.220# 07-01-11 A 14,000 15,260,000 7.54
Puerto Rico Highway and Transportation Auth,
Highway Rev Rites PA Rte 114 ................................ 8.705# 07-01-11 A 13,130 14,590,713 7.83
-----------
38,876,293
-----------
South Carolina (2.12%)
Florence, County of,
Ind Dev Rev Stone Container Proj ............................ 7.375 02-01-07 BB 5,000 5,086,450 7.25
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys ............................. 5.375 01-01-25 AAA 9,305 8,732,091 5.73
-----------
13,818,541
-----------
South Dakota (0.15%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss .......................... 7.625 11-01-13 AA- 925 1,009,490 6.99
-----------
Tennessee (2.06%)
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj .......................................... 6.500 09-01-24 A- 9,000 9,242,190 6.33
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp ................................ 6.750 09-01-12 BBB 4,000 4,144,680 6.51
-----------
13,386,870
-----------
Texas (5.39%)
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj ....... 8.250 05-01-15 A 2,000 2,139,420 7.71
Dallas-Fort Worth International Airport Facility Improvement,
Rev American Airlines Inc ................................... 7.250 11-01-30 BB+ 10,250 10,786,280 6.89
Rev Delta Air Lines Inc ..................................... 7.600 11-01-11 BB 3,000 3,200,670 7.12
Ector County Hospital District,
Hosp Rev 1992 ............................................... 7.300 04-15-12 A- 4,000 4,425,960 6.60
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj ....................... 7.750 03-01-12 B 1,410 1,385,353 7.89
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj ......... 8.250 02-15-08 AAA 1,000 1,118,550 7.38
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Texas (continued)
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp Proj.. 6.625% 02-01-24 BBB+ $ 1,000 $ 1,017,200 6.51%
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996* ...................... 5.000 01-01-10 AAA 7,000 6,352,710 5.51
Dallas North Thruway Rev Ref Ser 1996* ...................... 5.500 01-01-15 AAA 5,000 4,631,700 5.94
-----------
35,057,843
-----------
Utah (0.16%)
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon Development Corp 9.000 07-01-12 BBB-** 1,000 1,045,430 8.61
-----------
Virginia (0.71%)
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil ...................................... 7.550 01-01-19 BB** 4,500 4,639,770 7.32
-----------
Washington (4.18%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj .... 9.125 01-01-26 BB-** 11,000 10,458,910 9.60
Seattle, City of,
Municipal Light & Pwr Rev 1994 .............................. 6.625 07-01-16 AA 3,600 3,797,928 6.28
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A Unref Bal .............. 7.500 07-01-15 AA 1,455 1,568,635 6.96
Nuclear Proj No. 1 Ref Rev Ser 1989B ........................ 7.125 07-01-16 AA 1,500 1,663,335 6.43
Nuclear Proj No. 1 Ref Rev Ser 1991A ........................ 6.875 07-01-17 AA 1,250 1,309,637 6.56
Nuclear Proj No. 2 Ref Rev Ser 1990C ........................ 7.625 07-01-10 AAA 5,000 5,651,600 6.75
Nuclear Proj No. 3 Ref Rev Ser 1989B ........................ 7.250 07-01-15 AAA 2,500 2,749,875 6.59
-----------
27,199,920
-----------
Wisconsin (0.68%)
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A ................................ 7.400 07-01-20 AAA 4,000 4,453,360 6.65
-----------
TOTAL TAX EXEMPT LONG-TERM BONDS
(Cost $633,152,241) (101.42%) 659,724,715
======= ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
NUMBER
OF EXPIRATION MARKET
CONTRACTS DATE VALUE
--------- ---- -----
OPTIONS (0.13%)
U.S. Treasury Bond Option 114 USU6C 2,450 08-24-96 $ 842,188
---------
TOTAL OPTIONS
(Cost $363,901) (0.13%) 842,188
====== ============
TOTAL INVESTMENTS
(Cost $633,516,142) (101.55%) $660,566,903
====== ============
NOTES TO SCHEDULE OF INVESTMENTS
* These securities having an aggregate value of $26,413,323 or 4.06% of the
Fund's net asset value, have been purchased as forward commitments - that
is, the Fund has agreed on the trade date, to take delivery of and make
payment for such securities on a delayed basis subsequent to the date of
this schedule. The purchase price and interest rate of such securities is
fixed at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with the current value at least equal to the
amount of its forward commitment. Accordingly, the market values of
$5,889,359. of Foothill/Eastern Transportation Corridor Agency, Toll Rd Rev
Fixed Rate Cap Apprec Ser 1995A, Zero%, 01-01-19, $3,237,990 of Long Beach
Aquarium of the Pacific, Rev 1995 Ser A Aquarium of the Pacific Proj,
6.125%, 07-01-23, $13,812,266 of Madera, County of, Cert of Part Valley
Children's Hosp Proj, 6.50%, 03-15-15, $4,161,760 of Mobile Industrial
Development Board, Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj
1995, 6.95%, 01-01-20, and $3,535,630 of Savannah Hospital Auth, Rev Ref &
Imp Candler Hosp Proj, 7.00%, 01-01-23 have been segregated to cover the
forward commitments.
** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
+ The yield is not calculated with guidelines established by the U.S.
Securities Exchange Commission. Zero coupon yields are at yield to
maturity.
# Represents the rate in effect on June 30, 1996.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Tax-Free Bond Fund invests primarily in securities issued by the various
states and their various political subdivisions. The performance of the Fund is
closely tied to economic conditions within the applicable states and the
financial condition of the states and their agencies and municipalities. The
concentration of investments by states and credit ratings for individual
securities are shown in the schedule of investments. In addition, the
concentration of investments can be aggregated by various sector categories.
The table below shows the percentages of the Fund's investments at June 30, 1996
assigned to the various sector categories.
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
General Obligation............................ 6.94%
Revenue Bonds - Certificate of Participation.. 1.22
Revenue Bonds - Education..................... 1.34
Revenue Bonds - Electric Power................ 17.23
Revenue Bonds - Health........................ 16.62
Revenue Bonds - Housing....................... 2.57
Revenue Bonds - Industrial Development Bond... 8.09
Revenue Bonds - Other......................... 7.05
Revenue Bonds - Pollution Control Facilities.. 14.84
Revenue Bonds - Transportation................ 21.77
Revenue Bonds - Water & Sewer................. 3.75
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 101.42%
======
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Free Bond Fund (the "Fund") is a diversified open-end
management investment company, registered under the Investment Company Act of
1940. The investment objective of the Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of capital by investing primarily in municipal bonds, notes and
commercial paper, the interest on which is exempt from federal income taxes.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution/service expenses under terms of
a distribution plan, have exclusive voting rights regarding such distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $12,505,428 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gains distribution will be made. The carryforwards expire as follows:
December 31, 2002 -- $7,349,795 and December 31, 2003 -- $5,155,633. Expired
capital loss carryforwards are reclassified to capital paid-in, in the year of
expiration.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principals. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees if any, are calculated daily at the class level based
on the appropriate net assets of each class and the specific expense rate(s)
applicable to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund
amortizes the amount paid in excess of par value on securities purchased from
either the date of purchase or date of issue to date of sale, maturity or
23
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
to next call date, if applicable. The Fund accretes original issue discount from
par value on securities purchased from either the date of issue or the date of
purchase over the life of the security, as required by the Internal Revenue
Code. The Fund records market discount on bonds purchased after April 30, 1993
at time of disposition.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues,
and expenses of the Fund. Actual results could differ from these estimates.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange. 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. Daily variation
margin adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At June 30, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
SEP 1996 900 U.S TREASURY BONDS SHORT $2,315,938
==========
At June 30, 1996, the Fund has deposited in a segregated account $809,242
to cover margin requirements on open financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked-to-market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and writing calls will tend to
decrease the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
24
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended June 30,
1996.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent at
an annual rate of 0.55% of the Fund's average daily net asset value.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the 12b-1 fee), to 0.70% of the Fund's average daily net
assets. Accordingly, the reduction in the Adviser's fee amounted to $319,925 for
the period ended June 30, 1996.
The Fund has an agreement with its custodian bank under which $11,818 of
custodian fees have been reduced by balance credits applied during the period
ended June 30, 1996. If the Fund had not entered into this agreement, the assets
not invested, on which these balance credits were earned, could have produced
taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended June 30,
1996, net sales charges received with regard to sales of Class A shares amounted
to $241,984. Out of this amount, $25,504 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $74,804 was paid
as sales commissions to unrelated broker-dealers and $141,676 was paid as sales
commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., Inc. ("Sutro"), all of which are broker dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended June 30, 1996,
contingent deferred sales charges paid to JH Funds amounted to $120,127.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.25% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution/service costs. JH Funds has
temporarily agreed to limit the distribution and service fees pursuant to Class
A and Class B plans to 0.15% and 0.90% of the average daily net assets,
respectively. Up to a maximum 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. The Fund pays Investor
25
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Services a fee based on the number of shareholder accounts and certain
out-of-pocket expenses.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are directors and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. Effective with the fees paid for 1995, the unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation under the
John Hancock Group of Funds Deferred Compensation Plan. The Fund makes
investments into other John Hancock funds, as applicable, to cover its liability
for the deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always equal and
are marked to market on a periodic basis to reflect any income earned by the
investment as well as any unrealized gains or losses. At June 30, 1996, the
Fund's investments to cover the deferred compensation liability had unrealized
appreciation of $878.
The Fund has an independent advisory board composed of certain retired
Directors who provide advice to the current Board of Directors in order to
facilitate a smooth management transition. The Fund pays the advisory board and
its counsel a fee.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended June 30, 1996, aggregated $151,979,840 and $157,776,038, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30, 1996.
The cost of investments owned at June 30, 1996 for federal income tax
purposes was $633,516,142. Gross unrealized appreciation and depreciation of
investments aggregated $31,453,549 and $4,402,788, respectively, resulting in
net unrealized appreciation of $27,050,761.
NOTE D --
REORGANIZATION
On May 2, 1996, the shareholders of John Hancock Tax-Exempt Income Fund (JHTEIF)
approved a plan of reorganization between JHTEIF and the Fund providing for the
transfer of substantially all of the assets and liabilities of JHTEIF to the
Fund in exchange solely for Class A and Class B shares of the Fund. The
acquisition was accounted for as a tax free exchange of 45,353,943 Class A
shares, and 903,108 Class B shares of the Fund for the net assets of JHTEIF,
which amounted to $460,732,563 and $9,174,769 for Class A and B shares,
respectively, including $14,942,866 of unrealized appreciation, after the close
of business on May 3, 1996.
26
<PAGE>
================================================================================
Additional Information
John Hancock Funds - Tax-Free Bond Fund
SHAREHOLDER MEETING
On June 26, 1996, a special meeting of John Hancock Tax-Free Bond Fund (the
"Fund") was held involving the election of trustees and certain other matters
concerning the Fund.
Specifically, shareholders first approved an Amended and Restated
Declaration of Trust for the Fund to provide the Trustees with greater
flexibility to manage the Fund and to take advantage of potential investment
opportunities. The shareholder votes tallied were 9,435,928 FOR, 312,033 AGAINST
and 757,872 ABSTAINING.
Next, the Class A shareholders approved an amendment to the Fund's Class A
distribution plan to increase the maximum distribution fees for Class A shares
from 0.15% to 0.25% annually of the Fund's average daily net assets attributable
to Class A shares, effective December 23, 1996. The Class A shareholder votes
tallied were 4,969,605 FOR, 995,108 AGAINST and 546,741 ABSTAINING.
Lastly, the following trustees were elected to serve until their respective
successors shall become duly elected and qualified, with the votes tabulated as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- --- --------
Edward J. Boudreau, Jr................. 11,999,128 307,890
James F. Carlin........................ 11,999,128 307,890
William H. Cunningham.................. 11,999,128 307,890
Charles F. Fretz....................... 11,999,128 307,890
Harold R. Hiser, Jr.................... 11,999,128 307,890
Anne C. Hodsdon........................ 11,991,247 315,771
Charles L. Ladner...................... 11,999,128 307,890
Leo E. Linbeck, Jr..................... 11,999,128 307,890
Patricia P. McCarter................... 11,999,128 307,890
Steven R. Pruchansky................... 11,999,128 307,890
Richard S. Scipione.................... 11,999,128 307,890
Norman H. Smith........................ 11,991,247 315,771
John P. Toolan......................... 11,999,128 307,890
27
<PAGE>
================================================================================
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Tax-Free Bond Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies. CPrinted on Recycled Paper
[A recycled logo in lower left hand corner with caption "Printed
on Recycled Paper."]
520SA 6/96
8/96
<PAGE>
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL
SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK MANAGED TAX-EXEMPT FUND
101 HUNTINGTON AVENUE, BOSTON, MASSACHUSETTS 02199
SPECIAL MEETING OF SHAREHOLDERS - NOVEMBER 14, 1996
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Susan S. Newton and James B. Little, with full power of
substitution in each, to vote all the shares of beneficial interest of John
Hancock Managed Tax-Exempt Fund ("Managed Tax-Exempt Fund" or the "Fund") which
the undersigned is (are) entitled to vote at the Special Meeting of Shareholders
(the "Meeting") of Managed Tax-Exempt Fund to be held at 101 Huntington Avenue,
Boston, Massachusetts, on November 14, 1996 at 9:00 a.m., Boston time, and at
any adjournment(s) of the Meeting. All powers may be exercised by a majority of
said proxy holders or substitutes voting or acting, or, if only one votes and
acts, then by that one. Receipt of the Proxy Statement dated October __, 1996 is
hereby acknowledged. If not revoked, this proxy shall be voted:
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Date __________________, 1996
NOTE: Signature(s) should agree
with name(s) printed herein. When
signing as attorney, executor,
administrator, trustee or guardian,
please give your full title as
such. If a corporation, please sign
in full corporate name by president
or other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
-----------------------------------
Signature(s)
<PAGE>
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE
OF ADDITIONAL MAILINGS.
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO SPECIFICATION IS
MADE BELOW. AS TO ANY OTHER MATTER, SAID PROXY OR PROXIES SHALL VOTE IN
ACCORDANCE WITH THEIR BEST JUDGEMENT. PLEASE VOTE BY FILLING IN THE APPROPRIATE
BOX BELOW, AS SHOWN, USING BLUE OR BLACK INK OR DARK PENCIL. DO NOT USE RED INK.
(1) To approve an Agreement and Plan of Reorganization between Managed
Tax-Exempt Fund and John Hancock Tax-Free Bond Fund ("Tax-Free Bond Fund")
providing for Tax-Free Bond Fund's acquisition of all of Managed Tax-Exempt
Fund's assets in exchange solely for the assumption of Managed Tax-Exempt
Fund's liabilities, and the issuance of Class A and Class B shares of
Tax-Free Bond Fund to Managed Tax-Exempt Fund for distribution to its
shareholders.
---- ---- ----
FOR |____| AGAINST |____| ABSTAIN |____|
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
JOHN HANCOCK TAX-FREE BOND FUND
October __, 1996
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the related Proxy Statement and Prospectus (also dated
October __, 1996) relating to Class A and Class B shares of John Hancock
Tax-Free Bond Fund ("Tax-Free Bond Fund") to be issued in exchange for all of
the net assets of John Hancock Managed Tax-Exempt Fund ("Managed Tax-Exempt
Fund"). Please retain this Statement of Additional Information for future
reference. A copy of the Proxy Statement and Prospectus can be obtained free of
charge by calling Shareholder Services at 1-800-225-5291 or by written request
to Tax-Free Bond Fund at 101 Huntington Avenue, Boston, Massachusetts 02199.
TABLE OF CONTENTS
Page
----
Introduction........................................................ 3
Additional Information About Tax-Free Bond Fund..................... 3
General Information and History
Investment Objective and Policies
Management of Tax-Free Bond Fund
Control Persons and Principal Holders of Shares
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Tax-Free Bond Fund Shares
Underwriters
Calculation of Performance Data
Financial Statements
Additional Information about Managed Tax-Exempt Fund................ 5
General Information and History
Investment Objective and Policies
Management of Managed Tax-Exempt Fund
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of
Managed Tax-Exempt Fund Shares
Underwriters
Calculation of Performance Data
Financial Statements
<PAGE>
EXHIBITS
A - Statement of Additional Information, dated September 30, 1996, of John
Hancock Tax-Free Bond Fund including audited financial statements as of
December 31, 1995 and unaudited semi-annual financial statements as of
June 30, 1996.
B - Statement of Additional Information, dated March 1, 1996, of John Hancock
Managed Tax-Exempt Fund including audited financial statements as of
October 31, 1995 and unaudited semi-annual financial statements as of
April 30, 1996.
C - Pro Forma Combined Financial Statements at June 30, 1996 and for the period
then ended of Tax-Free Bond Fund and Managed Tax-Exempt Fund.
2
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a Proxy Statement and Prospectus dated October __, 1996
(the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus has
been sent to the shareholders of Managed Tax-Exempt Fund in connection with the
solicitation by the management of Managed Tax-Exempt Fund of proxies to be voted
at the Special Meeting of Shareholders of Managed Tax-Exempt Fund to be held on
November 14, 1996. This Statement of Additional Information incorporates by
reference the statement of additional information of Managed Tax-Exempt Fund,
dated March 1, 1996 (the "Managed Tax-Exempt Fund SAI"), and the statement of
additional information of Tax-Free Bond Fund, dated September 30, 1996 (the
"Tax-Free Bond Fund SAI"). The Managed Tax-Exempt Fund SAI and the Tax-Free Bond
Fund SAI are included with this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT TAX-FREE BOND FUND
-----------------------------------------------
General Information and History
- -------------------------------
For additional information about Tax-Free Bond Fund generally and its
history, see "Organization of the Fund" in the Tax-Free Bond Fund SAI.
Investment Objective and Policies
- ---------------------------------
For additional information about Tax-Free Bond Fund's investment objective,
policies and restrictions see "Investment Objective and Policies," "Certain
Investment Practices" and "Investment Restrictions" in the Tax-Free Bond Fund
SAI.
Management of Tax-Free Bond Fund
- --------------------------------
For additional information about the Tax-Free Bond Fund's Board of
Trustees, officers and management personnel, see "Those Responsible for
Management" in the Tax-Free Bond Fund SAI.
Control Persons and Principal Holders of Shares
- -----------------------------------------------
For additional information about control persons of Tax-Free Bond Fund and
principal holders of shares of Tax-Free Bond Fund, see "Those Responsible for
Management" in the Tax-Free Bond Fund SAI.
3
<PAGE>
Investment Advisory and Other Services
- --------------------------------------
For additional information about Tax-Free Bond Fund's investment adviser,
custodian, transfer agent and independent accountants, see "Investment Advisory
and Other Services," "Distribution Contract," "Transfer Agent Services,"
"Custody of Portfolio" and "Independent Auditors" in the Tax-Free Bond Fund SAI.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about Tax-Free Bond Fund's brokerage allocation
practices, see "Brokerage Allocation" in the Tax-Free Bond Fund SAI.
Shares of Beneficial Interest
- -----------------------------
For additional information about the voting rights and other
characteristics of Tax-Free Bond Fund's shares of beneficial interest, see
"Description of the Fund's Shares" in the Tax-Free Bond Fund SAI.
Purchase, Redemption and Pricing of Tax-Free Bond Fund Shares
- -------------------------------------------------------------
For additional information about the determination of net asset value, see
"Net Asset Value" in the Tax-Free Bond Fund SAI.
Underwriters
- ------------
For additional information about Tax-Free Bond Fund's principal underwriter
and the distribution contract between the principal underwriter and Tax-Free
Bond Fund, see "Distribution Contract" in the Tax-Free Bond Fund SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of Tax-Free
Bond Fund, see "Calculation of Performance" in the Tax-Free Bond Fund SAI.
Financial Statements
- --------------------
Audited financial statements of Tax-Free Bond Fund at December 31, 1995 and
unaudited semi-annual financial statements as of June 30, 1996 are attached to
the Tax-Free Bond Fund SAI.
Pro Forma combined financial statements at June 30, 1996 for Tax-Free Bond
Fund as though the Reorganization had occurred on June 30, 1996 are attached
hereto.
4
<PAGE>
ADDITIONAL INFORMATION ABOUT MANAGED TAX-EXEMPT FUND
----------------------------------------------------
General Information and History
- -------------------------------
For additional information about Managed Tax-Exempt Fund generally and its
history, see "Organization of the Funds" in the Managed Tax-Exempt Fund SAI.
Investment Objectives and Policies
- ----------------------------------
For additional information about Managed Tax-Exempt Fund's investment
objectives and policies, see "Investment Objective and Policies," "Certain
Investment Practices" and "Investment Restrictions" in the Managed Tax-Exempt
Fund SAI.
Management of Managed Tax-Exempt Fund
- -------------------------------------
For additional information about Managed Tax-Exempt Fund's Board of
Trustees, officers and management personnel, see "Those Responsible for
Management" in the Managed Tax-Exempt Fund SAI.
Investment Advisory and Other Services
- --------------------------------------
For additional information about Managed Tax-Exempt Fund's investment
adviser, custodian, transfer agent and independent accountants, see "Investment
Advisory and Other Services," "Distribution Contract," "Transfer Agent
Services," "Custody of Portfolio" and "Independent Accountants" in the Managed
Tax-Exempt Fund SAI.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about Managed Tax-Exempt Fund's brokerage
allocation practices, see "Brokerage Allocation" in the Managed Tax-Exempt SAI.
Shares of Beneficial Interest
- -----------------------------
For additional information about the voting rights and other
characteristics of Managed Tax-Exempt Fund's shares of beneficial interest, see
"Description of the Funds' Shares" in the Managed Tax-Exempt Fund SAI.
Purchase, Redemption and Pricing of Managed Tax-Exempt Fund Shares
- ------------------------------------------------------------------
For additional information about the net asset value of Managed Tax-Exempt
Fund's shares, see "Net Asset Value" in the Managed Tax-Exempt Fund SAI.
5
<PAGE>
Underwriters
- ------------
For additional information about Managed Tax-Exempt Fund's principal
underwriter and the distribution contract between the principal underwriter and
Managed Tax-Exempt Fund, see "Distribution Contracts" in the Managed Tax-Exempt
Fund SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of Managed
Tax-Exempt Fund, see "Calculation of Performance" in the Managed Tax-Exempt Fund
SAI.
Financial Statements
- --------------------
Audited financial statements of Managed Tax-Exempt Fund at October 31, 1995
and unaudited semi-annual financial statements as of April 30, 1996 are attached
to the Managed Tax-Exempt Fund SAI.
6
<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............................................ 13
Those Responsible for Management................................... 17
Investment Advisory and Other Services............................. 24
Distribution Contract.............................................. 27
Net Asset Value.................................................... 30
Initial Sales Charge On Class A Shares............................. 30
Deferred Sales Charge on Class B Shares............................ 33
Special Redemptions................................................ 36
Additional Services and Programs................................... 37
Description of the Fund's Shares................................... 38
Tax Status......................................................... 40
Calculation of Performance......................................... 45
Brokerage Allocation............................................... 48
Transfer Agent Services............................................ 50
Custody of Portfolio............................................... 50
Independent Auditors............................................... 50
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 investment objective of the Fund is to obtain
as high a level of current income exempt from Federal income tax 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
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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 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
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of ratings. Many issuers of securities choose not to have their obligations
rated. Although unrated securities eligible for purchase by the Fund must be
determined to be comparable in quality to securities having certain specified
ratings, the market for unrated securities may not be as broad as for rated
securities since many investors rely on rating organizations for credit
appraisal.
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 must be rated at least Prime-2 by Moody's or A-1 by S&P. The
Fund may retain Municipal Obligations whose ratings are downgraded below
permissible ratings until the Adviser determines that disposing of such
Obligations is in the best 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 services requirements but provide a limited
margin of safety and are vulnerable to default in the event of adverse business,
financial or economic conditions. In addition, the market for these instruments
may be less liquid than the market for higher rated securities. Therefore, the
Adviser's judgment at times 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.
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Because there is no restriction on the maturities of the Municipal
Obligations in which the Fund may invest, the Fund's average portfolio maturity
is not subject to any limit. Generally, the longer the average portfolio
maturity, the greater will be the impact of fluctuations in interest rates on
the values of the Fund's assets and on the net asset value per share.
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 money market securities rated in the three highest ratings as
determined by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or Fitch 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 met is based (floating rate). Variable or floating
rate obligations may include a demand feature which entitles the purchaser to
demand prepayment of the principal amount prior to stated maturity. Also, the
issuer may have a corresponding right to prepay the principal amount prior to
maturity. As with any other type of debt security, the marketability of variable
or floating rate instruments may vary depending upon a number of factors,
including the type of issuer and the terms of the instruments. The Fund may also
invest in more recently developed floating rate instruments which are created by
dividing a municipal security's interest rate into two or more different
components. Typically, one component ("floating rate component" or "FRC") pays
an interest rate that is reset periodically through an auction process or by
reference to an interest rate index. A second component ("inverse floating rate
component" or "IFRC") pays an interest rate that varies inversely with changes
to market rates of interest, because the interest paid to the IFRC holders is
generally determined by subtracting a variable or floating rate from a
predetermined amount (i.e., the difference between the total interest paid by
the municipal security and that paid by the FRC). The Fund may 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
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interest gives the Fund an undivided interest in the tax exempt security in the
proportion that the Fund's participation interest bears to the total amount of
the tax exempt security. For certain participation interests, the Fund will have
the right to demand payment, on a specified number of days' notice, for all or
any part of the Fund's participation interest in the tax exempt security plus
accrued interest. Participation interests, which are determined to be not
readily marketable, will be considered as such for purposes of the Fund's 10%
investment restriction on investment in non-readily marketable illiquid
securities. The Fund may also invest in Certificates of Participation (COP's)
which provide participation interests in lease revenues. Each Certificate
represents a proportionate interest in or right to the lease-purchase payment
made under municipal lease obligations or installment sales contracts.
Typically, municipal lease obligations are issued by a state or municipal
financing authority to provide funds for the construction of facilities (e.g.,
schools, dormitories, office buildings or prisons) or the acquisition of
equipment. The facilities are typically used by the state or municipality
pursuant to a lease with a financing authority. Certain municipal lease
obligations may trade infrequently. Participation interests in municipal lease
obligations will not be considered illiquid for purposes of the Fund's 10%
limitation on illiquid securities provided the 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
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a temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of, various
types of tax- exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield or diversification
for any one or more of the following purposes: (a) to increase income, (b) to
improve portfolio quality, (c) to minimize capital depreciation, (d) to realize
gains or losses, or (e) for such other reasons as the Adviser deems relevant in
light of economic market conditions.
The Fund is a "diversified" management investment company under the
Investment Company Act of 1940 (the "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.
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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
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, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase Agreements. 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
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continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving
as collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income and lack of
access to income during this period and the expense of enforcing its rights.
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. 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.
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A call option gives the purchaser of such option in return for a premium paid,
the right to buy, and the seller has the obligation to sell, the underlying
security at the exercise price if the option is exercised during the option
period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The exercise price of a call option may be below, equal to or above the
current market value of the underlying security at the time the option is
written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier point in time when the writer effects a closing
purchase transaction.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price of
such security. The Fund will write put options only on a "cash secured" basis
which means that if the Fund writes a "put" it will segregate cash obligations
in the event the "put" is exercised. "Puts" will only be written in furtherance
of the basic investment objectives of the Fund relating to the acquisition of
tax exempt securities and will not be written with the primary intent of
generating income from premiums paid to the Fund in connection with the sale of
the "put".
The purchase and writing of put and call options involves certain risks.
During the option period, the covered call writer has, in return for the premium
on the option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss in the event the price of
the underlying security declines. A secured put writer assumes the risk that the
underlying security will fall below the exercise price in which case the writer
could be required to purchase the security at a higher price than the then
current market price of the security. In either instance, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities, in the
case of a call, or acquire the contract securities, in the case of a put, at the
exercise price. If a put or call option purchased by the Fund is not sold when
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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 avoids by
taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by the
Fund would be substantially offset by an increase in the value of the futures
contract sold by the Fund. While the Fund could sell a long-term debt security
and invest in a short-term security, ordinarily the Fund would give up income on
its investment, since long-term rates normally exceed short-term rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate an
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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
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
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risks applicable to all option transactions. In addition, the Fund's ability to
use this technique will depend in part on the development and maintenance of a
liquid secondary market for such options. For a discussion of the inherent risks
involved with futures contracts and options thereon, see "Risks Relating to
Transactions in Futures Contracts and Related Options" below.
The Fund's policies permitting the purchase and sale of futures contracts
and the purchase and writing of related put or call options for hedging purposes
only may not be changed without the approval of shareholders holding a majority
of the Fund's outstanding voting securities. The Board of Directors may
authorize procedures, including numerical limitations, with regard to such
transactions in furtherance of the Fund investment objectives. Such procedures
are not deemed to be fundamental and may be changed by the Board of Trustees
without the vote of the Fund's shareholders.
Risks Relating to Transactions in Futures Contracts and Related Options.
Positions in futures contracts may be closed out only on an exchange or board of
trade which provides a market for such futures. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract or at
any particular time. In the event a liquid market does not exist, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
maintenance margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent the Fund from
closing out a contract which may result in reduced gain or increased loss to the
Fund. The absence of a liquid market in futures contracts might cause the Fund
to make or take delivery of the underlying securities at a time when it may be
disadvantageous to do so. The purchase of put options on futures contracts
involves less potential dollar risk to the Fund than an investment of equal
amount in futures contracts, since the premium is the maximum amount of risk the
purchaser of the option assumes. The entire amount of the premium paid for an
option can be lost by the purchaser, but no more than that amount.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon its
investments as set forth below which may not be changed without the approval of
the holders of a majority of the outstanding shares of the Fund. A majority for
this purpose means: (a) more than 50% of the outstanding shares of the Fund or
(b) 67% or more of the shares represented at a meeting where more than 50% of
the outstanding shares of the Fund are represented, whichever is less. Under
these restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
13
<PAGE>
that might otherwise require the untimely disposition of securities,
in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowings was made.
While borrowing exceed 5% of the value of the Fund's total assets, the
Fund will not purchase any additional securities. Interest paid on
borrowing will reduce the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its total assets but only to
secure borrowing for temporary or emergency purposes or as may be
necessary in connection with maintaining collateral in connection with
writing put and call options or making initial margin deposits in
connection with the purchase or sale of financial futures, index
futures contracts and related options.
3. With respect to 75% of its total assets, purchase securities (other
than obligations issued or guaranteed by the United States government,
its agencies of instrumentalities and shares of other investment
companies) of any issuer if the purchase would cause immediately
thereafter more than 5% of the value of the Fund's total assets
invested in the securities of such issuer or the Fund would own more
than 10% of the outstanding voting securities of such issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not exceeding
one third of its total assets.
5. Purchase illiquid securities, including securities subject to
restrictions on disposition under the Securities Act of 1933,
repurchase agreements maturing in more than seven days, and securities
which do not have readily available market quotations, if such
purchase would cause the Fund to have more than 10% of its net assets
invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers and
Trustees of the Fund or the Adviser who own beneficially more than of
1% of the securities of such issuer, together own more than 5% of the
securities of such issuer.
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
14
<PAGE>
based on indices of debt securities, sell securities on margin or make
short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
8. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
9. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, except commodities and commodities
contracts which are necessary to enable the Fund to engage in
permitted futures and options transactions necessary to implement
hedging strategies, or oil and gas interests. This limitation shall
not prevent the Fund from investing in municipal securities secured by
real estate or interests in real estate or holding real estate
acquired as a result of owning such municipal securities.
10. Invest in common stock or in securities of other investment companies,
except that securities of investment companies may be acquired as part
of a merger, consolidation or acquisition of assets and units of
registered unit investment trusts whose assets consist substantially
of tax-exempt securities may be acquired to the extent permitted by
Section 12 of the Act or applicable rules.
11. Invest more than 25% of its assets in the securities of "issuers" in
any single industry; provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or by any state or
political subdivision thereof. For purposes of this limitation when
the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond is
backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such government
15
<PAGE>
or other entity unless all securities issued or guaranteed by the
government or other entity owned by the Fund does not exceed 10% of
the Fund's total assets.
12. Invest more than 5% of its total assets in securities of any issuers
if the party responsible for payment, together with any predecessor,
has been in operation for less than three years (except U.S.
government and agency obligations and obligations backed by the faith,
credit and taxing power of any person authorized to issue tax exempt
securities).
13. Issue any senior securities, except insofar as the Fund may be deemed
to have issued a senior security by: entering into a repurchase
agreement; purchasing securities in a when-issued or delayed delivery
basis; purchasing or selling any options or financial futures
contract; borrowing money or lending securities in accordance with
applicable investment restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non-fundamental policy prohibiting the purchase of warrants. The
Fund's Board of Trustees has approved the following non-fundamental investment
policy pursuant to an order of the SEC: Notwithstanding any investment
restriction to the contrary, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds provided that, as a result, (i) no more than 10% of the Fund's assets
would be invested in securities of all other investment companies, (ii) such
purchase would not result in more than 3% of the total outstanding voting
securities of any one such investment company being held by the Fund and (iii)
no more than 5% of the Fund's assets would be invested in any one such
investment company.
16
<PAGE>
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers and Directors of the Adviser or officers and directors of
John Hancock Funds, Inc. ("John Hancock Funds") .
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.
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
October 1944 Officer, the Adviser and The
Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"); John Hancock
Funds; John Hancock Investor
Services Corporation ("Investor
Services") and Sovereign Asset
Management Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.
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).
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Dennis S. Aronowitz Trustee (3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
Richard P. Chapman, Jr. Trustee (1,3) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc., EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
Douglas M. Costle Trustee (1,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean, Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Leland O. Erdahl Trustee (3) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987- 1991) and
President of Albuquerque Uranium
Corporation (from 1985- 1992);
Director of Freeport-McMoRan Copper
& Gold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995) (management
consultant).
Richard A. Farrell Trustee (3) President of Farrell, Healer & Co.,
Farrell, Healer & Company, Inc. (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank
Boston, MA 02110 of Boston Corporation.
November 1932
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
*Anne C. Hodsdon Trustee and President (1,2) President and Chief Operating
April 1953 Officer, the Adviser; Executive
Vice President, The Adviser (until
December 1994); Senior Vice
President; the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks, (nonprofit
1101 Vermont Avenue N.W. institution) ( since September
Suite 608 1989).
Washington, DC 20005
February 1939
Patti McGill Peterson Trustee (3) President, St. Lawrence University;
St. Lawrence University Director, Niagara Mohawk Power
110 Vilas Hall Corporation (electric utility) and
Canton, NY 13617 Security Mutual Life (insurance).
May 1943
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937 Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Fort Lauderdale, FL
November 1932
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer (2) Officer, the Adviser; President,
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.
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
*James B. Little Senior Vice President, Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds and Investor Services; Senior
Vice President and Chief Financial
Officer, each of the John Hancock
funds.
*John A. Morin Vice President Vice President and Secretary, the
July 1950 Adviser; Vice President, Investor
Services, 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.
*Susan S. Newton Vice President, Secretary Vice President and Assistant
March 1950 Secretary, the Adviser; Vice
President and Secretary, certain
John Hancock funds; Vice President
and Secretary, John Hancock Funds,
Investor Services and John Hancock
Distributors, Inc. (until 1994);
Secretary, SAMCorp; Vice President,
The Berkeley Group.
*James J. Stokowski Vice President and Treasurer Vice President, the Adviser; Vice
November 1946 President and Treasurer, each of
the John Hancock funds.
</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.
As of June 17, 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
June 17, 1996, Merrill Lynch Pierce Fenner & Smith Inc., Trade House Account
Team B, 4800 Deerlake Drive East, Jacksonville, FL held 825,025 shares
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
representing 10.39% of the Fund's Class B shares. At such date, no person owned
of record or was known by the Fund to own beneficially as much as 5% of the
outstanding shares of the Fund.
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the 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.
22
<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.
Aggregate Total Compensation from all
Compensation Funds in 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 December 31, 1995, the value of the aggregate 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.
23
<PAGE>
Total
Pension or Compensation
Retirement from all Funds in
Aggregate Benefits Accrued John Hancock
Compensation as Part of the Fund Complex to
Advisory Board*** from the Fund Fund's Expenses Advisory Board***
- ----------------- ------------- --------------- -----------------
R. Trent Campbell $ 3,672 $0 $ 70,000
Mrs. Lloyd Bentsen 3,783 0 63,000
Thomas R. Powers 3,672 0 63,000
Thomas B. McDade 3,672 0 63,000
------- ------ --------
TOTAL $14,799 $0 $259,000
*** 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.
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
24
<PAGE>
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 Investment 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 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
25
<PAGE>
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
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
26
<PAGE>
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 and expense
assumption and fee waiver 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 was 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.
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
27
<PAGE>
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 services fee will not exceed an
annual rate of 0.15% of the average daily net asset value of the Class A Shares
of the Fund (determined in accordance with such Fund's Prospectus as from time
to time in effect). The Board of Trustees and the shareholders have approved
that the distribution and service fee on Class A Shares be increased to 0.25% of
the average daily net asset value effective after December 22, 1996. Any
expenses under the Class A Plan not reimbursed within 12 months of being
presented to the Fund for repayment are forfeited and not carried over to future
years. Under the Class B Plan, the distribution or services fee to be paid by
the Fund will not exceed an annual rate of 1.00% of the average daily net assets
of the Class B Shares of the Fund (determined in accordance with such Fund's
prospectus as from time to time in effect); provided that the portion of such
fee used to cover Service Expenses (described below) shall not exceed an annual
rate of 0.25% of the average daily net asset value of the Class B Shares of the
Fund. The Distributor has agreed to limit the payment of expenses pursuant to
the Class B Plan to 0.90% of the average daily net assets of the Class B Shares
of the Fund until December 23, 1996. Under the Class B Plan, the fee covers the
Distribution and Service Expenses (described below) and interest expenses on
unreimbursed distribution expenses. In accordance with generally accepted
accounting principles, the Fund does not treat distribution fees in excess of
0.75% of the Fund's net assets attributable to Class B shares as a liability of
the Fund and does not reduce the current net assets of Class B by such amount
although the amount may be payable in the future.
28
<PAGE>
Under the Plans, expenditures shall be calculated and accrued daily and
paid monthly or at such other intervals as the Trustees shall determine. The fee
may be spent by the Distributor on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, including, but
not limited to: (i) initial and ongoing sales compensation payable out of such
fee as such compensation is received by the Distributor or by Selling Brokers,
(ii) direct out-of-pocket expenses incurred in connection with the distribution
of shares, including expenses related to printing of prospectuses and reports;
(iii) preparation, printing and distribution of sales literature and advertising
material; (iv) an allocation of overhead and other branch office expenses of the
Distributor related to the distribution of Fund Shares; (v) distribution
expenses that were incurred by the Fund's former distributor and not recovered
through payments under the Class A or Class B former plans or through receipt of
contingent deferred sales charges; and (vi) in the event that any other
investment company (the "Acquired Fund") sells all or substantially all of its
assets, merges or otherwise engages in a combination with the Fund, distribution
expenses originally incurred in connection with the distribution of the Acquired
Fund's shares. Service Expenses under the Plans include payments made to, or on
account of, account executives of selected broker-dealers (including affiliates
of the Distributor) and others who furnish personal and shareholder account
maintenance services to shareholders of the relevant class of the Fund.
During the fiscal year ended December 31, 1995, the Funds paid John Hancock
Funds the following amounts of expenses with respect to the Class A and Class B
shares of the Fund:
<TABLE>
<CAPTION>
Printing and
Mailing of Interest, Carrying
Prospectuses to Compensation to or Other Finance
Advertising New Shareholders Selling Brokers Charges
----------- ---------------- --------------- -------
<S> <C> <C> <C> <C>
Class A shares $13,395 $518 $116,514 $ 0
Class B shares $17,054 $707 $247,449 $338,251
</TABLE>
Each of the Plans provides that it will continue in effect only so long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class'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
29
<PAGE>
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
The Board of Trustees, including the Trustees who are not interested in the Fund
and have no direct or indirect interest in the Plans, has determined that, in
their judgment, there is a reasonable likelihood that the Plans will benefit the
holders of the applicable class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class of
the Fund are provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In its quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Agreement and the level of
compensation provided therein.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of 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.
INITIAL SALES CHARGE ON CLASS A SHARES
Class A 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
30
<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. 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,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
31
<PAGE>
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 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 million 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
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may not opt to make the
32
<PAGE>
necessary investments called for by the LOI over a forty-eight (48) month
period. These qualified retirement plans include IRA's, SEP, SARSEP, TSA, 401(k)
plans, TSA plans and 457 plans. Such an investment (including accumulations and
combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5%) of the aggregate to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Contingent Deferred Sales Charge. Investments in Class B shares are
purchased at net asset value per share without the imposition of a sales charge
so that the Fund will receive the full amount of the purchase payment. Class B
Shares which are redeemed within six years of purchase will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
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. No CDSC will be imposed on 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.
33
<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 the Distributor and are used in whole or
in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
34
<PAGE>
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.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other plans qualified under
the Internal Revenue Code of 1986, as amended (the "Code") unless otherwise
noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code after age 70 1/2.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans such as 401(k), 403(b), 457. In
all cases, the distribution must be free from penalty under the Code.
* Redemptions made to effect distributions from an Individual Retirement
Account either before age 59 1/2 or after age 59 1/2, as long as the
distributions are based on your life expectancy or the joint-and-last
survivor life expectancy of you and your beneficiary. These distributions
must be free from penalty under the Code.
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
For non-retirement accounts (please see above for retirement account waivers):
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 10% of your account value at
the time you established your periodic withdrawal plan and 10% 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.)
Please see matrix for reference.
35
<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 10% of account
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Between 59 1/2 Only Life 10% of account
and 70 1/2 Waived Waived Waived Expectancy value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for
rollover, or
annuity
payments. Not 10% of account
waived if paid Waived for Waived for Waived for value annually
directly to annuity annuity annuity in periodic
participant. payments payments payments payments
- ------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ------------------------------------------------------------------------------------------------------
</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
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
36
<PAGE>
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 realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B Shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on such purchases of Class A Shares and the
CDSC imposed on redemptions of Class B Shares and because redemptions are
taxable events. Therefore, a shareholder should not purchase Fund shares at the
same time as a Systematic Withdrawal Plan is in effect. The Fund reserves the
right to modify or discontinue the Systematic Withdrawal Plan of any shareholder
on 30 days' prior written notice to such shareholder, or to discontinue the
availability of such plan in the future. The shareholder may terminate the plan
at any time by giving proper notice to Fund Services.
Monthly Automatic Accumulation Program ("MAAP"). 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.
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
37
<PAGE>
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,
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
Shares of the Fund. Ownership of the Fund is represented by transferable
shares of beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Fund and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Fund.
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Fund, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Board of Trustees. Shares of the Fund have a
par value of $0.01 per share. The assets of each series are segregated on the
Fund's books and are charged with the liabilities of that series and with a
share of the Fund's general liabilities. The Board of Trustees determines those
assets and liabilities deemed to be general assets or liabilities of the Fund,
and these items are allocated among each series in proportion to the relative
total net assets of each series. In the unlikely event that the liabilities
allocable to a series exceed the assets of that series, all or a portion of such
liabilities may have to be borne by the other series.
38
<PAGE>
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund designated as Class A and Class B. Class A and Class B Shares of the
Fund represent an equal proportionate interest in the aggregate net asset values
attributable to that class of the Fund. Holders of Class A Shares and Class B
Shares each have certain exclusive voting rights on matters relating to the
Class A Plan and the Class B Plan, respectively. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences resulting from the facts that
(i) the distribution and service fees relating to Class A and Class B shares
will be borne exclusively by such 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 class expenses properly allocable to
such class of shares, subject to the requirements imposed by the Internal
Revenue Service on Funds that have a multiple-class structure. Similarly, the
net asset value per share may vary depending whether Class A Shares or Class B
Shares are purchased.
Voting Rights. Shareholders are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that at all times at least a majority of
the Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. Although
the Fund need not hold annual meetings of shareholders, the trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholder's
meeting must be called if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Fund. In addition, the Trustees may
be removed by the action of the holders of record of two-thirds or more of the
outstanding shares.
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
39
<PAGE>
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.
Shareholder Liability. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue share
certificates. The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
Reports to Shareholders. Shareholders of the Fund will receive annual and
semi-annual reports showing diversification of investments, securities owned and
other information regarding the Fund's activities. The financial statements of
the Fund are audited at least once a year by the Fund's independent auditors.
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
in the future. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on taxable and tax-exempt income (including net short-term and
long-term capital gains from the disposition of portfolio securities or the
right to when-issued securities prior to issuance, or from the lapse, exercise,
delivery under or closing out of options or futures contracts, income from
repurchase agreements and other taxable securities, income attributable to
accrued market discount, income from securities lending, and a portion of the
discount from certain stripped tax-exempt obligations or their coupons) which is
distributed to shareholders at least annually in accordance with the timing
requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
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<PAGE>
Fund intends under normal circumstances 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.
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.
41
<PAGE>
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.
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
42
<PAGE>
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 the Fund's net short-term and long-term capital gains, if
any, in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options or futures
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or, less
frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon 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 will be disallowed to the
extent the shares disposed of are replaced with identical or substantially
identical securities within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to 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
43
<PAGE>
such shares and, if not thus disallowed, will be treated as a long-term capital
loss to the extent of any amounts treated as distributions of long-term capital
gain with respect to such shares.
Although 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 its "net capital gain," which is 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 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 had paid his pro rata share of the taxes paid by
the Fund and reinvested the remainder in the Fund. Accordingly, each shareholder
would (a) include his pro rata share of such excess as long-term capital gain
income in his return for his taxable year in which the last day of the Fund's
taxable year falls, (b) be entitled either to a tax credit on his return for, or
to a refund of, his pro rata share of the taxes paid by the Fund, and (c) be
entitled to increase the adjusted tax basis for his shares in the Fund by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, the Fund is generally permitted to carry
forward a net capital loss in any year to offset its net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
net capital gains are offset by such losses, they would not result in Federal
income tax liability to the Fund and, as noted above, would not be distributed
as such to shareholders. The Fund has $12,505,428 of capital loss carry
forwards, $7,349,795 expires in 2002 and $5,155,633 expires in 2003 which are
available to offset future net capital gains.
Dividends paid by the Fund to its corporate shareholders will not qualify
for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include accrued market discount in income currently), the Fund must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, the Fund must distribute, at least annually, all or
substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
44
<PAGE>
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's gains. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. Certain of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
45
<PAGE>
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1995, the annualized yields of the
Fund's Class A Shares and Class B Shares were 5.11% and 4.61%, respectively.
As of December 31, 1995, the average annual total returns of the Class A
Shares of the Fund for the one-year period and since inception on January 5,
1990 were 14.79% and 8.39%, respectively 14.67% and 8.06%, respectively, without
taking into account the expense limitation arrangements). As of December 31,
1995, the average annual returns for the Fund's Class B Shares for the one-year
period and since inception on December 31, 1991 were 14.42% and 7.24%,
respectively 14.30% and 7.07%, respectively, without taking into account the
expense limitation arrangements).
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.
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<PAGE>
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:
Yield = 2([(a - b) + 1] 6 - 1)
-----
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period
(NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the 36% tax rate for the 30-day period
ended December 31, 1995 were 7.98% and 7.20%, 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.
47
<PAGE>
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized. The Fund's promotional and sales literature may make reference
to the Fund's "beta." Beta is a reflection of the market-related risk of the
Fund by showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the 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.
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<PAGE>
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
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
49
<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's portfolio turnover rates for the fiscal years ended December 31,
1994 and 1995 were 107% and 113%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205- 9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
a monthly transfer agent fee of $19 per account for the Class A Shares and
$21.50 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
_______________________________________, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in the Prospectus and this Statement of Additional
Information have been audited by _________________ 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.
50
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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% 14.09% 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>
FREEDOM INVESTMENT TRUST
consisting of five series
which are included herein:
- John Hancock Sovereign U.S. Government Income Fund
- John Hancock Managed Tax-Exempt Fund
- John Hancock Gold & Government Fund
- John Hancock Sovereign Achievers Fund
- John Hancock Regional Bank Fund
and
FREEDOM INVESTMENT TRUST II
consisting of five series,
two of which are included herein:
- John Hancock Global Fund
- John Hancock Global Income Fund
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1996
This Statement of Additional Information provides information about
John Hancock Sovereign U.S. Government Income Fund, John Hancock Managed
Tax-Exempt Fund, John Hancock Gold & Government Fund, John Hancock Sovereign
Achievers Fund, John Hancock Regional Bank Fund, John Hancock Global Fund and
John Hancock Global Income Fund in addition to the information that is contained
in the Funds' Class A and Class B Shares Prospectus dated March 1, 1996
(together, the "Prospectuses").
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Funds' Prospectuses, 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
1
<PAGE>
TABLE OF CONTENTS
-----------------
Statement of
Additional
Information
Page
ORGANIZATION OF THE FUNDS 3
INVESTMENT OBJECTIVES AND POLICIES 3
- ---John Hancock Sovereign U.S. Government Income Fund
- ---John Hancock Managed Tax-Exempt Fund
- ---John Hancock Gold & Government Fund
- ---John Hancock Sovereign Achievers Fund
- ---John Hancock Regional Bank Fund
- ---John Hancock Global Fund
- ---John Hancock Global Income Fund
THE FUNDS' OPTIONS TRADING ACTIVITIES 19
THE FUNDS' INVESTMENTS IN FUTURES CONTRACTS 26
CERTAIN INVESTMENT PRACTICES. 31
INVESTMENT RESTRICTIONS 36
TAX STATUS 40
THOSE RESPONSIBLE FOR MANAGEMENT 46
INVESTMENT ADVISORY AND OTHER SERVICES 53
DISTRIBUTION CONTRACTS 56
NET ASSET VALUE 59
INITIAL SALES CHARGE ON CLASS A SHARES 60
DEFERRED SALES CHARGE ON CLASS B SHARES 61
SPECIAL REDEMPTIONS 62
ADDITIONAL SERVICES AND PROGRAMS 62
DESCRIPTION OF THE FUNDS' SHARES 64
CALCULATION OF PERFORMANCE 65
BROKERAGE ALLOCATION 70
DISTRIBUTIONS 73
TRANSFER AGENT SERVICES 75
CUSTODY OF PORTFOLIO 75
INDEPENDENT ACCOUNTANTS 75
APPENDIX A - BOND AND COMMERCIAL 76
PAPER RATINGS 77
FINANCIAL STATEMENTS --
2
<PAGE>
ORGANIZATION OF THE FUNDS
Freedom Investment Trust is a diversified open-end management
investment company organized as a Massachusetts business trust on March 29,
1984. Freedom Investment Trust was originally organized under the name Freedom
Gold & Government Trust. It changed its name to Freedom Investment Trust on July
22, 1985. The Trustees have authority to issue an unlimited number of shares of
beneficial interest of separate series without par value. To date, five series
of Freedom Investment Trust have been authorized for sale to the public by the
Board of Trustees: John Hancock Gold & Government Fund (formerly John Hancock
Freedom Gold & Government Trust), created on March 29, 1984 ("Gold & Government
Fund"), John Hancock Regional Bank Fund (formerly John Hancock Freedom Regional
Bank Fund), created on April 2, 1985 ("Regional Bank Fund"), John Hancock
Sovereign U.S. Government Income Fund (formerly Freedom Government Income Fund),
created on January 16, 1986 ("Government Fund"), John Hancock Sovereign
Achievers Fund (formerly Freedom Equity Value Fund), created on January 16, 1986
("Sovereign Achievers Fund"), and John Hancock Managed Tax-Exempt Fund (formerly
John Hancock Freedom Managed Tax Exempt Fund).
Freedom Investment Trust II (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on March 31,
1986. The Trust currently has five series of shares, John Hancock Global Fund
(formerly John Hancock Freedom Global Fund), created on March 31, 1986 ("Global
Fund"), John Hancock Global Income Fund (formerly John Hancock Freedom Global
Income Fund), created on July 30, 1986 ("Global Income Fund") and John Hancock
Short-Term Strategic Income Fund (formerly John Hancock Freedom Short-Term World
Income Fund), created on July 31, 1990; John Hancock Special Opportunities Fund,
created on November 1, 1993 ("Special Opportunities Fund"), and John Hancock
International Fund (formerly John Hancock Freedom International Fund), created
on January 3, 1994 ("International Fund").
Freedom Investment Trust and Freedom Investment Trust II may be
referred to individually as a "Trust" and collectively as the "Trusts". Gold &
Government Fund, Regional Bank Fund, Government Fund, Sovereign Achievers Fund,
Managed Tax-Exempt Fund, Global Fund and Global Income Fund may be referred to
individually as a "Fund" and collectively as the "Funds."
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in each Fund's respective
Prospectus. The Adviser for all the Funds is John Hancock Advisers, Inc. (the
"Adviser"). John Hancock Advisers International Limited ("JH Advisers
International") is the Sub-Adviser for the Global Fund.
3
<PAGE>
John Hancock Sovereign U.S. Government Income Fund
--------------------------------------------------
The Adviser believes that a high current income consistent with
long-term total return may be derived from: (i) interest income from Government
Securities; (ii) income from premiums from expired put and call options on
Government Securities written by the Government Fund; (iii) net gains from
closing purchase and sale transactions with respect to options on Government
Securities; and (iv) net gains from sales of portfolio securities on exercise of
options or otherwise.
Since interest yields on Government Securities and opportunities to
realize net gains from options transactions may vary from time to time because
of general economic and market conditions and many other factors, it is
anticipated that the Government Fund's share price and yield will fluctuate, and
there can be no assurance that the Government Fund's objective will be achieved.
Government Securities
- ---------------------
U.S. TREASURY SECURITIES. The Government Fund may invest in U.S. Treasury
securities, including Bills, Notes, Bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and differ primarily in their interest rates, the lengths of their
maturities and the times of their issuance.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Government Fund may also invest in securities issued by
agencies of the U.S. Government or instrumentalities established or sponsored by
the U.S. Government. The obligations, including those which are guaranteed by
Federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Government Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Securities in which the Government Fund may invest but which are not backed by
the full faith and credit of the United States include but are not limited to
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation ("FHLMC") and the United States Postal Service, each of which has
the right to borrow from the United States Treasury to meet its obligations, and
obligations of the Federal Farm Credit System, the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Banks, the obligations of which
may only be satisfied by the individual credit of the issuing agency.
Obligations of the Government National Mortgage Association ("GNMA"), the
Farmers Home Administration and the Export-Import Bank are backed by the full
faith and credit of the United States.
Securities of International Bank for Reconstruction and Development
- -------------------------------------------------------------------
The Government Fund may also purchase obligations of the International
Bank for Reconstruction and Development ("World Bank"), which, while technically
not a U.S. Government agency or instrumentality, has the right to borrow from
the participating countries, including the United States.
4
<PAGE>
Mortgage-Related Securities
- ---------------------------
The Government Fund may invest in mortgage-backed securities, including
those representing an undivided ownership interest in a pool of mortgage loans,
e.g., securities of the GNMA and pass-through securities issued by the FHLMC and
FNMA.
GNMA CERTIFICATES. Certificates of the Government National Mortgage Association
("GNMA Certificates") are mortgage-backed securities, which evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that the principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. GNMA Certificates
that the Government Fund purchases are the "modified pass-through" type.
"Modified pass-through" GNMA Certificates entitle the holder to receive a share
of all interest and principal payments paid and owed on the mortgage pool, net
of fees paid to the "issuer" and GNMA, regardless of whether or not the
mortgagor actually makes the payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration ("FMHA"), or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limit from the U.S. Treasury if
necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the contractual maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee. Because they represent the underlying mortgages, GNMA Certificates
may not be an effective means of locking in long-term interest rates due to the
need for the Government Fund to reinvest scheduled and unscheduled principal
payments. At the time principal payments or prepayments are received by the
Government Fund, prevailing interest rates may be higher or lower than the
current yield of the Fund's portfolio.
Statistics published by the FHA indicate that the average life of
single-family dwelling mortgages with 25- to 30-year maturities, the type of
mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. However, because prepayment rates of individual mortgage pools vary
widely, it is not possible to predict accurately the average life of a
particular issue of GNMA Certificates.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest on GNMA
Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, by the amount of the fees
paid to GNMA and the issuer.
5
<PAGE>
The coupon rate by itself, however, does not indicate the yield which
will be earned on GNMA Certificates. First, GNMA Certificates may be issued at a
premium or discount, rather than at par, and, after issuance, GNMA Certificates
may trade in the secondary market at a premium or discount. Second, interest is
earned monthly, rather than semi-annually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher-yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced. Prepayments of
principal by mortgagors (which can be made at any time without penalty) may
increase during periods when interest rates are falling.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in 1970
through enactment of Title III of the Emergency Home Finance Act of 1970. Its
purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities,
mortgage participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. The FHLMC guarantees timely payment of interest on PCs and the full return
of principal.
GMC's also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments.
FNMA SECURITIES. The Federal National Mortgage Association was established in
1938 to create a secondary market in mortgages insured by the FHA.
FNMA ISSUED GUARANTEED MORTGAGE PASS-THROUGH CERTIFICATES ("FNMA CERTIFICATES").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest on FNMA
Certificates and the full return of principal.
COLLATERALIZED MORTGAGE-BACKED OBLIGATIONS ("CMO'S"). CMOs are
fully-collateralized bonds which are the general obligations of the issuer
thereof, either the U.S. Government or a U.S. Government instrumentality. Such
bonds generally are secured by an assignment to a trustee (under the indenture
pursuant to which the bonds are issued) of collateral consisting of a pool of
mortgages. Payments with respect to the underlying mortgages generally are made
to the trustee under the indenture. Payments of principal and interest on the
underlying mortgages are not passed through to the holders of the CMOs as such
(i.e. the character of payments of principal and interest is not passed through,
and therefore payments to holders of CMOs attributable to interest paid and
principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
CMOs often are issued in two or more classes with varying maturities and stated
rates of interest. Because interest and principal payments on the underlying
mortgages are not passed through to holders of CMOs, CMOs of
6
<PAGE>
varying maturities may be secured by the same pool of mortgages, the payments on
which are used to pay interest on each class and to retire successive maturities
in sequence. Unlike other mortgage-backed securities (discussed above), CMOs are
designed to be retired as the underlying mortgages are repaid. In the event of
prepayment on such mortgages, the class of CMO first to mature generally will be
paid down. Therefore, although in most cases the issuer of CMOs will not supply
additional collateral in the event of such prepayment, there will be sufficient
collateral to secure CMOs that remain outstanding.
INVERSE FLOATING RATE SECURITIES. The Government Fund may invest in inverse
floating rate securities. It is the current intention of the Fund to invest no
more than 5% of its net assets in inverse floating rate securities. The interest
rate on an inverse floating rate security resets in the opposite direction from
the market rate of interest to which the inverse floating rate security is
indexed. An inverse floating rate security may be considered to be leveraged to
the extent that its interest rate varies by a multiple of the index rate of
interest. A higher degree of leverage in the inverse floating rate security is
associated with greater volatility in the market value of such security.
The inverse floating rate securities that the Government Fund may
invest in include but are not limited to, an inverse floating rate class of a
government agency issued CMO and a government agency issued yield curve note.
Typically, an inverse floating rate class of a CMO is one of two components
created from the cash flows from a pool of fixed rate mortgages. The other
component is a floating rate security in which the amount of interest payable
varies directly with a market interest rate index. A yield curve note is a fixed
income security that bears interest at a floating rate that is reset
periodically based on an interest rate benchmark. The interest rate resets on a
yield curve note in the opposite direction from the interest rate benchmark.
Portfolio Turnover
- ------------------
If the Government Fund writes a number of call options and the market
prices of the underlying securities appreciate, or if the Fund writes a number
of put options and the market prices of the underlying securities depreciate,
there may be a substantial turnover of the portfolio. While the Government Fund
will pay commissions in connection with its options transactions, Government
Securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. Nevertheless, high
portfolio turnover may involve correspondingly greater commissions and other
transaction costs, which will be borne directly by the Fund.
John Hancock Managed Tax-Exempt Fund
------------------------------------
Municipal Securities
- --------------------
Municipal securities are issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities to obtain funds for various public purposes. The interest
on these obligations is generally exempt from federal income tax in the hands of
most investors. The two principal classifications of municipal securities are
"Notes" and "Bonds".
7
<PAGE>
MUNICIPAL NOTES. Municipal Notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal Notes
include: Project Notes (which carry a U.S. Government guarantee), Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes and
Construction Loan Notes.
Project Notes are issued by public bodies (called "Local Issuing
Agencies") created under the laws of a state, territory, or U.S. possession.
They have maturities that range up to one year from the date of issuance.
Project Notes are backed by an agreement between the Local Issuing Agency and
the U.S. Department of Housing and Urban Development to provide financing for a
range of programs of financial assistance for housing, redevelopment, and
related needs such as low-income housing programs and urban renewal programs.
While they are the primary obligations of the local public housing agencies or
the local urban renewal agencies, the agreement provides for the additional
security of the full faith and credit of the U.S. Government.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
Anticipation Notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction Loan
Notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
MUNICIPAL BONDS. Municipal Bonds, which meet longer term capital needs and
generally have maturities of more than one year when issued, have two principal
classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount of special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service
8
<PAGE>
reserve fund whose monies may also be used to make principal and interest
payments on the issuer's obligations. Housing finance authorities have a wide
range of security including partially or fully insured, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. In addition to a debt service reserve fund, some authorities provide
further security in the form of a state's ability (without obligation) to make
up deficiencies in the debt service reserve fund. Lease rental revenue bonds
issued by a state or local authority for capital projects are secured by annual
lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations.
Industrial Development and Pollution Control Bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user.
Variable Floating Rate Obligations. As discussed under "Investment Objective and
Policies" in the Prospectus, certain of the obligations in which the Fund may
invest may be variable or floating rate obligations on which the interest rate
is adjusted at predesignated periodic intervals (variable rate) or when there is
a change in the market rate of interest on which the interest rate payable on
the obligation is met is based (floating rate). Variable or floating rate
obligations may include a demand feature which entitles the purchaser to demand
prepayment of the principal amount prior to stated maturity. Also, the issuer
may have a corresponding right to prepay the principal amount prior to maturity.
As with any other type of debt security, the marketability of variable or
floating rate instruments may vary depending upon a number of factors, including
the type of issuer and the terms of the instruments. The Fund may also invest in
more recently developed floating rate instruments which are created by dividing
a municipal security's interest rate into two or more different components.
Typically, one component ("floating rate component" or 'FRC"') pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index. A second component ("inverse floating rate component" or
'IFRC"') pays an interest rate that varies inversely with changes to market
rates of interest, because the interest paid to the IFRC holders is generally
determined by subtracting a variable or floating rate from a predetermined
amount (i.e., the difference between the total interest paid by the municipal
security and that paid by the FRC). The Fund may purchase the 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 value of an equal principal amount of fixed-rate municipal security
having similar credit quality, redemption provisions and maturity. To the extent
that such instruments are not readily marketable, as determined by the
Investment Adviser pursuant to the 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. Variable and
floating rate obligations are subject to the quality characteristics for
municipal obligations described in the Appendix to this Statement of Additional
Information.
OTHER MUNICIPAL SECURITIES. There is, in addition, a variety of hybrid and
special types of municipal securities as well as numerous differences in the
security of municipal securities both within and between the two principal
classifications above.
For the purpose of certain requirements of various of the Fund's
investment restrictions, identification of the "issuer" of a municipal security
depends on the terms and conditions of the security. When the assets and
revenues of a political subdivision are separate from those of the government
which created the subdivision and the security is backed only by the assets and
revenues of the subdivision, the subdivision would be deemed to be the sole
issuer. Similarly, in the case of an industrial development bond, if that bond
is backed only by the assets and revenues of the nongovernmental user, then the
nongovernmental user would be deemed to be the sole issuer. If, however, in
either case, the creating government or some other entity guarantees the
security, the guarantee would be considered a separate security and would be
treated as an issue of the government or other agency.
9
<PAGE>
Ratings as Investment Criteria
- ------------------------------
(See Appendix A.) In general, the ratings of Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent the
opinions of these agencies as to the quality of the municipal securities which
they rate. It should be emphasized, however, that such ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Managed Tax-Exempt Fund as initial criteria for the selection of
portfolio securities, but the Fund will also rely upon the independent advice of
the Adviser to evaluate potential investments. Among the factors which will be
considered are the long-term ability of the issuer to pay principal and interest
and general economic trends. Appendix A contains further information concerning
the ratings of Moody's and S&P and their significance.
Subsequent to its purchase by the Managed Tax-Exempt Fund, an issue of
municipal securities may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Managed Tax-Exempt Fund. Neither event
will require the sale of such municipal securities by the Fund, but the Adviser
will consider such event in its determination of whether the Fund should
continue to hold the securities.
Risk Factors
- ------------
The yields on municipal securities are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions of the municipal securities market, size of a particular
offering, maturity of the obligation, and rating of the issue.
Municipal securities are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, 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 or upon the ability of municipalities to levy taxes. 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, principal of and interest
on certain municipal securities may be materially affected.
From time to time, proposals to restrict or eliminate the Federal
income tax-exemption for interest on municipal securities have been introduced
before Congress. If such a proposal were enacted, the availability of municipal
securities for investment by the Managed Tax-Exempt Fund would be adversely
affected. In such event, the Fund would re-evaluate its investment objective and
policies and submit possible changes in its structure for the consideration of
shareholders.
John Hancock Gold & Government Fund
-----------------------------------
The Adviser believes that during periods of increasing inflation or
economic or monetary instability, gold and related assets have served as a
storehouse of value and their prices have tended to increase at least as rapidly
as the rate of inflation. During such periods, interest rates
10
<PAGE>
have tended to increase, causing the market value of debt instruments to
decline. Conversely, during periods of disinflation (when inflationary pressures
are being reversed), the price of high grade debt instruments has tended to
increase while the value of precious metals and related instruments has tended
to decline.
The Adviser's determination as to whether the economy is in an
inflationary or disinflationary environment will be made based upon its
evaluation of numerous economic and monetary factors. These factors will
include, but not necessarily be limited to, the actual and anticipated rate of
change of the Consumer Price Index ("CPI") over specified periods of time,
actual and anticipated changes and rate of changes in the value of the U.S.
dollar in relation to other key foreign currencies (e.g., the German mark, the
British pound and the Japanese yen), actual and anticipated changes, and rate of
changes, in short and long term interest rates and real interest rates (i.e.,
inflation adjusted interest rates), actual and anticipated changes in the money
supply, and actual and anticipated governmental fiscal and monetary policy. It
should be emphasized that the Adviser will not apply a rigid, mechanical
determination in assessing whether the economy is in an inflationary or
disinflationary environment. Rather, its determination will be the result of its
subjective judgment of all factors it deems relevant.
Additional Information on Investments
- -------------------------------------
Precious metal and mining securities and currencies can be extremely
volatile at times. Gold mining securities and other precious metal and mining
securities likewise fluctuate with gold, but generally even more so. Mining and
other related securities tend to fluctuate more than gold in a major cycle price
change because operating results will usually be positively or negatively
leveraged by considerable upward or downward movements of the gold price. This
is due to the fact that the costs of mining gold remain relatively fixed, so
that an increase or decrease in the price of gold has a direct effect on the
profits of the company. Also, the prices of precious metals-related securities
are likely to be further affected by changes in the currency value of the
country of domicile relative to the dollar. Additionally, precious metal mining
and other related securities generally will be more volatile than gold in a
major cycle of price change either because of a greater or lesser supply of such
securities relative to gold, or because of economic, speculative or other
factors.
Gold Bullion and Coins
- ----------------------
The Gold & Government Fund's gold holdings ordinarily will consist of
gold bullion and bullion-type coins, such as South African Krugerrands and
Canadian Maple Leaf coins. The Fund does not expect to acquire coins for their
numismatic value. The Gold & Government Fund may purchase and sell gold coins
through the American Gold Coin Exchange or other appropriate gold coin and
bullion dealers and may purchase gold bullion through any appropriate gold
bullion dealer. No more than 10% of the Fund's portfolio may be invested in gold
bullion or coins. Unlike investments in gold or precious metals securities,
which may produce income in addition to offering potential for capital
appreciation, gold bullion or coins earn no investment income. Furthermore, the
Fund will incur storage or extra costs which may be higher than costs associated
with more traditional forms of investments.
11
<PAGE>
U.S. Government Securities
- --------------------------
The Gold & Government Fund may invest up to 5% of its total assets in
securities issued or guaranteed as to principal and interest by the U.S.
Government in the form of separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and interest
components of selected securities are traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are individually
numbered and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Risk Factors
- ------------
Because of the following considerations, an investment in the Gold &
Government Fund should not be considered a complete investment program.
1. FAILURE TO ANTICIPATE CHANGES IN ECONOMIC CYCLES. The Gold &
Government Fund's investment success will be dependent to a high
degree on the Adviser's ability to anticipate the onset and
termination of inflationary and disinflationary cycles. A failure to
anticipate a disinflationary cycle could result in the Fund's assets
being disproportionately invested in securities of gold or other
mining companies. Conversely, a failure to predict an inflationary
cycle could result in the Fund's assets being disproportionately
invested in U.S. Government securities.
2. UNANTICIPATED ECONOMIC ACTIVITY. The Gold & Government Fund's
investment success will depend to a high degree on the validity of the
premise that the values of securities of gold and precious metals
companies will move in a different direction than the values of U.S.
Government securities during periods of inflation or disinflation. If
the values of both types of securities move down during the same
period of time the value of the shareholder's investment will decline
rather than stabilize or increase, as anticipated, regardless of
whether the Fund is primarily invested in gold or government
securities.
3. CONCENTRATION IN AND VOLATILITY OF MINING STOCKS. The securities of
companies engaged in the exploration for and/or mining and processing
of gold and precious metals have been volatile historically. Mining
and other related securities tend to fluctuate as much as or more than
gold during periods of market instability because operating results
will usually be positively or negatively leveraged by considerable
movements in the price of gold. Such securities are further affected
by changes in value of the currency of the country of domicile. Since
the Gold & Government Fund may from time to time, as set forth in the
Prospectus, invest up to 80% of its total assets in gold and precious
metals mining stocks, its shares may be subject to greater risks and
market fluctuations than other investment companies with investment
portfolios having a broader range of investment alternatives.
12
<PAGE>
4. INVESTMENT IN GOLD BULLION AND COINS. Precious metals prices are
affected by various factors such as economic conditions, political
events and monetary policies. In addition, gold bullion and coins do
not generate income and may subject the Gold & Government Fund to
taxes and insurance, shipping and storage costs. The sole source of
return to the Fund from such investments would be gains realized on
sales; a negative return would be realized if gold is sold at a loss.
The price of gold has historically been subject to dramatic upward and
downward price movements over short periods of time. In the event of a
substantial decrease in the price of gold, the Gold & Government Fund
would incur realized or unrealized losses on its investment in gold
bullion. In the event of a substantial increase in the price of gold,
the Fund may be forced to liquidate a portion of its holdings of gold
bullion to ensure that the value thereof does not increase to the
extent that, at the close of any fiscal quarter, more than 25% of the
value of the Fund's total assets are invested in securities of any one
issuer or more than 50% of its total assets are invested in gold
bullion in order to remain qualified under the Internal Revenue Code
as a regulated investment company. Therefore, the Fund may be forced
to partially liquidate its holdings of gold bullion even if the
Adviser anticipates further increases in the price of gold.
Furthermore, Gold & Government Fund may derive no more than 10% of its
gross income in any taxable year from gross gains from transactions in
gold bullion to remain so qualified and therefore may be required
either to dispose of or continue to hold gold bullion when it would
not otherwise do so for investment reasons.
5. TAX OR CURRENCY LAWS. Changes in the tax or currency laws of the
U.S. and of foreign countries, such as imposition of withholding or
other taxes or exchange controls on foreign currencies may increase
the cost of, or inhibit the Gold & Government Fund's ability to
pursue, its investment program.
6. UNPREDICTABLE INTERNATIONAL MONETARY POLICIES, ECONOMIC AND
POLITICAL CONDITIONS. There is the possibility that under unusual
international monetary or political conditions the Gold & Government
Fund's assets might be less liquid or that the change in value of its
assets might be more volatile than would be the case with other
investments. In particular, because the price of gold may be affected
by unpredictable international monetary policies and economic
conditions there may be greater likelihood of a more dramatic impact
upon the market prices of securities of companies mining, processing
or dealing in gold than changes which would occur in other industries.
Although Gold & Government Fund expects to take delivery of its
investments in the United States, any investment where delivery takes place
outside of the United States will be conducted in compliance with any applicable
United States and foreign currency restrictions and other laws limiting the
amount and types of foreign investments. Since the Adviser expects to make
substantially all of the Fund's purchases and sales of securities and gold
bullion in the U.S. markets and in U.S. dollars, the Adviser does not believe
that it will be materially affected by changes in exchange rates, currency
convertibility and repatriation except to the extent the Fund holds foreign
currencies, including gold coins, as part of its cash position. However, changes
in governmental administrations or of economic or monetary policies, in the
United States or abroad, or changed circumstances in dealings between nations
could result in investment losses to the Fund and otherwise affect the Fund's
operations adversely.
13
<PAGE>
7. FOREIGN SECURITIES. Although the Adviser does not believe the risk
to be substantial, foreign issuers of securities in many countries are
subject to less stringent standards of disclosure and regulatory
controls than are found in the United States which may result in less
reliable and less detailed information being available to the Gold &
Government Fund than would be the case with United States companies.
In addition, investments in foreign issuers may be affected by
fluctuating exchange rates and adverse changes in foreign investment
or exchange control regulation. However, the Fund's policy of
generally investing in American depository receipts ("ADRs") or other
securities which can be sold for United States dollars and for which
market quotations are readily available in New York may minimize some
of these risks. (ADRs are certificates issued by United States banks
representing the right to receive securities of a foreign issuer
deposited in that bank or a correspondent bank.)
Portfolio Turnover
- ------------------
Gold & Government Fund's rate of portfolio turnover may vary widely
from year to year, and may be higher than many other mutual funds with similar
investment objectives. Nevertheless, high portfolio turnover in any given year
will result in the Fund's payment of above-average amounts of commissions and
other transaction costs and may result in the realization of greater amounts of
net short-term capital gains, distributions from which will be taxable to
shareholders as ordinary income.
John Hancock Sovereign Achievers Fund
-------------------------------------
Foreign Investments
- -------------------
While Sovereign Achievers Fund may invest in some foreign securities,
such investments are expected to constitute less than 10% of the Fund's
portfolio. Although the Adviser does not believe the risk to be substantial,
foreign issuers of securities in many countries are subject to less stringent
standards of disclosure and regulatory controls than are found in the United
States which may result in less reliable and less detailed information being
available to the Fund than would be the case with United States companies. In
addition, investments in foreign issuers may be affected by fluctuating exchange
rates and adverse changes in foreign investment or exchange control regulation.
However, Sovereign Achievers Fund's policy of generally investing in American
depository receipts ("ADRs") or other securities which can be sold for United
States dollars and for which market quotations are readily available in New York
may minimize some of these risks. ADRs are certificates issued by United States
banks representing the right to receive securities of a foreign issuer deposited
in that bank or a correspondent bank.
John Hancock Regional Bank Fund
-------------------------------
The Adviser believes that the ongoing deregulation of the banking
industry continues to provide new opportunities for banks. As deregulation
continues and interstate banking becomes more likely, some Regional Banks may
become attractive acquisition candidates for large money center banks or other
Regional Banks. Typically, acquisitions accelerate the capital appreciation of
the shares of the company to be acquired.
14
<PAGE>
In addition, Regional Banks located in sections of the country
experiencing strong economic growth are likely to participate in and benefit
from such growth through increased deposits and earnings. Many banks which are
actively and aggressively managed and are expanding services as deregulation
opens up new opportunities also show potential for capital appreciation.
The Adviser will seek to invest in those Regional Banks it believes are
well positioned to take advantage of the changes in the banking industry. A
Regional Bank may be well positioned for a number of reasons. It may be an
attractive acquisition for a bank wishing to strengthen its presence in the
geographic region or to expand into interstate activities, or it may be planning
on a regional merger to strengthen its position in the geographic area. The
Regional Bank may be located in a geographic region with strong economic growth
and be actively seeking to participate in such growth, or it may be expanding
into financial services previously unavailable to it (due to an easing of
regulatory constraints) in order to become a full service financial center.
Risk Factors
- ------------
Banks, finance companies and other financial services organizations are
subject to extensive governmental regulations which may limit both the amounts
and types of loans and other financial commitments which may be made and the
interest rates and fees which may be charged. The profitability of these
concerns is largely dependent upon the availability and cost of capital funds,
and has shown significant recent fluctuation as a result of volatile interest
rate levels. Volatile interest rates will also affect the market value of debt
securities held by the Regional Bank Fund. In addition, general economic
conditions are important to the operations of these concerns, with exposure to
credit losses resulting from possible financial difficulties of borrowers
potentially having an adverse effect.
John Hancock Global Fund and
----------------------------
John Hancock Global Income Fund
-------------------------------
Today, more than two-thirds of the world's stock market value is traded
on stock exchanges located outside of the United States. Europe is poised for
economic change. The European Economic Commission has ratified the economic
directives which will essentially create a single, unified market amongst the
European nations allowing the free movement of goods and services within a
population which is larger than that of the USA. Europe also intends to
participate in the restructuring of the social and economic policies of the
former Soviet Union and other Eastern bloc countries. The Pacific Region, which
includes Japan, Hong Kong, Korea, Taiwan, Thailand, Singapore, Malaysia and
Australia, has experienced substantial economic growth in recent years. The
Global Fund provides you with access to the stock markets of the world, enabling
you to diversify your investments among a variety of countries, companies and
industrial sectors.
15
<PAGE>
In general, the securities in which Global Income Fund may invest
include debt obligations issued or guaranteed by United States or foreign
governments, political subdivisions thereof (including states, provinces and
municipalities) or their agencies and instrumentalities ("governmental
entities"), or issued or guaranteed by international organizations designated or
supported by governmental entities to promote economic reconstruction or
development ("supranational entities"), or issued by corporations or financial
institutions. Examples of supranational entities include the International Bank
for Reconstruction and Development (the "World Bank"), the European Steel and
Coal Community, the Asian Development Bank and the Inter-American Development
Bank. The governmental members, or "stockholders", usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings. Securities issued by supranational entities may be
denominated in U.S. dollars, a foreign currency or a multi-national currency
unit such as the European Currency Unit ("ECU"). The ECU is a composite currency
consisting of specified amounts of each of the currencies of the member
countries of the European Economic Community. Securities of corporations and
financial institutions in which the Fund may invest include corporate and
commercial obligations, such as medium-term notes and commercial paper, which
may be indexed to foreign currency exchange rates. In accordance with guidelines
promulgated by the Staff of the Securities and Exchange Commission, the Fund
will consider as an industry any category of such supranational entities which
may have been designated by the Commission.
American Depository Receipts and European Depository Receipts
- -------------------------------------------------------------
In addition to purchasing equity securities of foreign issuers in
foreign markets, Global Fund and the Global Income Fund may invest in American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other
securities convertible into securities of corporations domiciled in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in the U.S. securities markets and EDRs,
in bearer form, are designed for use in European securities markets. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing a
similar arrangement. It is the current intention of JH Advisers International
that no more than 5% of the Global Fund's assets will be invested in ADRs and
EDRs.
Foreign Currency Transactions
- -----------------------------
Global Fund and Global Income Fund will conduct their foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
amount of currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are usually traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for such trades.
16
<PAGE>
The Global Fund and the Global Income Fund may enter into forward
foreign currency exchange contracts to enhance return, as a substitute for the
purchase or sale of currency or to hedge against fluctuations in currency
exchange rates. The Funds' hedging transactions in forward contracts may include
the following. A Fund may enter into a contract for the purchase or sale of a
security denominated in a foreign currency to "lock-in" the United States dollar
price of the security. By entering into a forward contract for a fixed amount of
dollars for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, a Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
United States dollar and that foreign currency during the period between the
date on which the security is purchased or sold and the date on which payment is
made or received.
When the Adviser or JH Advisers International believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, a Fund may enter into a forward contract to
sell or buy the amount of the former foreign currency approximating the value of
some or all of that Fund's portfolio securities denominated in such foreign
currency. This second investment practice is generally referred to as
"cross-hedging". The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain.
In addition, the Funds may enter into forward contracts for non-hedging
purposes. For example, if a portfolio security with an attractive rate of return
is denominated in a currency (including the U.S. dollar) that is not expected to
perform well, a Fund may use forward contracts to offset its exposure to the
non-performing currency while retaining the security.
Under normal circumstances, consideration of the prospects for currency
exchange rates will be incorporated into a Fund's long-term investment decisions
made with regard to overall investment strategies. However, each Fund believes
that it is important to have the flexibility to enter into forward contracts
when it determines that the best interests of the Fund will thereby be served.
State Street Bank and Trust Company, the Funds' custodian, will place cash or
liquid debt securities into a segregated account of each Fund in an amount equal
to the value of that Fund's total assets committed to the consummation of
forward foreign currency exchange contracts involving the purchase of foreign
currency. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Fund's
commitments with respect to such contracts.
At the maturity of a forward contract, a Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. There can be no assurance, however, that either Fund will be
able to effect such a closing purchase transaction.
17
<PAGE>
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, it may be necessary for
a Fund to purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
If either the Global Fund or the Global Income Fund retains the
portfolio security and engages in an offsetting transaction, that Fund will
incur a gain or a loss (as described below) to the extent that there has been
movement in forward contract prices. Should forward prices decline during the
period between a Fund's entering into a forward contract for the sale of a
foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, such Fund will realize a gain to the extent
that the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Funds are not required to enter into forward contracts with regard
to their foreign currency-denominated securities. It also should be realized
that this method of protecting the value of a Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time, they tend to limit any
potential gain which might result should the value of such currency increase.
Although the Global Fund and the Global Income Fund value their assets
daily in terms of United States dollars, neither Fund intends to convert its
holdings of foreign currencies into United States dollars on a daily basis. A
Fund will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell the currency
to the dealer.
Portfolio Turnover
- ------------------
The Global Income Fund's portfolio turnover rate may vary widely from
year to year and may be higher than that of many other mutual funds with similar
investment objectives. For example, if the Global Income Fund writes a
substantial number of call options and the market prices of the underlying
securities appreciate, or if it writes a substantial number of put options and
the market prices of the underlying securities depreciate, there may be a very
substantial turnover of the portfolio. While the Fund will pay commissions in
connection with its options transactions, government securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission. Nevertheless, high portfolio turnover may involve
correspondingly greater commissions and other transaction costs, which will be
borne directly by the Fund.
18
<PAGE>
THE FUNDS' OPTIONS TRADING ACTIVITIES
The following information supplements the discussion in the
Prospectuses regarding options transactions in which the Funds may engage.
A call option gives the purchaser of the option the right to buy, and
the writer the obligation to sell (if the option is exercised), the underlying
security or asset at the exercise price during the option period. Conversely, a
put option gives the purchaser the right to sell, and the writer the obligation
to buy, (if the option is exercised) the underlying security or asset at the
exercise price during the option period.
The principal reason for writing covered call options on a portfolio
security or foreign currency is to attempt to realize through the receipt of
premiums a greater return than would be realized on the security or foreign
currency alone. A covered call option writer, in return for the premium, has
given up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price so long as its obligation
continues, but has retained the risk of loss should the price of the security
decline. The call option writer has no control over when it may be required to
sell its securities, since it may be assigned an exercise notice at any time
prior to the termination of its obligation as a writer. If an option expires,
the writer realizes a gain in the amount of the premium. Such a gain, of course,
may be offset by a decline in the market value of the underlying security during
the option period. If a call option is exercised, the writer realizes a gain or
loss from the sale of the underlying security or currency.
It is the policy of each Fund to meet the requirements of the Internal
Revenue Code to qualify as a regulated investment company to prevent double
taxation of the Fund and its investors. One of these requirements is that less
than 30% of a Fund's gross income for each taxable year must be derived from
gross gains from the sale or other disposition of certain financial assets,
including stocks, securities, and most options, futures and forward contracts,
held for less than three months. The extent to which the Funds may engage in
options, futures and forward transactions may be materially limited by this 30%
test.
Gold & Government Fund, Global Income Fund, Sovereign Achievers Fund, Managed
- --------------------------------------------------------------------------------
Tax-Exempt and Regional Bank Fund
- ---------------------------------
Call Options
------------
Each Fund may trade in options, including purchasing calls and writing
covered calls. Gold & Government Fund may write covered call options and
purchase put and call options on gold bullion, U.S. Government securities and
equity securities in which it may invest. Call options ("calls") may be written
(i.e., sold) by each Fund if (i) the calls are listed on a domestic exchange or
are traded over-the-counter; and (ii) the calls are covered, i.e., the Fund owns
the assets subject to the call (or other assets acceptable for escrow
arrangements) while the call is outstanding.
19
<PAGE>
Each Fund may write call options to obtain additional income. When a
Fund writes a call it receives a premium and agrees to sell the callable
securities to the purchaser of the call, if the option is exercised during the
call period, at a fixed exercise price (which may differ from the market price)
regardless of market price changes during the call period. Thus, in exchange for
the premium received, the Fund foregoes any possible profit from an increase in
market price over the exercise price.
When a Fund writes a call option, an amount equal to the premium
received by it is included in that Fund's Statement of Assets and Liabilities as
an asset and as an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of the option
written. The premium paid by a Fund for the purchase of a call or put option is
included in the assets section of the Statement of Assets and Liabilities as an
investment and subsequently adjusted to the current market value of the option.
The current market value of a purchased or written option is the last sale price
on the principal exchange on which such option is traded or, in the absence of a
sale or in the case of an unlisted option, the mean between the last bid and
offering prices.
To terminate its obligation on a call which it has written, each Fund
may purchase a call in a "closing purchase transaction." (As discussed below,
each Fund may also purchase calls other than as part of such transactions.) A
profit or loss will be realized depending on the amount of option transaction
costs and whether the premium previously received is more or less than the price
of the call purchased. A profit may also be realized if the call lapses
unexercised, because the Fund retains the underlying security and the premium
received. Any such profits are considered short-term gains for federal tax
purposes and, when distributed by the Fund, are taxable as ordinary income.
Each Fund may purchase calls only if the calls are listed on a domestic
exchange or traded over-the-counter. Each Fund will purchase call options to
attempt to obtain capital appreciation. When a Fund buys a call, it pays a
premium and has the right to buy the callable securities from the seller of a
call during a period at a fixed exercise price. The Fund benefits only if the
market price of the callable securities is above the call price during the call
period and the call is either exercised or sold at a profit. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and the Fund will lose its premium payment and the right to
purchase the underlying security.
In the case of Gold & Government Fund, hedging by writing covered call
options on gold bullion is similar to hedging through the use of similar options
on securities as described above. In addition, Gold & Government Fund may
purchase call options on gold bullion if it desires to achieve a more rapid
exposure to anticipated increases in the price of gold mining shares or gold
bullion than is practical by buying such assets.
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Put Options
-----------
Any of the Funds may purchase put options ("puts") if they are listed
on a domestic exchange or traded over-the-counter. None of the Funds may write
(sell) puts, but may resell puts previously purchased by it to third parties who
are not broker-dealers. When a Fund buys a put, it pays a premium and has the
right to sell the underlying assets to the seller of the put during the put
period at a fixed exercise price.
Each Fund may buy puts related to securities it owns ("protective
puts") or to securities it does not own ("nonprotective puts"). Buying a
protective put permits the Fund to protect itself during the put period against
a decline in the value of the underlying securities below the exercise price by
selling them through the exercise of the put. Thus, protective puts will assist
the Funds in achieving their investment objectives of capital appreciation by
protecting them against a decline in the market value of their portfolio
securities.
Buying a non-protective put permits each Fund, if the market price of
the underlying securities is below the put price during the put period, either
to resell the put or to buy the underlying securities and sell them at the
exercise price. A non-protective put can enable each Fund to achieve
appreciation during a period when the price of securities underlying such put is
declining. If the market price of the underlying securities is above the
exercise price and as a result, the put is not exercised or resold (whether or
not at a profit), the put will become worthless at its expiration date.
In the case of the Gold & Government Fund, hedging by purchasing put
options on gold bullion is similar to hedging through the use of similar options
on securities as described above.
Government Fund
- ---------------
Writing Covered Options on Government Securities
------------------------------------------------
The Government Fund may write (sell) covered call options and covered
put options on all or any part of the Fund's portfolio of Government Securities.
The Government Fund may write (i.e., sell) options which are traded on
registered securities exchanges ("Exchanges") and may also write options on
Government Securities which are traded over-the-counter. A call option gives the
purchaser of the option the right to buy, and the writer the obligation to sell,
the underlying security at the exercise price if the option is exercised during
the option period. Conversely, a put option gives the purchaser the right to
sell, and the writer the obligation to buy (if the option is exercised) the
underlying security at the exercise price during the option period. The Fund may
also write straddles (combinations of covered puts and calls on the same
underlying security).
The Government Fund writes only "covered" options. This means that as
long as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option, except that, in the case of call
options on U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a
different series from those underlying the call option, but with a principal
amount corresponding to the option contract amount and a maturity date no later
than that of the securities deliverable under the call option. See "Risk Factors
Applicable to Options" below.
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The Government Fund will be considered "covered" with respect to a put
option it writes if, as long as it is obligated as the writer of a put option,
it deposits and maintains with its Custodian, cash, Government Securities or
other high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time that the writer effects a closing purchase
transaction by purchasing an option covering the same underlying security and
having the same exercise price and expiration date ("of the same series") as the
one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of the option is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "OCC"), an
institution created to interpose itself between buyers and sellers of options.
Technically, the OCC assumes the other side of every purchase and sale
transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price as so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of the premium, so long as the price of the underlying security remains above
the exercise price, but assumes an obligation to purchase the underlying
security from the buyer of the put option at the exercise price, even though the
security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then-market value of the underlying
security.
Because the Government Fund can write only covered options, it may at
times be unable to write additional options unless it sells a portion of its
portfolio holdings to obtain new debt securities against which it can write
options. This may result in higher portfolio turnover and correspondingly
greater brokerage commissions and other transaction costs.
To the extent that a secondary market is available on the Exchanges,
the covered option writer may close out options it has written prior to the
assignment of an exercise notice by purchasing, in a closing purchase
transaction, an option of the same series as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a loss
in the transaction.
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The extent to which the Government Fund may write covered call and put
options and enter into so-called "straddle" transactions may be limited by the
Code's requirements for qualification as a regulated investment company and the
Fund's intention to qualify as such.
Purchasing Put Options on Government Securities
-----------------------------------------------
The Government Fund may purchase put options on optionable Government
Securities in anticipation of a price decline in the underlying security. This
contemplates the purchase of put options at a time when the Fund does not own
the underlying security and it seeks to benefit from an anticipated decline in
the market price of the underlying security. If the put option 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 during the life of the put
option, the Fund will lose its entire investment in the put option. Further,
unless the put option is sold in a closing sale transaction, in order for the
purchase of a put option to be profitable, the market price of the underlying
security must decline sufficiently below the exercise price to cover the premium
and transaction costs.
The Government Fund may also purchase put options ("protective puts")
to protect its holdings in an underlying security against a substantial decline
in market value. Such hedge protection is provided only during the life of the
put option when the Fund as the holder of the put option is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. By using put options in this manner, the
Fund will reduce any profit it might otherwise have realized in its underlying
security by the premium paid for the put option and by transaction costs.
The Government Fund will not invest more than 5% of its net assets in
put options.
Risk Factors Applicable to Options (Government Fund, Gold & Government Fund and
- -------------------------------------------------------------------------------
Global Income Fund Only)
- ------------------------
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds
and Notes tends to center on the most recently auctioned issues, the Exchanges
will not indefinitely continue to introduce new series of options with
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each series of Bonds or Notes will thus be phased out as new options are
listed on the more recent issues, and a full range of expiration dates will not
ordinarily be available for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable Treasury Bill changes from
week to week, writers of Treasury Bill call options cannot provide in advance
for their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Government Fund or the Gold & Government
Fund holds a long position in Treasury Bills with a principal amount
corresponding to the option contract size, such Fund may be hedged from a risk
standpoint. In addition, each Fund will maintain in a segregated account with
its custodian Treasury Bills maturing no later than those which would be
deliverable in the event of an assignment of an exercise notice to ensure that
it can meet its open options obligations.
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<PAGE>
ADDITIONAL RISKS OF OPTIONS ON GOVERNMENT SECURITIES. The Gold &
Government Fund, the Government Fund and the Global Income Fund may purchase and
sell options on Government Securities including securities issued by the
Government National Mortgage Association. Certain options on Government
Securities are traded "over-the-counter" rather than on an exchange. This means
that each of these Funds will enter into such options with particular
broker-dealers who make markets in these options. With respect to options not
traded on an exchange, there is the additional risk that a Fund may not be able
to enter into a closing transaction with the other party to the option on
satisfactory terms or that such other party may be unable to fulfill its
contractual obligations. However, the Adviser or JH Advisers International, as
the case may be, will enter into transactions in non-listed options only with
responsible dealers where it does not believe that the foregoing factors present
a material risk. There is no assurance that the Funds will be able to effect
closing transactions at any particular time or at an acceptable price. A Fund's
ability to terminate options positions in Government Securities may involve the
risk that broker-dealers participating in such transactions will fail to meet
their obligations to the Fund. The Funds will purchase options on Government
Securities only from broker-dealers whose debt securities are investment grade
(as determined by the Boards of Trustees).
All Funds
- ---------
Put and Call Options: General
--------------------- -------
A call option position may be closed out only on an exchange which
provides a secondary market for options of the same series or, in the case of an
over-the-counter option, only with the other party to the transaction. 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
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. There is no assurance that the Funds will be able to close out
options acquired or sold over-the-counter.
The Funds will acquire only those over-the-counter options for which
management believes the Funds 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 over-the-counter options valued by an independent
pricing service. The Funds will write and purchase over-the-counter 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 over-the-counter options
are illiquid securities, subject to the restriction that illiquid securities are
limited to not more than 10% of a Fund's assets. The SEC, however, has a partial
exemption from the above restrictions on transactions in over-the-counter
options. The SEC allows a Fund to exclude from the 10% limitation on illiquid
securities a portion of the value of the over-the-counter options written by the
fund, provided that certain conditions are met. First, the other party to the
over-the-counter options has to be a primary U.S. Government securities dealer
designated as such by the Federal Reserve Bank. Second, the Funds would have
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<PAGE>
an absolute contractual right to repurchase the over-the-counter options at a
formula price. If the above conditions are met, a Fund must treat as illiquid
only that portion of the over-the-counter option's value (and the value of its
underlying securities) which is equal to the formula price for repurchasing the
over-the-counter option, less the over-the-counter option's intrinsic value.
Although the Funds will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there can be no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time. In the event
that no liquid secondary market exists, it might not be possible to effect
closing transactions in particular options. If Fund cannot close out an
exchange-traded or over-the-counter option which it holds, it would have to
exercise such option in order to realize any profit and would incur transaction
costs on the purchase or sale of underlying assets. If the Government Fund, Gold
& Government Fund, Sovereign Achievers Fund, Regional Bank Fund, Global Fund or
Global Income Fund, as covered call option writers, are unable to effect a
closing purchase transaction, they will not be able to sell the underlying
assets until the option expires or they deliver the underlying asset upon
exercise. Accordingly, these Funds may run the risk of either foregoing the
opportunity to sell the underlying asset at a profit or being unable to sell the
underlying asset as its price declines.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) an exchange may impose restrictions on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the exchanges and the Options
Clearing Corporation have had only limited experience with the trading of
certain options and the facilities of an exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The put and call options activities of Government Fund, Gold &
Government Fund, Sovereign Achievers Fund, Regional Bank Fund, Global Fund and
Global Income Fund may affect their turnover rates and the amount of brokerage
commissions paid by them. The exercise of calls written by these Funds may cause
them to sell portfolio securities or other assets at times and amounts
controlled by the holder of a call, thus increasing the Funds' portfolio
turnover rates and brokerage commission payments. The exercise of puts purchased
by the Fund may also cause the sale of securities or other assets, also
increasing turnover. Although such exercise is within the Funds' control,
holding a protective put might cause the Funds to sell the underlying securities
or other assets for reasons which would not exist in the absence of the put.
Holding a non-protective put might cause the purchase of the underlying
securities or other assets to permit the Funds to exercise the put. The put and
call activities of Gold & Government Fund will be restricted by the limited
availability of options relating to mining securities and foreign investments
that are listed on domestic exchanges or quoted at some future date on NASDAQ.
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<PAGE>
A Fund will pay a brokerage commission each time it buys or sells a put
or call or buys or sells a security in connection with the exercise of a put or
call. Such commissions may be higher than those which would apply to direct
purchases or sales of equity securities.
There is no limit as to how many times either the Global Fund's or the
Global Income Fund's options positions may be replaced and therefore the
potential risks to each Fund may be greater than 5% of its net assets.
Successful use by the Adviser or JH Advisers International of options on
securities, foreign currencies and/or forward foreign currency exchange
contracts will be based upon predictions by the Adviser or JH Advisers
International as to anticipated movements of foreign currency exchange rates
and/or interest rates.
The Funds' Custodian, or a securities depository acting for it, will
act as the Funds' escrow agent as to the securities on which they have written
calls, or as to other securities acceptable for such escrow, so that pursuant to
the rules of the Options Clearing Corporation and certain exchanges, no margin
deposit will be required of the Funds. Until the securities are released from
escrow, they cannot be sold by the Funds; this release will take place on the
expiration of the call or the Funds' entering into a closing purchase
transaction. For information on the valuation of the puts and calls, see "Net
Asset Value."
THE FUNDS' INVESTMENTS IN FUTURES CONTRACTS
The following information supplements the discussion in the
Prospectuses regarding investment by certain Funds in futures contracts and
related options.
INTEREST RATE FUTURES CONTRACTS. The Government Fund, Managed Tax-Exempt Fund,
Gold & Government Fund and Global Income Fund may invest in interest rate
futures contracts and related options that are traded on a United States or
foreign exchange or board of trade.
Currently, interest rate futures contracts can be purchased and sold with
respect to U.S. Treasury bonds, U.S. Treasury notes, Government National
Mortgage Association mortgage-backed certificates, U.S. Treasury bills and
ninety-day commercial paper.
The purpose of the purchase or sale of interest rate futures contracts
by the Funds will be to protect the Funds from fluctuations in interest rates
without necessarily buying or selling fixed income securities. For example, if a
Fund owns bonds and interest rates are expected to increase, that Fund might
sell futures contracts on debt securities having characteristics similar to
those held in the portfolio. Such a sale would have much the effect as selling
an equivalent value of the
26
<PAGE>
bonds owned by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the futures
contracts to the Fund would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against having to make an
anticipated purchase of bonds at the higher prices subsequently expected to
prevail. Since the fluctuations in the value of appropriately selected futures
contracts should be similar to that of the bonds that will be purchased, a Fund
could take advantage of the anticipated rise in the cost of the bonds without
actually buying them until the market has stabilized. At this time, that Fund
could make the intended purchase of the bonds in the cash market and the futures
contracts could be liquidated. To the extent a Fund enters into futures
contracts for this purpose, it will maintain in a segregated account assets
sufficient to cover its obligations with respect to such futures contracts,
which will consist of cash or U.S. Government or other high quality debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
futures contracts.
MUNICIPAL BOND INDEX FUTURES CONTRACTS. The Managed Tax-Exempt Fund may invest
in municipal bond index futures contracts that are traded on a United States
exchange or board of trade. Such investments may be made by the Fund solely for
the purposes of hedging against changes in the value of its portfolio securities
due to anticipated changes in interest rates and market conditions, and not for
purposes of speculation.
A municipal bond index futures contract is an agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
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 index contract was originally
written. No physical delivery of the underlying municipal bonds in the index is
made.
The purpose of the acquisition or sale of a municipal bond index
futures contract by the Managed Tax-Exempt Fund, as the holder of long-term
municipal securities, is to protect the Fund from fluctuations in interest rates
on municipal securities without actually buying or selling long-term municipal
securities. For example, if the Fund owns long-term bonds and interest rates are
expected to increase, it might sell municipal bond index futures contracts. Such
a sale would have much the same effect as selling some of the long-term bonds in
the Fund's portfolio. If interest rates increase as anticipated by the Adviser,
the value of certain long-term municipal securities in the portfolio would
decline, but the value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. Of course, since the value of
the municipal securities in the Managed Tax-Exempt Fund's portfolio may exceed
the value of the futures contracts sold by the Fund, an increase in the value of
the futures contracts might only mitigate - but not totally offset - the decline
in the value of the portfolio.
27
<PAGE>
Similarly, when it is expected that interest rates may decline,
municipal bond index futures contracts could be purchased to hedge against the
Managed Tax-Exempt Fund's anticipated purchases of long-term municipal
securities at higher prices. Since the rate of fluctuation in the value of
municipal bond index futures contracts should be similar to that of long-term
bonds, the Fund could take advantage of the anticipated rise in the value of
long-term bonds without actually buying them until the market had stabilized. At
that time, the futures contracts could be liquidated and the Fund's cash could
be used to buy long-term bonds in the cash market. The Managed Tax-Exempt Fund
could accomplish similar results by selling municipal securities with long
maturities and investing in municipal securities with short maturities when
interest rates are expected to increase or buying municipal securities with long
maturities and selling municipal securities with short maturities when interest
rates are expected to decline. However, in circumstances when the market for
municipal securities may not be as liquid as that for the municipal bond index
futures contracts, the ability to invest in such contracts could enable the Fund
to react more quickly to anticipated changes in market conditions or interest
rates.
GOLD BULLION FUTURES CONTRACTS. The Gold & Government Fund may invest in gold
bullion futures contracts and related options that are traded on a United States
exchange or board of trade. Such investments may be made by the Gold &
Government Fund solely for the purpose of hedging against changes in the value
of its portfolio securities due to anticipated changes in gold prices, interest
rates or market conditions, and not for the purposes of speculation.
Generally, futures contracts on gold bullion are similar to the
interest rate futures contracts discussed above. By entering into gold bullion
futures contracts, the Fund will be able to establish the rate at which it will
be entitled to purchase set amounts of gold bullion in a future month. By
selling such futures, the Fund can establish the price it will receive in the
delivery month for a specified amount of gold bullion, or the Fund can attempt
to "lock in" the value of some or all of the gold bullion held in its portfolio
at a particular time.
FOREIGN CURRENCY FUTURES CONTRACTS. The Global Income Fund may invest in foreign
currency futures contracts and related options that are traded on a United
States foreign exchange or board of trade.
Foreign currency futures contracts can be purchased and sold with
respect to the British Pound, Deutsche Mark, Japanese Yen and other currencies
or groups of currencies in which securities held by the Global Income Fund are
denominated or which are sufficiently correlated with such currencies as to
constitute an appropriate vehicle for hedging.
Generally, foreign currency futures contracts are similar to the
interest rate futures contracts discussed above. By entering into foreign
currency futures contracts, the Global Income Fund will be able to establish the
rate at which it will be entitled to exchange U.S. dollars (or another foreign
currency) for another currency in a future month. By selling currency futures,
the Fund can establish the number of dollars (or another foreign currency) it
will receive in the delivery month for a certain amount of a foreign currency
against the U.S. dollar (or another foreign currency), or the Fund can attempt
to "lock in" the U.S. dollar value (or other foreign currency value) of some or
all of the securities held in its portfolio and denominated in that
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<PAGE>
currency. By purchasing currency futures, the Fund can establish the number of
dollars it will be required to pay for a specified amount of a foreign currency
in the delivery month. For example, if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
FOREIGN DEBT SECURITIES FUTURES CONTRACTS. The Global Income Fund may also
invest in foreign debt futures contracts that are traded on a U.S. exchange or
board of trade or, consistent with U.S. Commodity Futures Trading Commission
regulations, traded on foreign exchanges. Such investments may be made solely
for the purpose of hedging against changes in the value of its portfolio
securities due to anticipated changes in interest rates, foreign currency
exchange rates or market conditions, and not for the purpose of speculation.
Foreign debt futures contracts are similar to the interest rate futures
contracts discussed above. By purchasing a futures contract, the Global Income
Fund will legally obligate itself to accept delivery of the underlying foreign
debt security and pay the agreed price; by selling a foreign debt futures
contract, it will legally obligate itself to make delivery of the security
against payment of the agreement price. Futures contracts for the purchase and
sale of foreign debt futures contracts currently are actively traded on the
London International Financial Futures Exchange, the Tokyo Stock Exchange and
the Paris Stock Exchange.
RISK FACTORS. Unlike the purchase or sale of a security, no consideration is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker an amount of cash
or cash equivalents, known as "initial margin", as a type of performance bond or
good faith deposit which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. The required
amount of initial margin is subject to change by the board of trade or exchange
on which the contract is traded and members of such board of trade or exchange
may charge a higher amount. Subsequent payments, known as "variation margin", to
and from the broker, will be made on a daily basis as the price of the futures
contract fluctuates making long and short positions in the contract more or less
valuable, a process known as marking-to-market. At any time prior to the
expiration of the contract, a Fund may elect to close the position, which will
operate to terminate the Fund's existing position in the futures contract.
There are several risks in connection with the use of futures contracts
as a hedging device. Successful use of futures contracts by the Funds is subject
to the Adviser's ability to predict correctly movements in the direction of
interest rates, gold prices or foreign currency exchange rates, as the case may
be. A decision of 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 market behavior or unexpected trends in such rates and prices. In
addition, there can be no assurance that there will be a correlation between
movements in the price of the futures contracts and movements in the price of
the related securities, gold or foreign currencies which are the subject of the
hedge. The degree of imperfection or correlation depends upon various
circumstances such as, for example, variations in speculative market demand for
futures contracts and the specific securities, gold or foreign currencies being
hedged and upon the securities, gold or foreign currencies, as the case may be,
underlying the futures contracts.
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<PAGE>
Although the Funds intend to purchase or sell futures contracts only if
there is an active market for such contracts, there is no assurance that a
liquid market will exist for the contract at any particular time. Most domestic
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular contract,
no trades may be made that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. It is possible that futures contract prices could move to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of the futures position and subjecting
some futures traders to substantial losses. In such event, it will not be
possible to close a futures position, and in the event of adverse price
movements, a Fund would be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities, gold or foreign currencies, as the case may be, will,
in fact, correlate with the price movements in the respective futures contracts
and thus provide an offset to losses on such futures contracts.
If a Fund has hedged against the possibility of an increase in interest
rates, gold prices or foreign currency rates adversely affecting the value of
the securities, gold bullion or foreign currencies held in its portfolio and
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of the respective securities, gold bullion or foreign currencies
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if a Fund has insufficient cash, it
may have to sell securities to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices which
reflect the decline in interest rates, gold prices or foreign currency exchange
rates, as the case may be. The Funds may have to sell securities at a time when
it may be disadvantageous to do so.
OPTIONS ON INTEREST RATE, GOLD BULLION AND FOREIGN CURRENCY FUTURES CONTRACTS.
An option on a futures contract, as contrasted with the direct investment in
such a contract, gives the purchaser the right, in return for the premium paid,
to assume a position in the futures contract at a specified exercise price at
any time prior to the expiration of the option. The potential loss related to
the purchase of an option on a futures contract is limited to the premium paid
for the option (plus transaction costs).
The Funds may purchase and write put and call options on interest rate,
gold bullion and foreign currency futures contracts, as the case may be, that
are traded on a United States exchange or board of trade as a hedge against the
value of their portfolio securities due to anticipated changes in interest
rates, gold prices, foreign currency exchange rates or market conditions, and
may enter into closing transactions with respect to such options to terminate
existing positions.
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<PAGE>
In addition to the risks which apply to futures transactions generally
as described above, there are additional risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the existence of a liquid market. In addition, the purchase or
sale of put or call options will be based upon predictions as to anticipated
interest rate trends, gold bullion or foreign currency valuation trends, as the
case may be, by the Adviser which could prove to be incorrect. Even if the
expectations of the Adviser are correct, there may be an imperfect correlation
between the change in the value of the options and of the portfolio securities
hedged. In addition, the ability of the Funds to trade in futures contracts may
be materially limited by the requirements of the Internal Revenue Code.
When a Fund writes a call option or put option it will be required to
deposit initial margin and variation margin pursuant to broker's requirements
similar to those applicable to futures contracts. In addition, net option
premiums received for writing options will be included as initial margin
deposits.
There is no limit as to how many times the Gold & Government Fund's or
the Global Income Fund's options positions may be replaced, and, therefore, the
potential risks to those Funds may be greater than 5% of their net assets.
Successful use by the Adviser of options will be based upon predictions by the
Adviser as to anticipated movements of interest rates, gold prices and/or
foreign currency exchange rates.
CERTAIN INVESTMENT PRACTICES
The following information supplements the discussion of the Funds'
investment strategies and techniques in the Prospectuses.
Investment in Foreign Securities
- --------------------------------
Because of the following considerations, shares of the Global Fund and
the Global Income Fund should not be considered a complete investment program.
There is generally less publicly available information about foreign companies
and other issuers comparable to reports and ratings that are published about
issuers in the United States. Foreign issuers are also generally not subject to
uniform accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States issuers.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Similarly, volume
and liquidity in most foreign bond markets is less than in the United States and
at times, volatility of price can be greater than in the United States. Fixed
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commissions on foreign exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed issuers than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of a
Fund, political or social instability, or diplomatic developments which could
affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The dividends and interest payable on certain of the Global Fund's and
the Global Income Fund's foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income available for
distribution to each Fund's shareholders. See "Tax Status".
Investors should understand that the expense ratio of each of the
Global Fund and the Global Income Fund can be expected to be higher than that of
investment companies investing in domestic securities since the expenses of the
Funds, such as the cost of maintaining the custody of foreign securities and the
rate of advisory fees paid by the Funds, are higher.
Repurchase Agreements
- ---------------------
The Funds may also enter into repurchase agreements with domestic
broker-dealers, banks and financial institutions, but Government Fund, Managed
Tax-Exempt Fund, Gold & Government Fund, Sovereign Achievers Fund, Global Fund
and Global Income Fund may not invest more than 10% and Regional Bank Fund may
not invest more than 5% of their respective net assets in repurchase agreements
having maturities of greater than seven days.
A repurchase agreement is a contract pursuant to which a Fund, against
receipt of securities of at least equal value including accrued interest, agrees
to advance a specified sum to a broker-dealer, bank or financial institution
which agrees to reacquire the securities at a mutually agreed upon time and
price. Repurchase agreements, which are usually for periods of one week or less,
enable a Fund to invest its cash reserves at fixed rates of return. A Fund may
enter into repurchase agreements with domestic broker-dealers, banks and other
financial institutions, provided the Fund's custodian always has possession of
securities serving as collateral whose market value at least equals the amount
of the institution's repurchase obligation. The Global Fund and the Global
Income Fund will only enter into repurchase agreements which are collateralized
at all times by U.S. Government obligations. To minimize the risk of loss the
Funds will enter into repurchase agreements only with institutions and dealers
which the Boards of Trustees of the Trusts consider to be creditworthy. If an
institution enters an insolvency proceeding, the resulting delay in liquidation
of the securities serving as collateral could cause the relevant Fund some loss,
as well as legal expense, if the value of the securities declined prior to
liquidation.
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When-Issued and Delayed Delivery Securities
- -------------------------------------------
As stated in the Prospectus, the Managed Tax-Exempt Fund may purchase
and sell municipal securities and the Gold & Government Fund and the Global
Income Fund may purchase and sell fixed income securities (including GNMA, FHLMC
and FNMA Certificates) on a when-issued or delayed delivery basis. When-issued
or delayed delivery transactions arise when securities are purchased or sold by
a Fund with payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield. However, the yield on
a comparable security available when delivery takes place may vary from the
yield on the security at the time that the when-issued or delayed delivery
transaction was entered into. When a Fund engages in when-issued and delayed
delivery transactions, it relies on the seller or buyer, as the case may be, to
consummate the sale. Failure to do so may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous.
When-issued and delayed delivery transactions may be expected to settle within
three months from the date the transactions are entered into. However, no
payment or delivery is made by the Fund until it receives delivery or payment
from the other party to the transaction.
To the extent that a Fund remains substantially fully invested at the
same time that it has purchased when-issued securities, as it would normally
expect to do, there may be greater fluctuations in its net assets than if the
Fund set aside cash to satisfy its purchase commitment.
When a Fund purchases securities on a when-issued basis, it will
maintain in a segregated account with its Custodian cash, Government Securities
or other high-grade debt obligations readily convertible into cash having an
aggregate value equal to the amount of such purchase commitments until payment
is made. If necessary, additional assets will be placed in the account daily so
that the value of the account will equal or exceed the amount of the Fund's
purchase commitment. The Government Fund, the Global Income Fund and the Managed
Tax-Exempt Fund will likewise segregate securities they sell on a delayed
delivery basis.
The Managed Tax-Exempt Fund expects that commitments to purchase
when-issued securities will not normally exceed 25% of its net asset value.
Stand-By Commitments
- --------------------
When the Managed Tax-Exempt Fund exercises a stand-by commitment that
it has acquired from a dealer with respect to a municipal security held in its
portfolio, the dealer will normally pay to the Managed Tax-Exempt Fund an amount
equal to: (1) the Fund's acquisition cost of the municipal securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (2) all interest accrued
on the securities since the last interest payment date or the date the
securities were purchased by the Fund, whichever is later. The Fund's right to
exercise stand-by commitments would be unconditional and unqualified. A stand-by
commitment would not be transferable by the Managed Tax-Exempt Fund, although it
could sell the underlying municipal securities to a third party at any time.
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The Managed Tax-Exempt Fund intends to enter into stand-by commitments
only with those banks which, in the opinion of the Adviser, present minimal
credit risk. The Managed Tax-Exempt Fund may pay for stand-by commitments either
separately, in cash or by paying a higher price for portfolio securities which
are acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid for
outstanding stand-by commitments held by the Managed Tax-Exempt Fund is not
expected to exceed 1/2 of 1% of the Fund's total asset value calculated
immediately after each stand-by commitment is acquired. The Fund intends to
acquire stand-by commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder for trading purposes. The
acquisition of a stand-by commitment would not ordinarily affect the valuation
or maturity of the underlying municipal securities. Stand-by commitments
acquired by the Managed Tax-Exempt Fund would be valued at zero in determining
net asset value. Where the Fund paid directly or indirectly for a stand-by
commitment, its cost would be amortized over the period the commitment is held
by the Fund. Although Federal income tax law may not be entirely clear in
certain cases, the Fund intends to take the position that it is the owner of
municipal securities it holds subject to stand-by commitments.
Leverage Through Borrowing
- --------------------------
The Government Fund may borrow from banks to increase its portfolio
holdings of Government Securities. Such borrowings will be unsecured. The 1940
Act requires the Fund to maintain continuous asset coverage of not less than
300% with respect to such borrowings. This allows the Fund to borrow for such
purposes an amount (when taken together with any borrowings for temporary
extraordinary or emergency purposes as described below) equal to as much as 50%
of the value of its net assets (not including such borrowings). If such asset
coverage should decline to less than 300% due to market fluctuations or other
reasons, the Fund may be required to sell some of its portfolio holdings within
three days in order to reduce the Fund's debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Leveraging will exaggerate any increase or
decrease in the net asset value of the Fund's portfolio, and in that respect may
be considered a speculative practice. Money borrowed for leveraging will be
subject to interest costs which may or may not exceed the investment return
received from the securities purchased.
The Fund may also borrow money for temporary extraordinary or emergency
purposes. Such borrowings may not exceed 5% of the value of the Fund's total
assets when the loan is made. The Fund may pledge up to 10% of the lesser of
cost or value of its total assets to secure such borrowings.
Trading of Securities
- ---------------------
The Government Fund may trade those Government Securities which are not
covering outstanding options positions and are not on loan to broker-dealers if
the Fund's Adviser believes that there are opportunities to exploit
differentials in prices and yields or fluctuations in interest rates, consistent
with its investment objective.
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Investment in Rule 144A Securities and Other Restricted Securities
- ------------------------------------------------------------------
The Funds may purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the Securities Act
of 1933 and other securities for which market quotations are not readily
available if the Funds' Boards of Trustees or the Adviser have determined under
Board-approved guidelines that such restricted securities are liquid. The Boards
of Trustees will determine as a question of fact the liquidity of Rule 144A
securities in each Fund's portfolio using the guidelines set forth below.
In their determination of liquidity, the Boards of Trustees will
consider the following factors, among others: (1) the frequency of trades and
quotes for the security, (2) the number of dealers willing 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
transfer). In accordance with Rule 144A, each Board intends to delegate its
responsibility to the Adviser to determine the liquidity of each restricted
security purchased by the Funds pursuant to Rule 144A, subject to the Board's
oversight and review. The foregoing investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing the Rule 144A
securities. The Funds will not invest more than 5% of their total assets in Rule
144A securities without first supplementing the prospectuses and providing
additional information to shareholders.
The Funds 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 Securities Act
of 1933. Where registration is required, a 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, a Fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in good faith by the Funds' Boards of
Trustees. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, a Fund should be in a position where
more than 10% of the value of its assets is invested in illiquid securities
(including repurchase agreements which mature in more than seven days and
options which are traded over-the-counter and their underlying securities), the
Fund will bring its holdings of illiquid securities below the 10% limitation.
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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 Prospectuses 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 the meeting or (2) 50% of the Fund's outstanding shares.
A Fund may not:
1. PURCHASES ON MARGIN AND SHORT SALES. Purchase securities on margin
or sell short, except that a Fund may obtain such short term credits
as are necessary for the clearance of securities transactions. The
deposit or payment by a Fund of initial or maintenance margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
2. BORROWING. Borrow money, except from banks temporarily for
extraordinary or emergency purposes (not for leveraging or investment)
and then in an aggregate amount not in excess of (a) 5% of the value
of the Fund's net assets at the time of such borrowing with respect to
the Gold & Government Fund, Regional Bank Fund and Sovereign Achievers
Fund; (b) 10% of the value of the Fund's total assets at the time of
such borrowing with respect to the Managed Tax-Exempt Fund, Global
Fund and Global Income Fund, provided that the Fund will not purchase
securities for investment while borrowings equaling 5% or more of the
Fund's total assets are outstanding; and (c) with respect to the
Government Fund, 33 1/3% of the value of the Fund's total assets
(including the amount borrowed) less liabilities (not including the
amount borrowed).
3. UNDERWRITING SECURITIES. Act as an underwriter of securities of
other issuers, except to the extent that it may be deemed to act as an
underwriter in certain cases when disposing of restricted securities.
(See also Restriction 14.)
4. SENIOR SECURITIES. Issue senior securities except as appropriate to
evidence indebtedness which a Fund is permitted to incur, provided
that, to the extent applicable, (i) the purchase and sale of futures
contracts or related options, (ii) collateral arrangements with
respect to futures contracts, related options, forward foreign
currency exchange contracts or other permitted investments of a Fund
as described in the Prospectus, including deposits of initial and
variation margin, and (iii) the establishment of separate classes of
shares of a Fund for providing alternative distribution methods are
not considered to be the issuance of senior securities for purposes of
this restriction.
5. WARRANTS. With respect to the Managed Tax-Exempt Fund and
Government Fund, invest in marketable warrants to purchase common
stock; with respect to the Gold & Government Fund, Regional Bank Fund
and Sovereign Achievers Fund, invest more than 5% of the value of the
Fund's net assets in marketable warrants to purchase common
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<PAGE>
stock; and with respect to the Global Fund and the Global Income Fund,
invest more than 5% of the Fund's total assets in warrants, whether or
not the warrants are listed on the New York or American Stock
Exchanges, or more than 2% of the value of the Fund's total assets in
warrants which are not listed on those exchanges. Warrants acquired in
units or attached to securities are not included in this restriction.
6. SINGLE ISSUER LIMITATION/DIVERSIFICATION. Purchase securities of
any one issuer, except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of a Fund's total assets would
be invested in such issuer or the Fund would own or hold more than 10%
of the outstanding voting securities of such issuer; provided,
however, that with respect to all Funds, up to 25% of the value of a
Fund's total assets may be invested without regard to these
limitations. This restriction does not apply to Global Income Fund,
which is a non-diversified fund under the 1940 Act.
7. SINGLE CLASS OF ISSUER LIMITATION. Acquire more than 5% of any
class of securities of an issuer, except securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities. For this purpose, all outstanding bonds, preferred
stocks, and other evidences of indebtedness shall be deemed a single
class regardless of maturities, priorities, coupon rates, series,
designations, conversion rights, security or other differences. This
Restriction does not apply to the Managed Tax-Exempt Fund or Global
Income Fund.
8. REAL ESTATE. Purchase or sell real estate although a Fund may
purchase and sell securities which are secured by real estate,
mortgages or interests therein, or issued by companies which invest in
real estate or interests therein; provided, however, that no Fund will
purchase real estate limited partnership interests.
9. COMMODITIES; COMMODITY FUTURES; OIL AND GAS EXPLORATION AND
DEVELOPMENT PROGRAMS. Purchase or sell commodities or commodity
futures contracts or interests in oil, gas or other mineral
exploration or development programs, except a Fund (other than the
Regional Bank Fund) may engage in such forward foreign currency
contracts and/or purchase or sell such futures contracts and options
thereon as described in the Prospectus.
10. MAKING LOANS. Make loans, except that a Fund may purchase or hold
debt instruments and may enter into repurchase agreements (subject to
Restriction 14) in accordance with its investment objectives and
policies and, with respect to the Sovereign Achievers Fund, Government
Fund, Global Fund and Global Income Fund, make loans of portfolio
securities provided that as a result, no more than 5% of the Sovereign
Achievers Fund's total assets, 10% of the Global Fund's total assets
and 30% of the total assets of the Government Fund or Global Income
Fund, taken at current value would be so loaned.
11. SECURITIES OF OTHER INVESTMENT COMPANIES. Purchase securities of
other open-end investment companies, except in connection with a
merger, consolidation, acquisition or reorganization; or purchase more
than 3% of the total outstanding voting stock of any closed-end
investment company if more than 5% of a Fund's total assets would be
invested
37
<PAGE>
in securities of any closed-end investment company, or more than 10%
of the Fund's total assets would be invested in securities of any
closed-end investment companies in general. In addition, a Fund may
not invest in the securities of closed-end investment companies except
by purchase in the open market involving only customary broker's
commissions.
12. INDUSTRY CONCENTRATION. Purchase any securities which would cause
more than 25% of the market value of a Fund's total assets at the time
of such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry, provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; provided that,
notwithstanding the foregoing, (A) the Gold & Government Fund will
invest more than 25% of its total assets in gold and gold mining
industries, and will not at any time have less than 65% of its total
assets invested in some combination of gold and gold mining securities
and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; and (B) the Regional Bank Fund will
invest more than 25% of its total assets in issuers in the banking
industry; all as more fully set forth in the Prospectus. For purposes
of this Restriction, with respect to the Managed Tax-Exempt Fund,
state and municipal governments and their political subdivisions are
not considered members of any industry. With respect to Managed
Tax-Exempt Fund, this limitation shall not be applicable to
investments in Tax-Exempt securities issued by any state and municipal
governments and their political subdivisions. With respect to Global
Income Fund, this restriction will apply to obligations of a foreign
government unless the Securities and Exchange Commission permits their
exclusion.
Nonfundamental Investment Restrictions
- --------------------------------------
The following restrictions are designated as nonfundamental and may be
changed by the Board of Trustees without shareholder approval.
A Fund may not:
13. OPTIONS TRANSACTIONS. Write, purchase, or sell puts, calls or
combinations thereof except that a Fund may write, purchase or sell
puts and calls on securities as described in the Prospectuses, and the
Global Income Fund may purchase or sell puts and calls on foreign
currencies as described in the Prospectus.
14. ILLIQUID SECURITIES. Purchase or otherwise acquire any security
if, as a result, more than 10% of a Fund's net assets (taken at
current value) would be invested in securities that are illiquid by
virtue of the absence of a readily available market or legal or
contractual restrictions on resale. This policy includes repurchase
agreements maturing in more than seven days. This policy does not
include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of l933 which the Board of Trustees or
the Adviser has determined under Board-approved guidelines are liquid.
15. ACQUISITION FOR CONTROL PURPOSES. Purchase securities of any
issuer for the purpose of exercising control or management, except in
connection with a merger, consolidation, acquisition or
reorganization.
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<PAGE>
16. UNSEASONED ISSUERS. Purchase securities of any issuer with a
record of less than three years continuous operations, including
predecessors, if such purchase would cause the investments of a Fund
in all such issuers to exceed 5% of the total assets of the Fund taken
at market value, except this restriction shall not apply to (i)
obligations of the U.S. Government, its agencies or instrumentalities
and (ii) securities of such issuers which are rated by at least one
nationally recognized statistical rating organization. With respect to
Managed Tax-Exempt Fund, this restriction shall not apply to municipal
obligations for the payment of which is pledged the faith, credit and
taxing power of any person authorized to issue such securities. With
respect to the Global Income Fund, this restriction shall not apply to
obligations issued or guaranteed by any foreign government or its
agencies or instrumentalities.
17. BENEFICIAL OWNERSHIP OF OFFICERS AND DIRECTORS OF FUND AND
ADVISEr. Purchase or retain the securities of any issuer if those
officers or trustees of a Fund or officers or directors of the Adviser
who each own beneficially more than 1/2 of 1% of the securities of
that issuer together own more than 5% of the securities of such
issuer.
18. HYPOTHECATING, MORTGAGING AND PLEDGING ASSETS. Hypothecate,
mortgage or pledge any of its assets except (a) with respect to the
Gold & Government Fund, Regional Bank Fund, Sovereign Achievers Fund
and Managed Tax-Exempt Fund, to secure loans as a temporary measure
for extraordinary purposes and (b) with respect to Government Fund,
Global Fund and Global Income Fund, as may be necessary in connection
with permitted borrowings and then not in excess of 5% of the Fund's
total assets, taken at cost. For the purpose of this restriction, (i)
forward foreign currency exchange contracts are not deemed to be a
pledge of assets, (ii) the purchase or sale of securities by a Fund on
a when-issued or delayed delivery basis and collateral arrangements
with respect to the writing of options on debt securities or on
futures contracts are not deemed to be a pledge of assets; and (iii)
the deposit in escrow of underlying securities in connection with the
writing of call options is not deemed to be a pledge of assets.
19. JOINT TRADING ACCOUNTS. Participate on a joint or joint and
several basis in any trading account in securities (except for a joint
account with other funds managed by the Adviser for repurchase
agreements permitted by the Securities and Exchange Commission
pursuant to an exemptive order).
20. 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.
39
<PAGE>
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will not be considered a violation
of any of the foregoing restrictions (with the exception of Restriction 2
permitting Government Fund to borrow up to 33 1/3%, and Sovereign Achievers Fund
to borrow up to 5% of the value of their total assets).
The Global Income Fund has registered as a "non-diversified" investment
company under the Investment Company Act of 1940. However, the Fund intends to
limit its investments to the extent required by the diversification requirements
of the Internal Revenue Code. See "Taxes".
In addition, it is a fundamental policy of the Managed Tax-Exempt Fund
that the Managed Tax-Exempt Fund will invest at least 80% of its total assets in
municipal securities with varying maturities, the interest from which is, in the
opinion of bond counsel for the issuer, exempt from federal income tax.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax
purposes. Each Fund has qualified and elected to be treated as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to continue to so qualify 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 if its assets, each Fund will not be subject to Federal income
tax on taxable income (including net short-term and long-term capital gains from
the disposition of portfolio securities or the right to when-issued securities
prior to issuance or the lapse, exercise, delivery under or closing out of
certain options, futures and forward contracts, income from repurchase
agreements and other taxable securities, income attributable to accrued market
discount, and a portion of the discount from certain stripped tax-exempt
obligations or their coupons) which is distributed to shareholders at least
annually in accordance with the timing requirements of the Code.
Each Fund will be subject to a 4% nondeductible 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. Each
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectuses whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of an investor's
tax basis in Fund shares and thereafter (after such basis is reduced to zero)
will generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
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Distributions of tax-exempt interest ("exempt-interest dividend")
timely designated as such by the Managed Tax-Exempt Fund to its shareholders
will be treated as tax-exempt interest under the Code, provided that such Fund
qualifies as a regulated investment company and at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in tax-exempt
obligations. Shareholders are required to report their receipt of tax-exempt
interest, including such distributions, on their Federal income tax returns. The
portion of the Managed Tax-Exempt Fund's distributions designated as
exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprised of its total income during the period of any
particular shareholder's investment. This Fund will report to Shareholders the
amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Managed Tax-Exempt Fund may invest is treated as an
item of tax preference for purposes of the Federal alternative minimum tax. To
the extent that the Managed Tax-Exempt Fund invests in these types of tax-exempt
bonds, shareholders will be required to treat as an item of tax preference for
Federal alternative minimum purposes that part of such Fund's exempt-interest
dividends which is derived from interest on these tax-exempt bonds.
Exempt-interest dividends derived from interest income from all tax-exempt bonds
may be included in corporate "adjusted current earnings" for purposes of
computing the alternative minimum tax liability, if any, of corporate
shareholders of the Managed Tax-Exempt Fund.
If a Fund invests in stock of certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest producing investments, dividends, rents, royalties or capital gain) or
hold at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), that Fund could be subject to Federal
income tax and additional interest charges on "excess distributions" received
from these passive foreign investment companies, even if all income or gain
actually received by the Fund is timely distributed to its shareholders. The
Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the applicable
Fund to recognize taxable income or gain without concurrent receipt of cash. Any
Fund that is permitted to acquire stock in foreign corporations may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
41
<PAGE>
Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to a Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income. Income from investments in commodities,
such as gold and certain related derivative instruments, is also not treated as
qualifying income under this test. If the net foreign exchange loss for a year
treated as ordinary loss under Section 988 were to exceed a Fund's investment
company taxable income computed without regard to such loss (i.e., all of the
Fund's net income other than any excess of net long-term capital gain over net
short-term capital loss) the resulting overall ordinary loss for such year would
not be deductible by the Fund or its shareholders in future years.
Some Funds may be subject to withholding and other taxes imposed by
foreign countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits with respect
to such taxes, subject to certain provisions and limitations contained in the
Code. Specifically, if more than 50% of the value of a Fund's total assets at
the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
Pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Fund even though not
actually received by them, and (ii) treat such respective pro rata portions as
foreign income taxes paid by them.
If a Fund makes this election, shareholders may then deduct such pro
rata portions of foreign income taxes in computing their taxable incomes, or
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign income taxes paid by the Fund, although
such shareholders will be required to include their share of such taxes in gross
income. Shareholders who claim a foreign tax credit for such foreign taxes may
be required to treat a portion of dividends received from the Fund as a separate
category of income for purposes of computing the limitations on the foreign tax
credits. Tax-exempt shareholders will ordinarily not benefit from this
elections. Each year that a Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of foreign income taxes paid by the Fund and (ii) the portion of Fund
dividends which represents income from each foreign country. A Fund that cannot
or does not make this election may deduct such taxes in computing its taxable
income.
42
<PAGE>
For each Fund, the amount of net realized short-term and long-term
capital gains, if any, in any given year will vary depending upon the Adviser's
current investment strategy and whether the Adviser believes it to be in the
best interest of the Fund to dispose of portfolio securities or enter into
options or futures transactions that will generate capital gains. At the time of
an investor's purchase of Fund shares, a portion of the purchase price is often
attributable to realized or unrealized appreciation in the Fund's portfolio or
undistributed taxable income of the Fund. Consequently, subsequent distributions
on those shares from such appreciation or income may be taxable to such investor
even if the net asset value of the investor's shares is, as a result of the
distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of a Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing Class A shares of a Fund cannot be
taken into account for purposes of determining gain or loss on the redemption or
exchange of such shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to the Automatic Dividend Reinvestment Plan.
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 will be treated
as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, each Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain", which is the excess, as
computer for Federal income tax purposes, of net long-term capital gain over net
short-term capital loss in any year. The Funds will not in any event distribute
net long-term capital gains realized in any year to the extend 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 a
Fund. Each shareholder would be treated for Federal income tax purposes as if
such 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 of the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain income in his return for his taxable year in which the last day of
the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or 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.
43
<PAGE>
For Federal income tax purposes, each Fund is permitted to carryforward
a net capital loss in any year to offset its own 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 applicable Fund, as noted above, would not be
distributed as such to shareholders. The capital loss carryforwards for each of
the Funds are as follows: John Hancock Sovereign U.S. Government Income Fund has
$43,025,223 of capital loss carryforwards which will expire October 31, 1997 --
$282,637, October 31, 2002-- $16,549,431 and October 31, 2003 -- $26,193,155.
John Hancock Managed Tax Exempt Fund has no capital loss carryforwards. John
Hancock Gold & Government Fund has $11,789,591 of capital loss carryforwards
which will expire October 31, 2002 -- $8,066,420 and October 31, 2003 --
$3,723,171. John Hancock Sovereign Achievers Fund has no capital loss
carryforwards. John Hancock Regional Bank Fund has no capital loss
carryforwards. John Hancock Global Fund has no capital loss carryforwards. John
Hancock Global Income Fund has $3,413,372 which will expire October 31, 2002.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Managed Tax-Exempt Fund will not be deductible for Federal income
tax purposes to the extent it is deemed related to exempt-interest dividends
paid by such Fund. Pursuant to published guidelines, the Internal Revenue
Service may deem indebtedness to have been incurred for the purpose of
purchasing or carrying shares of this Fund even though the borrowed funds may
not be directly traceable to the purchase of shares.
For purposes of the dividends received deduction available to
corporations, dividends received by a Fund, if any, from U.S. domestic
corporations in respect of any share of stock held by the Fund, for U.S. Federal
income tax purposes, for at least 46 days (91 days in the case of certain
preferred stock) and distributed and designated by the Fund may be treated as
qualifying dividends. Only Sovereign Achievers Fund and Regional Bank Fund would
generally have any significant portion of its distributions treated as
qualifying dividends. Corporate shareholders must meet the minimum holding
period requirement stated above (46 or 91 days) with respect to their shares of
the applicable Fund in order to qualify for the deduction and, if they borrow to
acquire such shares, may be denied a portion of the dividends received
deduction. The entire qualifying dividend, including the otherwise deductible
amount, will be included in determining the excess (if any) of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its alternative minimum tax liability, if any.
Additionally, any corporate shareholder should consult its tax adviser regarding
the possibility that its tax basis in its shares may be reduced, for Federal
income tax purposes, by reason of "extraordinary dividends" received with
respect to the shares, for the purpose of computing its gain or loss on
redemption or other disposition of the shares.
44
<PAGE>
Investment in debt obligations that are at risk of or in default
presents special tax issues for any Fund that may hold such obligations. 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 any Fund that
may hold such obligations in order to reduce the risk of distributing
insufficient income to preserve its status as a regulated investment company and
seek to avoid becoming subject to Federal income or excise tax.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Limitations imposed by the Code on regulated investment companies like
the Funds may restrict each Fund's ability to enter into futures, options, and
forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by a 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 (or, in the case of certain
currency forward, options and futures, as ordinary income or loss) and timing of
some capital gains and losses realized by the Fund. Also, certain of a Fund's
losses on its transactions involving options, futures or forward contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income. Certain of the
applicable tax rules may be modified if a Fund is eligible and chooses to make
one or more of certain tax elections that may be available. These transactions
may therefore affect the amount, timing and character of a Fund's distributions
to shareholders. The Funds will take into account the special tax rules
(including consideration of available elections) applicable to options, futures
or forward contracts in order to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of Fund shares
may also be subject to state and local taxes. Shareholders should consult their
own tax advisers as to the Federal, state or local tax consequences of ownership
of shares of, and receipt of distributions from, the Funds in their particular
circumstances.
45
<PAGE>
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in a 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 a tax treaty) on amounts treated as
ordinary dividends from a Fund and, unless an effective IRS Form W-8 or
authorized substitute is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in any Fund.
The Funds are not subject to Massachusetts corporate excise or
franchise taxes, provided that a fund qualifies as a regulated investment
company under the Code, it will also not be required to pay any Massachusetts
income tax.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by its Trustees, who elect
officers who are responsible for the day-to-day operations of the Trust and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also officers and directors of the Adviser or officers
and Directors of the Funds' principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupation of employment
of the Trustees and principal officers of the Funds during the past five years:
46
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
---------------- WITH REGISTRANTS DURING PAST 5 YEARS
---------------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (3,4) Chairman and Chief Executive Officer, the
Adviser and The Berkeley Financial Group
("The Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM Capital");
John Hancock Advisers International
Limited ("Advisers International"); John
Hancock Funds, Inc., ("John Hancock
Funds"); John Hancock Investor Services
Corporation ("Investor Services") and
Sovereign Asset Management Corporation
("SAMCorp") (herein after the Adviser,
The Berkeley Group, NM Capital, Advisers
International, John Hancock Funds,
Investor Services and SAMCorp are
collectively referred to as the
"Affiliated Companies"); Chairman, First
Signature Bank & Trust; Director, John
Hancock Freedom Securities Corp., John
Hancock Capital Corp., New England/Canada
Business Council; Member, Investment
Company Institute Board of Governors;
Director, Asia Strategic Growth Fund,
Inc.; Trustee, Museum of Science;
President, the Adviser (until July 1992);
Chairman, John Hancock Distributors, Inc.
until April 1994.
- ------------
*Trustee may be deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940.
(1) Member of the Audit Committees of the Trusts.
(2) Member of the Committees on Administration of the Trusts.
(3) Member of the Executive Committee of each Trust. The Executive Committee
may generally exercise most powers of the Trustees between regularly
scheduled meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
---------------- WITH REGISTRANTS DURING PAST 5 YEARS
---------------- -------------------
<S> <C> <C>
Douglas M. Costle Trustee (1, 2) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow, Institute
Woodstock, Vermont 05091 for Sustainable Communities, Montpelier,
Vermont, since 1991. Dean Vermont Law School,
until 1991. Director, Air and Water
Technologies Corporation (environmental
services and equipment), Niagara Mohawk Power
Company (electric services) and MITRE Corporation
(governmental consulting services).
Leland O. Erdahl Trustee (1, 2) President and Director of Nature Quality
8046 Mackenzie Court Ingredients Company, Inc. and Sante Fe
Las Vegas, NV 89129 Ingredients Company, Inc. , private food
processing companies. Director of Uranium
Resources, Inc. President of Stolar, Inc.
from 1987 to 1991 and President of
Albuquerque Uranium Corporation from 1985
to 1992. Director of Freeport-McMoRan
Copper & Gold Company, Inc., Hecla Mining
Company, Canyon Resources Corporation and
Original Sixteen to One Mines, Inc. From
1984 to 1987 and 1991, management
consultant.
- -----------
*Trustee may be deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940.
(1) Member of the Audit Committees of the Trusts.
(2) Member of the Committees on Administration of the Trusts.
(3) Member of the Executive Committee of each Trust. The Executive Committee
may generally exercise most powers of the Trustees between regularly
scheduled meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
---------------- WITH REGISTRANTS DURING PAST 5 YEARS
---------------- -------------------
<S> <C> <C>
Richard A. Farrell Trustee(1, 2) President of Farrell, Healer & Co., a venture
Venture Capital Partners capital management firm, since 1980. Prior to
160 Federal Street that date, Mr. Farrell headed the venture
23rd Floor capital group at Bank of Boston Corporation.
Boston, MA 02110
William F. Glavin Trustee (1, 2) President, Babson College; Vice Chairman, Xerox
Babson College Corporation until June 1989. Director, Caldor
Horn Library Inc. and Inco Ltd.
Babson Park, MA 02157
Dr. John A. Moore Trustee (1, 2) President and Chief Executive Officer, Institute
Institute for Evaluating for Evaluating Health Risks, a nonprofit
Health Risks institution, since September 1989. Assistant
1629 K Street NW Administrator of the Office of Pesticides and
Suite 402 Toxic Substances at the Environmental Protection
Washington, DC 20006 Agency from December 1983 to July 1989.
Patti McGill Peterson Trustee (1, 2) President, St. Lawrence University; Director,
St. Lawrence University Niagara Mohawk Power Corporation and Security
110 Vilas Hall Mutual Life.
Canton, NY 13617
John W. Pratt Trustee (1, 2) Professor of Business Administration at Harvard
2 Gray Gardens East University Graduate School of Business
Cambridge, MA 02138 Administration (Since 1961).
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment Officer, the
Investment Officer (4) Adviser; President (until December 1994).
- -----------
*Trustee may be deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940.
(1) Member of the Audit Committees of the Trusts.
(2) Member of the Committees on Administration of the Trusts.
(3) Member of the Executive Committee of each Trust. The Executive Committee
may generally exercise most powers of the Trustees between regularly
scheduled meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
- ---------------- WITH REGISTRANTS DURING PAST 5 YEARS
---------------- -------------------
<S> <C> <C>
Anne C. Hodsdon President (4) President and Chief Operating Officer,
the Adviser; Executive Vice President,
the Adviser (until December 1994); Senior
Vice President; the Adviser (until
December 1993).
James B. Little Senior Vice President, Senior Vice President, the Adviser.
Chief Financial Officer
Thomas H. Drohan Senior Vice President and Senior Vice President and Secretary, the
Secretary Adviser.
John A. Morin Vice President Vice President, the Adviser.
Susan S. Newton Vice President, Assistant Vice President and Assistant Secretary,
Secretary and Compliance the Adviser.
Officer
James J. Stokowski Vice President and Vice President, the Adviser.
Treasurer
- -----------
*Trustee may be deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940.
(1) Member of the Audit Committees of the Trusts.
(2) Member of the Committees on Administration of the Trusts.
(3) Member of the Executive Committee of each Trust. The Executive Committee
may generally exercise most powers of the Trustees between regularly
scheduled meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
</TABLE>
50
<PAGE>
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.
<TABLE>
The following table provides information regarding the compensation
paid by the Funds and the other investment companies in the John Hancock Fund
Complex to the Independent Trustees for their services. Mr. Boudreau, and each
of the officers of the Funds are interested persons of the Adviser, are
compensated by the Adviser and receive no compensation from the Funds for their
services.
<CAPTION>
AGGREGATE COMPENSATION
----------------------
SOVEREIGN U.S.
--------------
INDEPENDENT TRUSTEES GOVERNMENT* MANAGED TAX- EXEMPT* GOLD & GOVERNMENT*
- -------------------- ----------- -------------------- ------------------
<S> <C> <C> <C>
William A. Barron, III** $ 9,344 $ 4,232 $ 704
Douglas M. Costle 9,344 4,232 704
Leland O. Erdahl 9,344 4,232 704
Richard A. Farrell 9,690 4,388 731
William F. Glavin 2,774 1,275 84
Patrick Grant** 9,805 4,440 740
Ralph Lowell, Jr.** 9,344 4,232 704
Dr. John A. Moore 9,344 4,232 704
Patti McGill Peterson 9,344 4,232 704
John W. Pratt 9,344 4,232 704
------- ------- ------
Totals $87,677 $39,727 $6,483
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
----------------------
SOVEREIGN
---------
INDEPENDENT TRUSTEES ACHIEVERS* REGIONAL BANK* GLOBAL* GLOBAL INCOME*
- -------------------- ---------- -------------- ------- --------------
<S> <C> <C> <C> <C>
William A. Barron, III** $ 2,105 $ 13,754 $ 2,283 $ 2,190
Douglas M. Costle 2,105 13,754 2,283 2,190
Leland O. Erdahl 2,105 13,754 2,283 2,190
Richard A. Farrell 2,183 14,218 2,367 2,271
William F. Glavin 630 4,214 670 651
Patrick Grant** 2,208 14,372 2,395 2,299
Ralph Lowell, Jr.** 2,105 13,754 2,283 2,190
Dr. John A. Moore 2,105 13,754 2,283 2,190
Patti McGill Peterson 2,105 13,754 2,283 2,190
John W. Pratt 2,105 13,754 2,283 2,190
------- -------- ------- -------
Totals $19,756 $129,082 $21,413 $20,551
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
PENSION OR RETIREMENT BENEFITS TOTAL COMPENSATION FROM FUNDS AND
ACCRUED AS PART OF EACH FUND'S JOHN HANCOCK FUND COMPLEX TO
INDEPENDENT TRUSTEES EXPENSES* TRUSTEES(1)
- -------------------- --------- -----------
(TOTAL OF 12 FUNDS)
<S> <C> <C>
William A. Barron, III* $ $ 41,750
Douglas M. Costle - 41,750
Leland O. Erdahl - 41,750
Richard A. Farrell - 43,250
William F. Glavin 20,715 37,500
Patrick Grant** - 43,750
Ralph Lowell, Jr.** - 41,750
Dr. John A. Moore - 41,750
Patti McGill Peterson - 41,750
John W. Pratt - 41,750
------- --------
Totals $20,715 $416,750
(1)The total compensation paid the John Hancock Fund Complex to the Independent
Trustees is as of calendar year ended December 31, 1995.
*Compensation made for the fiscal year ended October 31, 1995.
**As of January 1, 1996, Messrs. Barron, Grant and Lowell resigned as Trustees.
</TABLE>
The nominees of the Funds may at times be the record holders of in
excess of 5% of shares of any one or more Funds by virtue of holding shares in
"street name." As of January 31, 1996 the officers and trustees of the Trusts as
a group owned less than 1% of the outstanding shares of each class of each of
the Funds.
As of January 31, 1996, the following shareholders beneficially owned
5% of or more of the outstanding shares of the Funds listed below:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NUMBER OF SHARES OF OUTSTANDING SHARES OF THE
NAME AND ADDRESS OF SHAREHOLDER FUND AND CLASS OF SHARES BENEFICIAL INTEREST OWNED CLASS OF THE FUND
- ------------------------------- ------------------------ ------------------------- -------------------------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith Regional Bank Fund 2,631,321 13.19%
Inc. Class A
Attn: Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Merrill Lynch Pierce Fenner & Regional Bank Fund 16,653,759 31.16%
Smith Inc. Class B
Attn: Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
</TABLE>
52
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for each of the Funds is John Hancock Advisers,
Inc., a Massachusetts corporation (the "Adviser"), with offices at 101
Huntington Avenue, Boston, Massachusetts 02199-7603. The Adviser is a registered
investment advisory firm which maintains a securities research department, the
efforts of which will be made available to the Funds.
The Adviser was organized in 1968 and presently has more than $16
billion in assets under management in its capacity as investment adviser to the
Funds and the other mutual funds and publicly traded investment companies in the
John Hancock group of funds having a combined total of approximately 1,080,000
shareholders. The Adviser is an affiliate 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 Trusts have entered into investment advisory agreements (the
"Advisory Agreements") dated as of November 6, 1986 as amended and restated
January 1, 1994 between Freedom Investment Trust and the Adviser, and dated as
of June 26, 1986 as amended and restated January 1, 1994 between Freedom
Investment Trust II and the Adviser. Pursuant to the Advisory Agreements, the
Adviser agreed to act as investment adviser and manager to the Funds. As manager
and investment adviser, the Adviser will: (a) furnish continuously an investment
program for each of the Funds and determine, subject to the overall supervision
and review of the Boards of Trustees, which investments should be purchased,
held, sold or exchanged, (b) provide supervision over all aspects of each Fund's
operations except those which are delegated to a custodian, transfer agent or
other agent, and (c) provide each of the Funds with such executive,
administrative and clerical personnel, officers and equipment as are deemed
necessary for the conduct of their business.
As compensation for its services under the Advisory Agreements, the
Adviser receives from each Fund a fee computed and paid monthly based upon the
following annual rates: (a) for each of Regional Bank Fund and Gold & Government
Fund, 0.80% of each respective Fund's first $500 million of average daily net
assets, and 0.75% of average daily net assets over $500 million; (b) for the
Sovereign Achievers Fund, 0.75% of the Fund's first $500 million of average
daily net assets, and 0.65% of average daily net assets in excess of that
amount; (c) for Government Fund, 0.50% of the Fund's first $500 million of
average daily net assets, and 0.45% of average daily net assets in excess of
that amount; (d) for Managed Tax-Exempt Fund, 0.60% of the Fund's first $250
million of average daily net assets, 0.50% of the next $500 million of average
daily net assets, and 0.45% of average daily net assets in excess of that
amount; (e) for Global Fund, 1% on the first $100 million of average daily net
assets of the Fund, 0.80% on the next $200 million of average net assets, 0.75%
on the next $200 million of average net assets and 0.625% of average net assets
in excess of $500 million; and (f) for the Global Income Fund 0.75% on the first
$250 million of average daily net assets, and 0.70% of average net assets in
excess of $250 million. The rates for some Funds are higher than those for
others because of the extensive amount of research required to manage such
portfolios in comparison to the portfolios of other Funds.
53
<PAGE>
The Global Fund and the Adviser have entered into a sub-investment
management contract with John Hancock Advisers International Limited under which
John Hancock Advisers International, subject to the review of the Trustees and
the overall supervision of the Adviser, is responsible for providing the Fund
with advice with respect to that portion of the assets invested in countries
other than the United States and Canada. As compensation for its services under
the Sub-Advisory Agreement, JH Advisers International receives from the Adviser
a monthly fee equal to 0.70% on an annual basis of the average daily net asset
value of the Global Fund for each calendar month up to $200 million of average
daily net assets; and 0.6375% on an annual basis of the average daily net asset
value over $200 million. The Sub-Adviser, with offices located at 34 Dover
Street, London, England W1X 3RA, is a wholly-owned subsidiary of the Adviser
formed in 1987 to provide international investment research and advisory
services to U.S. institutional clients.
The Adviser has entered into a service agreement with Sovereign Asset
Management Corporation ("SAMCorp"), which is an indirect wholly-owned subsidiary
of the Life Company. The service agreement provides that SAMCorp will provide to
the Adviser certain portfolio management services with respect to the equity
securities held in the portfolio of the Sovereign Achievers Fund. The service
agreement further provides that the Adviser will remain ultimately responsible
for all of its obligations under the investment management contract between the
Adviser and the Sovereign Achievers Fund. Subject to the supervision of the
Adviser, SAMCorp furnishes the Sovereign Achievers Fund with recommendations
with respect to the purchase, holding and disposition of equity securities in
the Sovereign Achievers Fund's portfolio; furnishes the Sovereign Achievers Fund
with research, economic and statistical data in connection with the Sovereign
Achievers Fund's equity investments; and places orders for transactions in
equity securities. The Adviser pays to SAMCorp 40% of the monthly investment
management fee received by the Adviser with respect to the equity securities
held in the portfolio of the Sovereign Achievers Fund during such month. The
fees paid by the Sovereign Achievers Fund to the Adviser under the investment
management contract are not affected by this arrangement.
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
Fund who are not "interested persons," as such term is defined in the Investment
Company Act, but excluding certain distribution-related activities 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 certain conditions imposed by the Internal Revenue
Service with respect to multiple-class structures.
The State of California imposes a limitation on the expenses of the
Funds. The Advisory Agreement provides that if, in any fiscal year, the total
expenses of a Fund (excluding taxes, interest, brokerage commissions and
extraordinary items, but including the management fee) exceed the expense
limitations applicable to a Fund imposed by the securities regulations of any
state in which it is then registered to sell shares, the Adviser will reduce
it's fee for that Fund in the amount of that excess up to the amount of its
management fee during that fiscal year. The Adviser and JH Advisers
International have agreed that if, in any fiscal year, the total expenses of the
Global Fund (excluding taxes, interest, brokerage commissions and extraordinary
items, but
54
<PAGE>
including the Adviser's fee and the portion thereof paid to JH Advisers
International) exceed the expense limitations applicable to such Fund, the
Adviser and JH Advisers International will each reduce it's fee for that Fund in
the amount of that excess up to the amount of its fee during that fiscal year.
Although there is no certainty that any limitations will be in effect in the
future, the California limitation on an annual basis currently is 2.5% of the
first $30 million of average net assets, 2.0% of the next $70 million of net
assets and 1.5% of the remaining net assets.
The continuation of the Advisory Agreement for Freedom Investment Trust
was last approved on May 1, 1995 by all of the Trustees, including all of the
Trustees who are not parties to the Advisory Agreement or "interested persons"
of any such party. The shareholders of Gold & Government Fund, Regional Bank
Fund and Government Fund also approved the Advisory Agreement on November 6,
1986. The Advisory Agreement was approved by the respective shareholders of the
Sovereign Achievers Fund and the Managed Tax-Exempt Fund on February 26, 1988.
An amendment to the Advisory Agreement to increase the fee payable thereunder
effective January 1, 1994, was approved by the respective shareholders of Gold &
Government Fund and Regional Bank Fund on October 28, 1993. The Advisory
Agreement will continue in effect from year to year, provided that its
continuance is approved annually both (i) by the holders of a majority of the
outstanding voting securities of the Trust or by the Board of Trustees, and (ii)
by a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" of any such party. The Advisory Agreement may be terminated
on 60 days written notice by any party and will terminate automatically if it is
assigned.
For the fiscal year ended October 31, 1993, Freedom Investment Trust
paid the Adviser an investment advisory fee of $6,061,838 pursuant to the
Advisory Agreement. Of this amount, $451,050 was attributable to the Gold &
Government Fund, $1,354,664 was attributable to the Regional Bank Fund,
$2,862,505 was attributable to the Government Fund, $583,838 was attributable to
the Sovereign Achievers Fund and $809,781 was attributable to the Managed
Tax-Exempt Fund. Under the terms of the Advisory Agreement the Adviser may
voluntarily not impose all or part of its management fees. During the year ended
October 31, 1993, for the Managed Tax-Exempt Fund, the Adviser agreed not to
impose management fees in the amount of $733,749.
For the fiscal year ended October 31, 1994, Freedom Investment Trust
paid the Adviser, the Funds' previous Adviser, an investment advisory fee of
$9,390,998 pursuant to the Advisory Agreement. Of this amount, $530,798 was
attributable to the Gold & Government Fund, $3,686,366 was attributable to the
Regional Bank Fund, $2,839,185 was attributable to the Government Fund, $902,465
was attributable to the Sovereign Achievers Fund and $1,432,184 was attributable
to the Managed Tax-Exempt Fund. During the year ended October 31, 1994, for the
Managed Tax-Exempt Fund, the Adviser agreed not to impose management fees in the
amount of $131,878. The Adviser's expense limitation may be discontinued at any
time.
For the fiscal year ended October 31, 1995, Freedom Investment Trust
paid the Adviser and Freedom Capital, the Funds' previous Adviser, an investment
advisory fee of $12,627,864 pursuant to the Advisory Agreement. Of this amount,
$354,905 was attributable to the Gold & Government Fund, $7,644,892 was
attributable to the Regional Bank Fund, $2,514,147 was
55
<PAGE>
attributable to the Government Fund, $1,247,519 was attributable to the Managed
Tax-Exempt Fund, and $866,401 was attributable to the Sovereign Achievers Fund.
Under the terms of the Advisory Agreement the Adviser may voluntarily not impose
all or part of its management fees. During the year ended October 31, 1995, for
the Managed Tax-Exempt Fund the Adviser and Freedom Capital agreed not to impose
management fees in the amount of $113,411.
The continuation of the Advisory Agreement for the Global Fund and for
the Global Income Fund were approved on May 1, 1995 by all of the Trustees of
Freedom Investment Trust II, including all of the Trustees who are not parties
to the Agreements or "interested persons" of any such party. The current
Sub-Advisory Agreement between the Adviser and JH Advisers International was
approved by all of the Trustees of Freedom Investment Trust II on June 25, 1992
and became effective on August 1, 1992. The shareholders of each Fund approved
the Advisory Agreement with respect to each Fund on May 8, 1987 and the
shareholders of the Global Fund approved the Sub-Advisory Agreement on September
25, 1992. An amendment to the Advisory Agreement to increase the fee payable
thereunder effective January 1, 1994 was approved by the shareholders of Global
Income Fund on October 28, 1993. The Agreements will continue in effect for a
period of two years from the date of their execution and thereafter from year to
year, provided that their continuance is approved annually both (i) by the
holders of a majority of the outstanding voting securities of each Fund or by
the Board of Trustees of Freedom Investment Trust II, and (ii) by a majority of
the Trustees who are not parties to the Agreements or "interested persons" of
any such party. The Agreements may be terminated on 60 days' written notice by
either party and will terminate automatically if they are assigned.
For the fiscal year ended October 31, 1993, Freedom Investment Trust II
paid the Adviser investment advisory fees of $922,722 with respect to the Global
Fund and $1,441,163 with respect to the Global Income Fund. For the fiscal year
ended October 31, 1994, Freedom Investment Trust II the Adviser investment
advisory fees of $1,175,313 with respect to the Global Fund and $1,207,673 with
respect to the Global Income Fund. For the fiscal year ended October 31, 1995,
Freedom Investment Trust II paid the Adviser and Freedom Capital, the Funds'
previous Adviser, investment advisory fees of $1,169,884 with respect to the
Global Fund and $840,527 with respect to the Global Income Fund.
DISTRIBUTION CONTRACT
Freedom Investment Trust and Freedom Investment Trust II have entered
into Distribution Agreements with John Hancock Funds, Inc. and Freedom
Distributors Corporation (together the "Distributors") whereby the Distributors
act as exclusive selling agent of the Funds, selling shares of each class of
each Fund on a "best efforts" basis. Shares of each class of each Fund are sold
to selected broker-dealers (the "Selling Brokers") who have entered into selling
agency agreements with the Distributors.
56
<PAGE>
The Distributors accept orders for the purchase of the shares of the
Funds which are continually offered at net asset value next determined, plus an
applicable sales charge, if any. In connection with the sale of Class A or Class
B shares of the Funds, the Distributors 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. The sales
charges are discussed further in the Prospectuses.
The Trustees have adopted Distribution Plans with respect to Class A
and Class B shares ("the Plans"), pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Under the Plans, each Fund will pay distribution and
service fees at an aggregate annual rate of up to 0.30% and 1.00% respectively,
of the Fund's daily net assets attributable to shares of that class. However,
the service fee will not exceed 0.25% of the applicable Fund's average daily net
assets attributable to each class of shares. The distribution fees reimburse the
Distributors for their distribution costs incurred in the promotion of sales of
the Funds'shares, and the service fees compensate Selling Brokers for providing
personal and account maintenance services to shareholders. In the event that the
Distributors are not fully reimbursed for expenses they incur under the Class B
Plan in any fiscal year, the Distributors may carry these expenses forward,
provided, however, that the Trustees may terminate the Class B Plan and thus any
Fund's obligation to make further payments at any time. Accordingly, the Funds
do not treat unreimbursed expenses relating to the Class B shares as a
liability. The Plans were approved by a majority of the voting securities of
each Fund. The Plans and all amendments were approved by the Trustees, including
a majority of the Trustees who are not interested persons of the applicable Fund
and who have no direct or indirect financial interest in the operation of the
Plans (the "Independent Trustees"), by votes cast in person at meetings called
for the purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, the Distributors provide the
Funds 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.
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 applicable Fund's outstanding
shares of the applicable class in each case upon 60 day's written notice to the
Distributors 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 applicable Fund which has
57
<PAGE>
voting rights with respect to the Plan. And finally, each of the Plans provides
that no material amendment tot he Plan will, in any event, be effective unless
it is approved by a vote of the Trustees and the Independent Trustees of the
applicable Fund. The holders of Class A 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
of shares of each Fund.
<TABLE>
During the fiscal year ended October 31, 1995, the Funds paid the
Distributors the following amounts of expenses with respect to the Class A
shares and Class B shares of each of the Funds:
<CAPTION>
Expense Items
-------------
Printing and Interest,
Mailing of Carrying or
Prospectuses to Expense of Compensation to Other Finance
Advertising New Shareholders Distributors Selling Brokers Charges
----------- ---------------- ------------ --------------- -------
<S> <C> <C> <C> <C> <C>
Government Fund
---------------
Class A Shares $ 63,551 $ 4,397 $ 182,706 $ 754,114 NONE
Class B Shares $ 63,450 $ 2,609 $ 190,722 $ 822,022 $ 598,399
Managed Tax-Exempt Fund
-----------------------
Class A Shares
Class B Shares $ 11,757 $ 515 $ 32,699 $ 38,407 NONE
$ 72,409 $ 0 $ 184,775 $ 981,260 $ 731,696
Gold & Government Fund
----------------------
Class A Shares $ 10,961 $ 0 $ 10,149 $ 28,882 NONE
Class B Shares $ 27,231 $ 0 $ 36,262 $ 202,288 $ 10,819
Sovereign Achievers Fund
------------------------
Class A Shares $ 10,326 $ 1,951 $ 24,700 $ 37,502 NONE
Class B Shares $ 40,251 $ 6,420 $ 93,473 $ 370,936 $ 361,952
Regional Bank Fund
------------------
Class A Shares $151,794 $ 9,160 $ 599,005 $ 89,574 NONE
Class B Shares $904,125 $54,026 $3,220,715 $1,018,102 $1,831,112
</TABLE>
58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Global Fund
-----------
Class A Shares $50,361 $9,469 $75,361 $145,419 NONE
Class B Shares $47,508 $2,409 $70,676 $ 80,744 $ 69,530
Global Income Fund
------------------
Class A Shares $10,013 $3,810 $20,681 $ 23,930 NONE
Class B Shares $59,062 $1,035 $70,074 $270,650 $516,687
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
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 categories 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.
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 a Fund's NAV.
A 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. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable securities may be significantly affected on days when a shareholder
has no access to the Fund.
59
<PAGE>
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the
Funds are described in the Funds' Prospectuses. Methods of obtaining reduced
sales charges referred to generally in the Prospectuses 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
Funds, owned by the investor, 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, her or their 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 CHARGES. As described in the Prospectuses, Class A shares of the
Funds may be sold without a sales charge to certain persons described in the
Prospectuses.
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 current account value of the Class A shares already
held by such person.
COMBINATION PRIVILEGE. Reduced sales charges (according to the schedule set
forth in the Prospectuses) are also available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares and
shares of all other John Hancock funds which carry a sales charge.
LETTER OF INTENTION. The reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention (the
"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 specified 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 group IRA, SEP,
SARSEP, TSA, 401(k), ISA and Section 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
60
<PAGE>
from the investor. However, for the purchases actually made within the specified
period 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 a number of
Class A shares (approximately 5% of the aggregate) sufficient 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
charge as may be due. By signing the LOI, the investor authorizes Investor
Services to act as his or her 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 Funds 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 an initial sales charge so that the Funds will
receive the full amount of the purchase price.
CONTINGENT DEFERRED SALES CHARGE. 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 Prospectuses as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining this number all
payments during a month will be aggregated and deemed to have been made on the
last day of the month.
Proceeds from the CDSC are paid to John Hancock Funds not "the
Distributors" and are used in whole or in part by John Hancock Funds to defray
its expenses related to providing distribution-related services to the Funds 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 Funds to sell the Class B shares without a sales charge being
deducted at the time of the purchase. See the Prospectuses for additional
information regarding the CDSC.
61
<PAGE>
SPECIAL REDEMPTIONS
Although they would not normally do so, the Funds have the right to pay the
redemption price of shares of the Funds in whole or in part in portfolio
securities as prescribed by the Trustees. If the shareholder were to sell
portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Funds
have, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Funds must redeem their shares for cash except to the
extent that the redemption payments to any shareholder during any 90-day period
would exceed the lesser of $250,000 or 1% of the applicable Fund's net asset
value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE. As described more fully in the Prospectuses, the Funds
permit exchanges of shares of any class of a Fund for shares of the same class
in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are
based on their respective net asset values. No sales charge or transaction
charge is imposed. Shares of the Funds which are subject to a CDSC may be
exchanged into shares of any of the other John Hancock funds that are subject to
a CDSC without incurring the CDSC; however, the shares acquired in an exchange
will be subject to the CDSC schedule of the shares acquired if and when such
shares are redeemed (except that shares exchanged into John Hancock Short-Term
Strategic Income Fund, John Hancock Intermediate Maturity Government Fund and
John Hancock Limited-Term Government Fund will retain the exchanged fund's CDSC
schedule). For purposes of computing the CDSC payable upon redemption of shares
acquired in an exchange, the holding period of the original shares is added to
the holding period of the shares acquired in an exchange.
Shares of each class may be exchanged only for shares of the same class in
another John Hancock fund.
If a shareholder exchanges Class B shares purchased prior to January 1,
1994 (except John Hancock Short-Term Strategic Income Fund) for Class B shares
of any other John Hancock fund, the acquired shares will continue to be subject
to the CDSC schedule that was in effect when the exchanged shares were
purchased.
Each Fund reserves the right to require that previously exchanged shares
(and reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange. The Funds may also terminate or alter the terms of the
exchange privilege upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and
the purchase of shares of another for Federal income tax purposes. An exchange
may result in a taxable gain or loss. See "Tax Status."
62
<PAGE>
To make an exchange, the account registration in both the existing and
new account, must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Prospectuses, each Fund
permits the establishment of a Systematic Withdrawal Plan. Payments under this
plan represent proceeds from the redemption of shares of the applicable Fund.
Since the redemption price of the shares of a Fund 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 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 Class A or Class B shares at the same time a Systematic
Withdrawal Plan is in effect. The Funds reserve 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 in
the Prospectuses. 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.
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 processing 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
same Fund or in any other John Hancock funds, 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 same Fund or in Class A shares of another John Hancock fund. If a CDSC was
paid upon a redemption, a shareholder may reinvest the proceeds from this
redemption at net asset value in additional shares of the class from which the
redemption was made. The shareholder's account
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<PAGE>
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 Funds 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 FUNDS' SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Funds. 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 authorized the issuance of a new
Fund named, John Hancock Financial Industries Fund, Class A and Class B, under
Freedom Investment Trust.
The shares of each class of a Fund represent an equal proportionate
interest in the aggregate net assets attributable to the classes of the Fund.
Class A and Class B shares of the Funds will be sold exclusively to members of
the public (other than the institutional investors described in the
Prospectuses) at net asset value. 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 CDSC
may be imposed in the event of certain redemption transactions within one year
of purchase.
Class A and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of a 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 will be in
the same amount, except that (i) the distribution and service fees relating the
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) Class A and Class B shares will bear any other class expenses properly
allocable to such class of shares, subject to the conditions set forth in a
private letter ruling that each Fund has received from the Internal Revenue
Service relating to its multiple-class structure. Similarly, the net asset value
per share may vary depending on whether Class A or Class B shares are purchased.
64
<PAGE>
In the event of liquidation, shareholders are entitled to share pro rata in
the net assets of the applicable Fund available for distribution to such
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, by the Trusts, except as set
forth below.
Unless otherwise required by the Investment Company Act or the Declaration
of Trust, each Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the 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 a request for 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, each 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
Funds' assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. Liability is therefore
limited to circumstances in which a Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
CALCULATION OF PERFORMANCE
The following information supplements the discussion in the Prospectuses
regarding performance information.
TOTAL RETURN. Average annual total return is determined separately for each
class of shares.
Set forth below are tables showing the performance on a total return basis
(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000
investment in the Class A and Class B shares of the Gold & Government Fund,
Regional Bank Fund, Government Fund, Managed Tax-Exempt Fund, Sovereign
Achievers Fund, Global Fund and Global Income Fund. The performance information
for each Fund is stated for the fiscal year ended October 31, 1995 and for the
five year period ended October 31, 1995 with respect to the Class B shares of
each Fund for the one year period of Class A shares of each Fund and for the
period from the commencement of operations (indicated by an asterisk), or the
ten year period, of the Class A and Class B shares of each Fund to October 31,
1995.
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<TABLE>
<CAPTION>
Gold & Government Fund
----------------------
<S> <C> <C> <C> <C>
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
(10.40%) (0.64%) (11.02%) 2.65% 5.59%
Regional Bank Fund
------------------
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
24.46% 25.58% 25.11% 35.11% 19.97%
Government Income Fund
----------------------
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
11.05% 5.29% 9.34% 8.03% 8.20%
Managed Tax-Exempt Fund
-----------------------
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
8.56% 5.82% 7.96% 6.22% 8.31%
Sovereign Achievers Fund
------------------------
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
6.62% 5.40% 6.51% 12.17% 7.23%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Global Fund
-----------
<S> <C> <C> <C> <C>
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
(5.38%) 7.09% (5.96%) 9.30% 9.31%
Global Income Fund
------------------
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 1/3/92* to One Year Ended Five Years Ended 9/26/84* to
10/31/95 10/31/95 10/31/95 10/31/95 10/31/95
-------- -------- -------- -------- --------
7.15% 3.13% 6.61% 5.34% 9.14%
* Commencement of operations.
</TABLE>
The "distribution rate" is determined by annualizing the result of
dividing the declared dividends of a Fund during the period stated by the
maximum offering price and net asset value at the end of the period. Excluding a
Fund's sales load from the distribution rate produces a higher rate.
Total return is computed by finding the average annual compounded rates
of return over the designated periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
[GRAPHIC OMITTED]
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, 5 years, and life-of-fund
periods.
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<PAGE>
This calculation assumes that the maximum sales charge for Class A
shares of 5% for Gold & Government Fund, Sovereign Achievers Fund, Regional Bank
Fund and Global Fund and 4.5% for Government Income Fund, Managed Tax-Exempt
Fund, and Global Income Fund is included in the initial investment or, for Class
B shares, the applicable 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.
In addition to average annual total returns, the Funds 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 Funds' sales charge on
Class A shares or the CDSC on Class B shares into account. Excluding the Funds'
sales charge on Class A shares and the CDSC on Class B shares from a total
return calculation produces a higher total return figure.
Yield. Yield is determined separately for Class A and Class B shares. The yields
for the Class A shares of the Gold & Government Fund, Government Fund, Managed
Tax-Exempt Fund and Global Income Fund for the thirty days ended October 31,
1995 were 1.42%, 5.62%, 4.74% and 5.80%, respectively. The yields for the Class
B shares of the Gold & Government Fund, Government Fund, Managed Tax-Exempt Fund
and Global Income Fund for the thirty days ended October 31, 1995 were 0.87%,
5.24%, 4.32% and 5.21%, respectively.
Yield is computed by dividing the net investment income per share
earned during a specified 30 day period by the maximum offering price per share
on the last day of such period, according to the following formula:
[GRAPHIC OMITTED]
Where: a= dividends and interest earned during the period
b= net expenses accrued for the period
c= the average daily number of share outstanding during the period
that were entitled to receive dividends
d= the maximum offering price per share on the last day of the
period.
To calculate interest earned (for the purpose of "a" above) on debt
obligations, a Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of last business day of the period, or, with respect to
obligations purchased during the period, the purchase price (plus actual accrued
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<PAGE>
interest). The yield to maturity is then divided by 360 and the quotient is
multiplied by the market value of the obligation (including actual accrued
interest) to determine the interest income on the obligation for each day of the
subsequent period that the obligation is in the portfolio.
Managed Tax-Exempt Fund only. 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.
Government Fund and Gold & Government Fund only. With respect to the
treatment of discount and premium on mortgage or other receivables-backed
obligations which are expected to be subject to monthly payments of principal
and interest ("paydowns") each Fund accounts for gain or loss attributable to
actual monthly paydowns as an increase or decrease to interest income during the
period.
Global Income Fund only. To calculate interest earned (for the purpose
of "a" above) on foreign debt obligations, the Fund computes the yield to
maturity of each obligation based on the local foreign currency market value of
the obligation (including actual accrued interest) at the beginning of the
period, or, with respect to obligations purchased during the period, the
purchase price plus accrued interest. The yield to maturity is then divided by
360 and the quotient is multiplied by the current market value of the obligation
(including actual accrued interest in local currency denomination), then
converted to U.S. dollars using exchange rates from the close of the last
business day of the period to determine the interest income on the obligation
for each day of the subsequent period that the obligation is in the portfolio.
Applicable foreign withholding taxes, net of reclaim, are included in the "b"
expense component.
Solely for the purpose of computing yield, each Fund recognizes
dividend income by accruing 1/360 of the stated dividend rate of a security each
day that a security is in the portfolio.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter.
All accrued expenses are taken to account as described later herein.
From time to time, in reports and promotional literature, the Funds'
total return and yield will be compared to indices of mutual funds such as
Lipper Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a
monthly publication which tracks net assets, total return, and yield on mutual
funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C.
Towers are also used for comparison purposes, as well as Russell and Wilshire
indices.
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<PAGE>
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MORNINGSTAR, STANGER'S and BARRON'S, etc. may also be utilized.
The performance of the Funds is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Funds for any period in the future. The performance of any 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 Funds' performances.
BROKERAGE ALLOCATION
Each Advisory Agreement authorizes the Adviser (subject to the control
of the Boards of Trustees) to select brokers and dealers to execute purchases
and sales of portfolio securities and gold bullion and coins. It directs the
Adviser to use its best efforts to obtain the best overall terms for the Funds,
taking into account such factors as price (including dealer spread), the size,
type and difficulty of the transaction involved, and the financial condition and
execution capability of the broker or dealer.
The Sub-Advisory Agreement between the Adviser and JH Advisers
International authorizes JH Advisers International (subject to the control of
the Board of Trustees of Freedom Investment Trust II) to provide the Global Fund
with a continuing and suitable investment program with respect to investments by
the Fund in countries other than the United States and Canada.
To the extent that the execution and price offered by more than one
dealer are comparable, the Adviser or JH Advisers International, as the case may
be, may, in their discretion, decide to effect transactions in portfolio
securities with dealers on the basis of the dealer's sales of shares of the
Funds or with dealers who provide the Funds, the Adviser or JH Advisers
International with services such as research and the provision of statistical or
pricing information. In addition, the Funds may pay brokerage commissions to
brokers or dealers in excess of those otherwise available upon a determination
that the commission is reasonable in relation to the value of the brokerage
services provided, viewed in terms of either a specific transaction or overall
brokerage services provided with respect to the Funds' portfolio transactions by
such broker or dealer. Any such research services would be available for use on
all investment advisory accounts of the Adviser or JH Advisers International.
The Funds may from time to time allocate brokerage on the basis of sales of
their shares. Review of compliance with these policies, including evaluation of
the overall reasonableness of brokerage commissions paid, is made by the Board
of Trustees.
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<PAGE>
The Adviser places all orders for purchases and sales of portfolio
securities of the Funds. In selecting broker-dealers, the Adviser may consider
research and brokerage services furnished to them. The Adviser may use this
research information in managing the Funds' assets, as well as assets of other
clients.
Municipal securities, foreign debt securities and Government Securities
are generally traded on the over-the-counter market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. The Managed Tax-Exempt Fund, Global Income Fund, Sovereign Government
Fund and Gold & Government Fund (with respect to Government Securities in its
portfolio) will primarily engage in transactions with these dealers or deal
directly with the issuer. Prices paid to the dealer will generally include a
"spread", which is the difference between the prices at which the dealer is
willing to purchase and sell the specific security at that time.
During the fiscal year ended October 31, 1993, Freedom Investment Trust
paid $161,459 in negotiated brokerage commissions on behalf of the Funds of
which $22,233 was attributable to the Gold & Government Fund, $3,000 was
attributable to Sovereign Government Fund, $49,951 was attributable to the
Regional Bank Fund and $86,275 was attributable to the Sovereign Achievers Fund.
During the fiscal year ended October 31, 1994, Freedom Investment Trust paid
$833,722 in brokerage commissions on behalf of the Funds, of which $10,051 was
attributable to the Managed Tax-Exempt Fund, $512,936 was attributed to the
Regional Bank Fund, $232,625 was attributable to the Sovereign Achievers Fund,
$48,650 was attributable to the Gold & Government Fund and $29,450 was
attributable to Sovereign Government Fund. During the fiscal year ended October
31, 1995, Freedom Investment Trust paid $1,043,663 in negotiated brokerage
commissions on behalf of the Funds of which $109,757 was attributable to the
Gold & Government Fund, $589,066 was attributable to the Regional Bank Fund and
$237,015 was attributable to the Sovereign Achievers Fund and $107,825 was
attributable to Sovereign U.S. Government Income Fund.
During the fiscal year ended October 31, 1993, Freedom Investment Trust
II paid $806,269 in brokerage commissions on behalf of the Global Fund and none
on behalf of the Global Income Fund. During the fiscal year ended October 31,
1994, Freedom Investment Trust II paid $509,845 in brokerage commissions on
behalf of the Global Fund and no brokerage commissions on behalf of the Global
Income Fund. During the fiscal year ended October 31, 1995, Freedom Investment
Trust II paid $525,839 in negotiated brokerage commissions on behalf of the
Global Fund and $24,400 on behalf of the Global Income Fund.
When a Fund engages in an option transaction, ordinarily the same
broker will be used for the purchase or sale of the option and any transactions
in the securities to which the option relates. The writing of calls and the
purchase of puts and calls by a Fund will be subject to limitations established
(and changed from time to time) by each of the Exchanges governing the maximum
number of puts and calls covering the same underlying security which may be
written or purchased by a single investor or group of investors acting in
concert, regardless of whether the options are written or purchased on the same
or different Exchanges, held or written in one or more accounts or through one
or more brokers. Thus, the number of options which a Fund may
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<PAGE>
write or purchase may be affected by options written or purchased by other
investment companies and other investment advisory clients of the Adviser and
its affiliates or JH Advisers International. An Exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose certain other sanctions.
In the U.S. Government securities market, securities are generally
traded on a "net" basis with dealers acting as principal for their own account
without a stated commission, although the price of the security usually includes
a profit to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid.
Municipal securities are generally traded on the over-the-counter
market on a "net" basis without a stated commission, through dealers acting for
their own account and not as brokers. The Managed Tax-Exempt Fund will primarily
engage in transactions with these dealers or deal directly with the issuer.
Prices paid to a municipal securities dealer will generally include a "spread",
which is the difference between the prices at which the dealer is willing to
purchase and sell the specific security at that time.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Corporation and its subsidiaries,
two of which, Tucker Anthony Incorporated ("Tucker Anthony"), John Hancock
Distributors, Inc. and Sutro & Company, Inc. ("Sutro"), are broker dealers
(together, "Affiliated Brokers"). The Trusts' Boards of Trustees have
established that any portfolio transaction for the Funds may be executed through
Affiliated Brokers if, in the judgment of the Adviser or JH Advisers
International, as the case may be, the use of Affiliated Brokers is likely to
result in price and execution at least as favorable as those of other qualified
brokers, and if, in the transaction, Affiliated Brokers charges the Funds a
commission rate consistent with those charged by Affiliated Brokers to
comparable unaffiliated customers in similar transactions. Affiliated Brokers
will not participate in commissions in brokerage given by a Fund to other
brokers or dealers and neither will receive any reciprocal brokerage business
resulting therefrom. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which better
prices and executions may be obtained elsewhere. Affiliated Brokers will not
receive any brokerage commissions for orders they execute for a Fund in the
over-the-counter market. A Fund will in no event effect principal transactions
with Affiliated Brokers in the over-the-counter securities in which Affiliated
Brokers makes a market.
Approximately 0.5% of Freedom Investment Trust's aggregate dollar
amount of transactions involving the payment of commissions were effected
through Tucker Anthony for the fiscal year ended October 31, 1993. During the
fiscal year ended October 31, 1993, Freedom Investment Trust paid $7,303 in
brokerage commissions to Tucker Anthony, $6,620 of which was attributable to
Gold & Government Trust and $683 of which was attributable to Regional Bank
Fund. Commissions paid to Tucker Anthony represent approximately 3.5% of the
total brokerage commissions paid by Freedom Investment Trust for the fiscal year
ended October 31, 1993. During the fiscal year ended October 31, 1994, Freedom
Investment Trust paid $3,962 in brokerage commissions to Tucker Anthony, $1,750
of which was attributable to Gold & Government Fund. Commissions paid to Tucker
Anthony represent approximately 0.5% of the total brokerage commissions paid by
Freedom Investment Trust for the fiscal year ended October
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<PAGE>
31, 1994. Approximately 2% of Freedom Investment Trust's aggregate dollar amount
of transactions involving the payment of commissions were effected through
Tucker Anthony for the fiscal year ended October 31, 1994. During the fiscal
year ended October 31, 1995, Freedom Investment Trust paid $2,800 in brokerage
commissions to Tucker Anthony which was attributable to Regional Bank Fund.
Commissions paid to Tucker Anthony represent less than 1% of the total brokerage
commissions paid by Freedom Investment Trust for the fiscal year ended October
31, 1995.
During the fiscal periods ended October 31, 1993, 1994 and 1995 no
brokerage commissions were paid to Affiliated Brokers in connection with the
portfolio transactions of either the Global Fund or the Global Income Fund.
Other investment advisory clients advised by the Adviser or JH Advisers
International, as the case may be, may also invest in the same securities as a
Fund. When these clients buy or sell the same securities at substantially the
same time, the Adviser or JH Advisers International may average the transactions
as to price and allocate the amount of available investments in a manner which
the Adviser or JH Advisers International believes to be equitable to each
client, including the Funds. In some instances, this investment procedure may
adversely affect the price paid or received by a Fund or the size of the
position obtainable for it. On the other hand, to the extent permitted by law,
the Adviser or JH Advisers International may aggregate the securities to be sold
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 such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended October 31,
1995, Regional Bank paid $159,705, Sovereign Achievers paid $36,176, Gold &
Government paid $16,150, Global paid $4,704 and Special Opportunities paid
$70,270.
DISTRIBUTIONS
Government Fund, Managed Tax-Exempt Fund and Global Income Fund declare
dividends from net investment income daily and pay dividends monthly.
Distribution of net long-term capital gains, if any, recognized on other
portfolio investments for the fiscal year, which ends October 31, will be made
at least annually.
Quarterly each shareholder of Government Fund, Managed Tax-Exempt Fund
and Global Income Fund will receive a statement setting forth the amount of the
monthly or daily dividends, as the case may be, paid that month from net
investment income for the preceding period. If any of such monthly or daily
dividends were made from sources other than (i) net income for the current or
preceding fiscal year, or accumulated undistributed net income, or both (not
including in either case profits or losses from the sale of securities or other
assets) or (ii) accumulated
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<PAGE>
undistributed net profits from the sale of securities or other assets (in each
case determined in accordance with generally accepted accounting principles),
such statement will indicate what portion of the distribution per share was made
from the sources referred to in (i) and (ii) above and from paid-in surplus or
other capital sources.
A shareholder of Government Fund, Managed Tax-Exempt Fund and/or Global
Income Fund will not be credited with a monthly or daily dividend, as the case
may be, until payment for shares purchased is received by the Funds' transfer
agent. Dividends normally will be paid in the form of additional full and
fractional shares at the net asset value determined on the payment date, unless
the shareholder elects to receive dividends in cash as described in the
respective Prospectus. If a shareholder redeems the entire value of his account
in any of these Funds, the amount of dividends declared but unpaid on his shares
through the date preceding the date of redemption will be paid on the next
succeeding dividend payment date.
Gold & Government Fund and Regional Bank Fund. Each Fund will
distribute net short-term capital gains, if any, quarterly, and net long-term
capital gains, if any, at least annually after the close of their fiscal year
(October 31). Sovereign Achievers Fund will distribute net short-term capital
gains, if any, semi-annually, and net long-term capital gains, if any, at least
annually after the close of their fiscal year (October 31).
MANAGED TAX-EXEMPT FUND. Dividends from net investment income are
declared daily and paid monthly. You will not be credited with a daily dividend
or become a shareholder until payment for shares of a Fund is received by Fund
Services, the Funds' transfer agent. The net investment income of the Fund for
dividend purposes consists of interest earned on portfolio securities, less
expenses, in each case computed since the most recent determination of the net
asset value. If you redeem the entire value of your account in a Fund, you will
receive a separate amount by check or wire representing all dividends declared
but unpaid, in addition to the net asset value of the shares redeemed. The Funds
will distribute net realized short-term capital gains, if any, quarterly and the
Fund will distribute net realized long-term capital gains, if any, at least
annually after the close of our fiscal year (October 31).
Certain realized gains or losses on the sale or retirement of
international bonds held by the Global Income Fund, to the extent attributable
to fluctuations in currency exchange rates, as well as certain other gains or
losses attributable to exchange rate fluctuations, must be treated as ordinary
income or loss for federal income tax purposes. Such income or loss may increase
or decrease (or possibly eliminate) the Fund's investment income available for
distribution. If, under rules governing the tax treatment of foreign currency
gains and losses, the Fund's investment income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gain. Your tax basis in your Global Income Fund
shares will be reduced to the extent that an amount distributed to you is
treated as a return of capital and distributions after your basis has been
reduced on zero will generally be treated as capital gains.
The per share dividends on the Class B shares will be lower than the
per share dividends on the Class A shares of the Funds as a result of the higher
distribution fee applicable with respect to the Class B shares.
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<PAGE>
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 Funds. The Gold &
Government Fund, Regional Bank Fund, Sovereign Achievers Fund and Global Fund
pays Investor Services an annual fee of $16.00 for each Class A shareholder and
of $18.50 for each Class B shareholder. The Government Fund and Global Income
Fund pay Investor Services an annual fee of $20.00 for each Class A shareholder
and $22.50 for each Class B shareholder. The Managed Tax Exempt Fund pays
Investor Services an annual fee of $19.00 for each Class A shareholder and
$21.50 for each Class B shareholder. Each Fund also pays certain out-of-pocket
expenses and these expenses are aggregated and charged to each Fund and
allocated to each class on the basis of the relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a custodian
agreement between the Trust and Investors Bank & Trust Company, 24 Federal
Street, Boston, Massachusetts 02110. Under the custodian agreement, Investors
Bank & Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Price Waterhouse LLP, 160
Federal Street, Boston, Massachusetts, 02110. Price Waterhouse LLP audits and
renders an opinion on each Fund's annual financial statements and reviews each
Fund's annual Federal income tax return.
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APPENDIX A
DESCRIPTION OF BOND RATINGS*
Moody's Bond ratings
- --------------------
Bonds. "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 likely 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 grater 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 sometime 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 the 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.
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
- ------------
*As described by the rating companies themselves.
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Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Standard & Poor's Bond ratings
- ------------------------------
"AAA. Debt rated 'AAA' has the highest rating by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA. Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A. Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB. Debt rated 'BBB' is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Debt rated "BB," OR "B," is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and pay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major risk exposures to adverse conditions.
UNRATED. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
- --------------------------------
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
77
<PAGE>
Standard & Poor's Commercial Paper Ratings
- ------------------------------------------
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
78
<PAGE>
JOHN HANCOCK TAX FREE BOND FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS - (UNAUDITED)
JUNE 3O, 1996
Pro forma information is intended to provide shareholders of John Hancock
Managed Tax Exempt Fund (JHMTE) with information about the impact of the
proposed merger by indicating how the merger might have affected information had
the merger been consummated as of June 30, 1995.
The pro forma combined statements of assets and liabilities and results of
operations as of June 30, 1996, have been prepared to reflect the merger of John
Hancock Tax Free Bond (JHTFB) and JHMTE after giving effect to pro forma
adjustments described in the notes listed below.
a. Acquisition by JHTFB of all of the net assets of JHMTE and issuance of
JHTFB Class A and Class B shares in exchange for all of the outstanding
Class A and Class B shares, respectively of JHMTE.
b. For JHMTE, the amounts for income, expense, and realized and unrealized
gain (loss) on investments and financial futures contracts are determined
by annualizing 241 days actual numbers for the period of starting from the
fiscal year ended October 31, 1995 to June 28, 1996.
c. The investment advisory fee was adjusted to reflect the application of the
fee structure in effect for JHTFB: 0.55% of the first $500,000,000 of the
Fund's average daily net asset value, 0.50% of the next $500,000,000, and
0.45% of the Fund's average daily net assets in excess of $1,000,000,000.
d. The 12b-1 fee was adjusted to reflect the application of the fee structure
which has been in effect for JHTFB: 0.15% of Class A average daily net
assets and 0.90% of Class B average daily net assets.
e. The actual expenses incurred by JHTFB and JHMTE for various expenses
included on a pro forma basis were reduced to reflect the estimated savings
arising from the merger.
f. The expense limitation is adjusted to reflect the application of JHTFB's
expense limits in effect: 0.70% of the Fund's average daily net assets,
including management fee and other expenses but not including the 12b-1
fee.
<PAGE>
JOHN HANCOCK TAX FREE BOND
<TABLE>
PROFORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
(UNAUDITED)
<CAPTION>
Tax Managed Pro
free tax exempt forma
bond Fund Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
- ------
Investments, at value 660,566,903 200,876,649 - 861,443,552
Receivable for shares sold 76,883 32,348 - 109,231
Receivable for investment sold 11,184,869 4,589,371 - 15,774,240
Interest Receivable 14,414,845 3,447,243 - 17,862,088
Segregated assets (futures) 0 0 - 0
Receivable from JH Advisers, Inc. 421,202 0 - 421,202
Other assets 54,277 144,392 - 198,669
----------- ----------- ----------- -----------
Total Assets 686,718,979 209,090,003 - 895,808,982
LIABILITIES:
- -----------
Temporary overdraft of cash 4,215,975 2,169,675 - 6,385,650
Dividend Payables 103,970 28,931 - 132,901
Payable for investments repurchased 29,751,854 7,697,370 - 37,449,224
Payable for shares repurchased 538,433 56,332 - 594,765
Payable for futures variation margin 1,012,500 0 - 1,012,500
Payable to JH Advisers, Inc. 319,420 158,277 - 477,697
Accounts payable and accrued expenses 286,859 (2,149) - 284,710
----------- ----------- ----------- -----------
36,229,011 10,108,436 - 46,337,447
NET ASSETS:
- ----------
Capital paid-in 638,629,747 189,202,952 - 827,832,699
Accumulated net realized gain (loss)
on investments and finacial contracts (12,821,223) 976,830 - (11,844,393)
Net unrealized appreciation of investments
and financial futures contracts 24,735,701 8,731,614 - 33,467,315
Undistributed net investment income (54,257) 70,171 - 15,914
----------- ----------- ----------- -----------
Net Assets 650,489,968 198,981,567 0 849,471,535
=========== =========== =========== ===========
NET ASSETS:
Tax Free Bond Fund
Class A 569,366,932 - 39,793,505 (a) 609,160,437
Class B 81,123,036 - 159,188,062 (a) 240,311,098
Managed Tax Exempt Fund
Class A - 39,793,505 ( 39,793,505)(a) 0
Class B - 159,188,062 (159,188,062)(a) 0
----------- ----------- ----------- -----------
650,489,968 198,981,567 0 849,471,535
=========== =========== =========== ===========
SHARES OUTSTANDING:
Tax Free Bond Fund
Class A 55,582,256 - 3,884,688 (a) 59,466,944
Class B 7,918,992 - 15,539,470 (a) 23,458,462
Managed Tax Exempt Fund
Class A - 3,518,903 3,518,903)(a) 0
Class B - 14,072,611 (14,072,611)(a) 0
NET ASSET VALUE PER SHARE:
Tax Free Bond Fund
Class A $10.24 - $10.24
Class B $10.24 - $10.24
Tax Exempt Income Fund
Class A - $11.31 -
Class B - $11.31 -
</TABLE>
See Notes to Proforma Combined Financial Statements
<PAGE>
JOHN HANCOCK TAX FREE BOND
<TABLE>
PROJECTED PROFORMA COMBINED STATEMENT OF OPERATIONS
JUNE 30, 1996
(UNAUDITED)
<CAPTION>
Tax Managed Pro
Free Tax Exempt Forma
Bond Fund (b) Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income
Interest $16,854,850 $13,663,454 $ - $30,518,304
Expenses
Management Fee 1,416,410 $ 1,265,812 (91,796)(c) $ 2,590,426
Distribution/Service Fee
Class A 276,207 123,804 (61,087)(d) 338,924
Class B 676,893 1,663,621 (135,181)(d) 2,205,333
Transfer Agent Fee 484,960 159,282 0 644,242
Registration & Filing Fees 43,233 25,827 (17,265)(e) 51,795
Custodian Fee 119,462 101,462 (42,535)(e) 178,389
Auditing 52,436 46,482 (43,918)(e) 55,000
Legal Fees 21,098 7,989 0 29,087
Trustee Fees 57,585 39,567 0 97,152
Printing 51,072 30,975 (20,512)(e) 61,535
Miscellaneous 10,983 8,749 (4,934)(e) 14,798
----------- ----------- --------- -----------
Gross Fund Total Expenses 3,210,339 3,473,570 (417,228) 6,266,681
----------- ----------- --------- -----------
Less Expense Reductions (36,237) 0 0 (36,237)
Less Expense Reimbursement (418,710) (105,484) 98,675 (f) (425,519)
----------- ----------- --------- -----------
Net Fund Total Expenses 2,755,392 3,368,086 (318,553) 5,804,925
----------- ----------- --------- -----------
Net Investment Income $14,099,458 $10,295,368 $ 318,553 $24,713,379
----------- ----------- --------- -----------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contract
Net Realized gain (loss) on investments sold (1,889,466) 1,734,570 0 (154,896)
Net Realized gain (loss) on futures contracts 1,616,060 685,959 0 2,302,019
Change in appreciation/depreciation
of investments 10,985,822 (5,616,143) 0 5,369,679
Change in appreciation/depreciation
of futures contracts (3,018,594) (440,795) 0 (3,459,389)
----------- ----------- --------- -----------
Net Realized and Unrealized Gain on
Investments and Futures Contracts 7,693,822 (3,636,409) 0 4,057,413
----------- ----------- --------- -----------
Net Increase in Net Assets Resulting
from Operations $21,793,280 $ 6,658,959 $ 318,553 $28,770,792
=========== =========== ========= ===========
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS
June 30, 1996 (Unaudited)
<TABLE>
- -----------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Tax Free Bond Fund and Managed
Tax Exempt Fund combined on June 30, 1996. The tax-exempt long-term bonds are further broken down by state
and each state by a list of securities held by the funds.
<CAPTION>
---------------------
TAX FREE BOND
- -----------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA 1.23%
Birmingham, City of,
GO Iss of 1989 7.350 03-01-14 A1***
Citronelle Industrial Development Board,
Poll Control Rev Stauffer Chemical Co
Proj 1982 8.000 12-01-12 A1***
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy
Serv Co Proj 6.950 01/01/20 BBB- 5,250 5,462,310
----------
5,462,310
ALASKA 0.53%
Alaska Housing Finance Corp,
Coll Home Mtg Ser A-3 GNMA/FNMA Coll 7.700 12-01-13 AAA3
Coll Home Mtg Ser B-1 GNMA Coll 7.650 06-01-24 AAA4
Coll Home Mtg Ser B-2 GNMA Coll 7.875 06-01-24 AAA4
Ins Mtg Prog 1990 1st Ser 7.750 12/01/14 A+ 1,000 1,028,020
Valdez Alaska Marine Terminal,
Rev Ref Sohio Pipe Line Co. Proj Ser 1985 7.125 12-01-25 AA-
----------
1,028,020
ARIZONA 2.91%
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp
Proj 8.200 06/01/21 BBB1 2,150 2,310,906
Arizona Municipal Financing Program,
Cert of Part Ser 25 7.875 08-01-14 AAA4
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public Service
Co Palo Verde Proj 6.375 08/15/23 BB 8,550 7,988,949
Phoenix Arizona Civic Improvement Corp,
Wtr Sys Rev Util Imp Jr. Lien 5.600 07-01-17 AA-
Pima, County of,
Swr Rev Ref Ser 1991 6.750 07-01-15 AAA
Swr Rev Ref Prerefunded Ser 1991 6.750 07-01-15 AAA
Salt River Project Agricultural Improvement and
Power District, Salt River Proj Elec Sys Rev
Ref Ser 1993C 5.250 01-01-19 AA 3,000 2,741,340
Scottsdale Industrial Development Auth,
Hosp Rev Ref Ser 1997A Scottsdale Memorial
Hosps 6.000 09-01-12 AAA 4,000 3,897,520
Hosp Rev Ref Ser 1997A Scottsdale Memorial
Hosps 6.125 09-01-17 AAA 3,520 3,432,493
----------
20,371,208
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ----------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market **
State - Issuer - Description Omitted) Value* Omitted) Value* %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA
Birmingham, City of,
GO Iss of 1989 750 805,095 750 805,095 6.80%
Citronelle Industrial Development Board,
Poll Control Rev Stauffer Chemical Co
Proj 1982 500 554,285 500 554,285 7.20
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy
Serv Co Proj 3,500 3,641,540 8,750 9,103,850 6.68
--------- ----------
5,000,920 10,463,230
ALASKA
Alaska Housing Finance Corp,
Coll Home Mtg Ser A-3 GNMA/FNMA Coll 150 150,619 150 150,619 7.60
Coll Home Mtg Ser B-1 GNMA Coll 2,000 2,095,900 2,000 2,095,900 7.30
Coll Home Mtg Ser B-2 GNMA Coll 130 130,892 130 130,892 7.80
Ins Mtg Prog 1990 1st Ser 1,000 1,028,020 7.54
Valdez Alaska Marine Terminal,
Rev Ref Sohio Pipe Line Co. Proj Ser 1985 1,000 1,094,750 1,000 1,094,750 6.50
--------- ----------
3,472,161 4,500,181
ARIZONA
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp
Proj 2,150 2,310,906 7.63
Arizona Municipal Financing Program,
Cert of Part Ser 25 1,000 1,259,780 1,000 1,259,780 6.20
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public Service
Co Palo Verde Proj 8,550 7,988,949 6.82
Phoenix Arizona Civic Improvement Corp,
Wtr Sys Rev Util Imp Jr. Lien 2,000 1,963,680 2,000 1,963,680 5.70
Pima, County of,
Swr Rev Ref Ser 1991 540 583,389 540 583,389 6.20
Swr Rev Ref Prerefunded Ser 1991 460 504,643 460 504,643 6.10
Salt River Project Agricultural Improvement and
Power District, Salt River Proj Elec Sys Rev
Ref Ser 1993C 3,000 2,741,340 5.75
Scottsdale Industrial Development Auth,
Hosp Rev Ref Ser 1997A Scottsdale Memorial
Hosps 4,000 3,897,520 6.16
Hosp Rev Ref Ser 1997A Scottsdale Memorial
Hosps 3,520 3,432,493 6.28
--------- ----------
4,311,492 24,682,700
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State -Issuer-Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARKANSAS
Arkansas Develpment Finance Auth, 0.08%
Single Family Mtg Rev Ref Ser 1991 A 8.000 08-15-11 AA
CALIFORNIA 12.45%
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc 5.875 05/01/20 A 4,000 3,805,440
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj 6.350 10/01/07 AAA 4,090 4,379,286
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice Gen Proj Ser 1993 6.200 07/01/20 BBB- 5,000 4,914,200
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center 8.400 04/01/15 B*** 470 417,713
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A Zero 01/01/19 BBB- 36,600 8,195,838
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A Zero 01/01/20 BBB- 10,000 2,090,500
Toll Rd Rev Fixed Rate Current Int Ser 1995A 6.000 01/01/16 BBB- 21,500 20,945,945
Long Beach Aquarium of the Pacific,
Rev 1995 Ser A Aquarium of the Pacific Proj 6.125 07-01-23 BBB 7,500 6,938,550
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant Proj 8.000 06/01/10 A 1,000 1,088,430
Madera, County of,
Cert of Part Valley Children's Hosp Proj 6.500 03/15/15 AAA 13,185 14,339,742
Orange, County of,
Cert of Part 1996 Ser A 5.875 07-01-19 AAA 5,000 4,916,400
Sacramento Cogeneration Auth,
Cogeneration Proj Rev Proctor & Gamble Proj 6.500 07-01-21 BBB-
Sacramento Municipal Utilities District,
Ind'l Devel Rev Ref San Diego Gas & Electric Ser C Inflos 8.641# 08-15-18 AAA
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A 7.750 09/01/16 BBB 2,000 2,123,760
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj 5.500 08/01/17 A- 9,130 8,352,946
Cert of Part Ser 1994 Medical Center Fin Proj 5.500 08/01/22 A- 2,500 2,271,975
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec Zero 01/01/10 BBB*** 6,250 2,342,000
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/17 BBB*** 4,900 1,273,363
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/19 BBB*** 5,510 1,250,109
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/20 BBB*** 2,000 423,840
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/14 BBB***
Toll Rd Rev Sr Lien Conv Cap Apprec Zero 01/01/22 BBB***
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding Facil Ser A 6.250 07-01-19 AAA
San Jose Financing Auth,
Rev Ser B Community Facil Proj 5.625 11/15/19 A+ 2,500 2,350,075
----------
92,420,112
COLORADO 3.51%
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
% of (000's Market (000's Market Market**
State - Issuer - Description Net Assets Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARKANSAS
Arkansas Develpment Finance Auth, 0.08%
Single Family Mtg Rev Ref Ser 1991 A 620 666,829 620 666,829 7.40
------- -------
666,829 666,829
CALIFORNIA 12.45%
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc 4,000 3,805,440 6.18
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj 4,090 4,379,286 5.93
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice Gen Proj Ser 1993 2,000 1,965,680 7,000 6,879,880 6.31
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center 470 417,713 9.45
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A 36,600 8,195,838 6.76
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A 10,000 2,090,500 6.86
Toll Rd Rev Fixed Rate Current Int Ser 1995A 21,500 20,945,945 6.16
Long Beach Aquarium of the Pacific,
Rev 1995 Ser A Aquarium of the Pacific Proj 7,500 6,938,550 6.62
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant Proj 1,000 1,088,430 7.35
Madera, County of,
Cert of Part Valley Children's Hosp Proj 13,185 14,339,742 5.98
Orange, County of,
Cert of Part 1996 Ser A 5,000 4,916,400 5.97
Sacramento Cogeneration Auth,
Cogeneration Proj Rev Proctor & Gamble Proj 4,500 4,525,245 4,500 4,525,245 6.40
Sacramento Municipal Utilities District,
Ind'l Devel Rev Ref San Diego Gas & Electric Ser C Inflos 1,000 1,045,000 1,000 1,045,000 8.20
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A 2,000 2,123,760 7.30
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj 9,130 8,352,946 6.01
Cert of Part Ser 1994 Medical Center Fin Proj 2,500 2,271,975 6.05
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec 6,250 2,342,000 8.75
Toll Rd Rev Sr Lien Cap Apprec 9,900 2,407,763 6.68
Toll Rd Rev Sr Lien Cap Apprec 5,000 1,134,400 5,510 1,250,109 6.73
Toll Rd Rev Sr Lien Cap Apprec 2,000 423,840 7.00
Toll Rd Rev Sr Lien Cap Apprec 5,000 1,590,550 5,000 1,590,550 6.70
Toll Rd Rev Sr Lien Conv Cap Apprec 5,000 928,600 5,000 928,600 6.50
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding Facil Ser A 2,000 2,121,420 2,000 2,121,420 5.80
San Jose Financing Auth,
Rev Ser B Community Facil Proj 2,500 2,350,075 5.98
---------- -----------
13,310,895 105,731,007
COLORADO 3.51%
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State -Issuer-Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 6.950 08/31/20 BAA*** 9,000 9,366,660
Colorado Housing Finance Auth,
Single Family Prog Sr Iss A-2 7.625 08-01-17 AA
Single Family Residential Rev Ser C 8.750 09-01-17 Aa***
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref 7.250 11-15-25 AAA 1,980 2,250,725
Airport Sys Rev Ser 1992A Unref Bal 7.250 11-15-25 BBB 5,020 5,575,212
Airport Sys Rev Ser 1994A 7.500 11/15/23 BBB 3,100 3,410,031
Douglas County School District No. Re. 1,
GO Douglas and Elbert Counties Imp Ser 1994A 6.400 12-15-11 AAA ----------
20,602,628
DELAWARE 0.82%
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj 6.750 05/01/19 AAA 4,500 4,824,225
----------
4,824,225
FLORIDA 4.87%
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P. South
Project 7.950 12/01/08 A 4,445 4,907,413
Citrus, County of,
Poll Control Ref Rev Ser 1992A Florida Pwr Corp Crystal Rvr Pwr Plant
Project 6.625 01-01-27 A+
Dade, County of,
Spec Oblig Rev Ref Cap Apprec Ser B Zero 10-01-16 AAA
Florida, State of,
Sunshine Skyway Rev Ser of 1984 10.250 06/01/10 AAA 1,250 1,348,150
Hernando, County of,
Criminal Justice Complex Rev Ser 1986 7.650 07-01-16 AAA
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co 8.500 12-01-14 BBB-*** 1,000 1,091,120
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport 6.000 10-01-17 AAA 5,880 6,080,449
Hillsborough, County of,
Ref Util Rev Ser 1991A 7.000 08-01-14 BBB+ 1,245 1,333,706
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A 5.250 10/01/28 AA 9,000 8,041,230
Lee, County of,
Hosp Board of Directors Hosp Rev Inflos 9.241# 04-01-20 AAA
Nassau, County of,
Poll Control Rev Ref ITT Rayonier Inc Proj 6.200 07-01-15 BBB 1,000 980,540
Orange County Health Facilities Auth,
Hosp Rev Orlando Regional Medical Center 8.860# 10-29-21 AAA
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D 6.750 10/01/17 AA- 2,200 2,499,992
Tampa, City of,
Cap Imp Prog Rev Ser B Iss of 1988 8.375 10-01-18 BBB
----------
26,282,600
GEORGIA 2.81%
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
% of (000's Market (000's Market Market**
State - Issuer - Description Net Assets Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 6,000 6,244,440 15,000 15,611,100 6.68
Colorado Housing Finance Auth,
Single Family Prog Sr Iss A-2 985 1,031,955 985 1,031,955 7.20
Single Family Residential Rev Ser C 390 411,107 390 411,107 8.30
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref 1,980 2,250,725 6.38
Airport Sys Rev Ser 1992A Unref Bal 5,020 5,575,212 6.53
Airport Sys Rev Ser 1994A 3,100 3,410,031 6.82
Douglas County School District No. Re. 1,
GO Douglas and Elbert Counties Imp Ser 1994A 1,400 1,487,710 1,400 1,487,710 6.00
--------- ----------
9,175,212 29,777,840
DELAWARE 0.82%
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj 2,000 2,144,100 6,500 6,968,325 6.30
--------- ----------
2,144,100 6,968,325
FLORIDA 4.87%
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P. South
Project 4,430 4,890,853 8,875 9,798,266 7.20
Citrus, County of,
Poll Control Ref Rev Ser 1992A Florida Pwr Corp Crystal Rvr Pwr Plant
Project 1,250 1,309,113 1,250 1,309,113 6.30
Dade, County of,
Spec Oblig Rev Ref Cap Apprec Ser B 4,630 1,322,235 4,630 1,322,235 6.30
Florida, State of,
Sunshine Skyway Rev Ser of 1984 1,250 1,348,150 9.50
Hernando, County of,
Criminal Justice Complex Rev Ser 1986 500 621,020 500 621,020 6.10
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co 1,000 1,091,120 7.79
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport 5,880 6,080,449 5.80
Hillsborough, County of,
Ref Util Rev Ser 1991A 1,245 1,333,706 6.53
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A 9,000 8,041,230 5.39
Lee, County of,
Hosp Board of Directors Hosp Rev Inflos 2,000 2,150,000 2,000 2,150,000 8.60
Nassau, County of,
Poll Control Rev Ref ITT Rayonier Inc Proj 1,000 980,540 6.32
Orange County Health Facilities Auth,
Hosp Rev Orlando Regional Medical Center 1,000 1,053,750 1,000 1,053,750 8.40
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D 2,200 2,499,992 5.94
Tampa, City of,
Cap Imp Prog Rev Ser B Iss of 1988 3,500 3,718,890 3,500 3,718,890 7.80
---------- ----------
15,065,861 41,348,461
GEORGIA 2.81%
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State -Issuer-Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB 5.700 01/01/19 A 1,000 964,400
Pwr Rev Ser C 5.700 01/01/19 AAA 5,000 4,912,900
Pwr Rev Ser EE 7.250 01/01/24 AAA 2,000 2,393,120
Pwr Rev Ser M 8.375 01/01/20 A 1,000 1,040,000
Pwr Rev Ser Z 5.500 01/01/20 AAA 5,840 5,609,437
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj 6.800 01/01/12 A+ 1,000 1,074,770
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1 6.500 01/01/17 AAA 3,500 3,827,110
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj 7.000 01/01/23 BBB+ 4,000 4,040,720
-----------
23,862,457
ILLINOIS 3.68%
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A 7.500 01/01/16 A+ 2,000 2,115,020
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev Ser 1992 6.750 01/01/12 AAA 3,000 3,162,150
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A American
Airlines Proj 7.875 11/01/25 BB+ 3,000 3,213,300
Skyway Toll Bridge Rev Ref Ser 1994 6.750 01-01-17 BBB- 2,000 2,036,460
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj 5.850 01/15/14 BBB 3,000 2,791,590
Rev Ref Ser A Columbus Cuneo Cabrini Proj 8.500 02/01/15 BBB+ 2,150 2,444,163
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg 6.750 12/01/08 A-*** 1,640 1,683,132
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj 7.000 01/01/07 A- 1,500 1,586,820
Rev Methodist Hlth Serv Corp Ser 1991 B 9.821# 05-01-21 AAA
Rev Swedish-American Hosp 7.400 04-01-20 AAA
Metropolitan Pier and Exposition Auth,
Hosp Facil Rev Ser 1996A McCormick Place Convention Complex 7.000 07-01-26 BBB- 5,000 5,326,100
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners 9.250 10-15-14 BB-*** 1,000 967,500
----------
25,326,235
INDIANA 0.24%
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj 7.500 06-01-26 B*** 2,000 2,012,180
----------
2,012,180
KANSAS 0.52%
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984 10.500 12/01/08 AAA 2,000 2,281,540
Sedgwick, County of,
GNMA Coll Mtg Ln Rev Ser C 8.625 11-01-18 AAA
----------
2,281,540
KENTUCKY 0.74%
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A 6.750 02/01/02 BB 2,000 2,078,100
Rev Spec Facil Delta Airlines Proj Ser 1992A 7.500 02/01/12 BB 2,000 2,128,260
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market**
State - Issuer - Description Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB 1,000 964,400 5.91
Pwr Rev Ser C 5,000 4,912,900 5.80
Pwr Rev Ser EE 2,000 2,393,120 6.06
Pwr Rev Ser M 1,000 1,040,000 8.05
Pwr Rev Ser Z 5,840 5,609,437 5.73
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj 1,000 1,074,770 6.33
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1 3,500 3,827,110 5.94
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj 4,000 4,040,720 6.93
----------
23,862,457
ILLINOIS
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A 2,000 2,115,020 7.09
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev Ser 1992 3,000 3,162,150 6.40
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A American
Airlines Proj 3,000 3,213,300 7.35
Skyway Toll Bridge Rev Ref Ser 1994 2,000 2,036,460 6.63
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj 3,000 2,791,590 6.29
Rev Ref Ser A Columbus Cuneo Cabrini Proj 2,150 2,444,163 7.48
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg 1,640 1,683,132 6.58
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj 1,500 1,586,820 6.62
Rev Methodist Hlth Serv Corp Ser 1991 B 1,000 1,111,250 1,000 1,111,250 8.80
Rev Swedish-American Hosp 750 832,035 750 832,035 6.60
Metropolitan Pier and Exposition Auth,
Hosp Facil Rev Ser 1996A McCormick Place Convention Complex 3,750 3,994,575 8,750 9,320,675 6.57
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners 1,000 967,500 9.56
--------- ----------
5,937,860 31,264,095
INDIANA
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj 2,000 2,012,180 7.45
----------
2,012,180
KANSAS
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984 2,000 2,281,540 9.20
Sedgwick, County of,
GNMA Coll Mtg Ln Rev Ser C 2,055 2,171,971 2,055 2,171,971 8.10
--------- ----------
2,171,971 4,453,511
KENTUCKY
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A 2,000 2,078,100 6.50
Rev Spec Facil Delta Airlines Proj Ser 1992A 2,000 2,128,260 7.05
</TABLE>
Page 4
<PAGE>
<TABLE>
-------------------
TAX FREE BOND
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating*** Omitted) Value*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rev Spec Facil Delta Airline Proj Ser 1992A 7.125 02/01/21 BB 2,000 2,071,620
-----------
LOUISIANA 2.22% 6,277,980
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States Util Co Proj 6.750 10-01-12 BB+ 2,975 2,983,389
Calcasieu Parish Public Trust Auth,
Mtg Rev Ref 1991 Ser A 7.750 06-01-12 A1***
De Soto, Parish of,
Rev Environ Impt Rev Int'l Paper Co Proj Ser A 7.700 11-01-18 A-
Rev Environ Impt Rev Int'l Paper Co Proj Ser B 6.550 04-01-19 A-
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj 6.500 05/15/22 AAA 3,405 3,518,999
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj 7.500 06/01/21 BBB+ 4,000 4,213,120
West Feliciana, Parish of,
Variable Rate Demand Poll Control Rev Ser 1985C
Gulf States Util Co Proj 7.000 11/01/15 BB+ 2,000 2,011,580
-----------
12,727,088
MAINE
Maine State Housing Auth,
Mtg Purchase Ser A-3 7.800 11-15-15 AA-
MARYLAND 0.21%
Maryland State Energy Financing Administration,
Solid Waste Disp Rev Ltd Oblig Recycling Hagerstown Proj 9.000 10-15-16 BB*** 1,900 1,757,595
-----------
1,757,595
MASSACHUSETTS 5.96%
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B 7.875 03/01/21 AAA 2,000 2,297,560
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D 6.750 07/01/24 A+ 2,450 2,543,933
Rev Lowell Gen Hosp Iss Ser A 8.400 06/01/11 BAA1*** 1,100 1,197,031
Rev New England Deaconess Hosp Iss Ser D 6.625 04/01/12 A 3,500 3,620,540
Rev New England Deaconess Hosp Iss Ser D 6.875 04/01/22 A 7,960 8,325,762
Rev New England Medical Center Hosp Iss Ser E 7.875 07/01/11 A- 1,950 2,119,357
Rev St. Elizabeth's Hosp of Boston Ser E 9.880# 08-15-21 AAA
Rev Worcester Polytechnic Institute Ser E 6.750 09/01/11 A+ 2,000 2,155,620
Massachusetts Housing Finance Agency,
Hsg Rev Insured Rental Ser A 6.650 07-01-19 AAA
Residential Dev 1992 Ser A 6.900 11/15/24 AAA 2,700 2,805,948
Single Family Hsg Ser 8 7.700 06/01/17 A+ 1,500 1,585,080
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of
The Commonw 6.750 07/01/17 BBB+ 4,405 4,730,662
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B 6.000 08-01-14 A+ 2,000 2,027,060
Massachusetts State Water Pollution Abatement Trust,
Wtr Poll Rev South Essex Swr District Loan Proj 1994 Ser A 6.375 02-01-15 AA-
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
MANAGED TAX EXEMPT COMBINED
- -------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market **
State - Issuer - Description Omitted) Value* Omitted) Value* %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rev Spec Facil Delta Airline Proj Ser 1992A 2,000 2,071,620 6.88
-----------
6,277,980
LOUISIANA
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States Util Co Proj 2,975 2,983,389 6.73
Calcasieu Parish Public Trust Auth,
Mtg Rev Ref 1991 Ser A 485 520,211 485 520,211 7.20
De Soto, Parish of,
Rev Environ Impt Rev Int'l Paper Co Proj Ser A 2,750 3,096,252 2,750 3,096,252 6.80
Rev Environ Impt Rev Int'l Paper Co Proj Ser B 2,500 2,552,625 2,500 2,552,625 6.40
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj 3,405 3,518,999 6.29
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj 4,000 4,213,120 7.12
West Feliciana, Parish of,
Variable Rate Demand Poll Control Rev Ser 1985C
Gulf States Util Co Proj 2,000 2,011,580 6.96
----------- -----------
6,169,088 18,896,176
MAINE
Maine State Housing Auth,
Mtg Purchase Ser A-3 1,250 1,312,000 1,250 1,312,000 7.40
----------- -----------
1,312,000 1,312,000
MARYLAND
Maryland State Energy Financing Administration,
Solid Waste Disp Rev Ltd Oblig Recycling Hagerstown Proj 1,900 1,757,595 9.73
-----------
1,757,595
MASSACHUSETTS
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B 2,000 2,297,560 6.86
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D 2,450 2,543,933 6.50
Rev Lowell Gen Hosp Iss Ser A 1,100 1,197,031 7.72
Rev New England Deaconess Hosp Iss Ser D 3,500 3,620,540 6.40
Rev New England Deaconess Hosp Iss Ser D 7,960 8,325,762 6.57
Rev New England Medical Center Hosp Iss Ser E 1,950 2,119,357 7.25
Rev St. Elizabeth's Hosp of Boston Ser E 1,000 1,100,000 1,000 1,100,000 8.90
Rev Worcester Polytechnic Institute Ser E 1,840 1,983,170 3,840 4,138,790 6.26
Massachusetts Housing Finance Agency,
Hsg Rev Insured Rental Ser A 5,500 5,633,045 5,500 5,633,045 6.40
Residential Dev 1992 Ser A 2,700 2,805,948 6.51
Single Family Hsg Ser 8 1,000 1,056,720 2,500 2,641,800 7.18
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of
The Commonw 4,405 4,730,662 6.29
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B 2,000 2,027,060 5.92
Massachusetts State Water Pollution Abatement Trust,
Wtr Poll Rev South Essex Swr District Loan Proj 1994 Ser A 1,000 1,050,790 1,000 1,050,790 6.00
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts State Water Resources Auth,
Gen Rev 1995 Ser B 6.250 12-01-12 AAA
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj 7.000 04/01/22 A- 2,750 3,029,400
----------
36,437,953
MICHIGAN 2.08%
Detroit, City of,
GO Unltd Ser 1995 A 6.800 04-01-15 BBB
Michigan Housing Development Auth,
Single Family Mtg Rev Ser A 7.500 06-01-15 AA+
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj 8.250 07-01-12 Baa1*** 2,250 2,406,195
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group 8.100 10-01-13 BBB 4,250 4,611,887
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines Facil 6.750 12/01/15 BB+*** 6,355 6,388,682
----------
13,406,764
MINNESOTA 0.03%
Minnesota Housing Finance Agency,
Single Family Mtg 1990 Ser C 7.700 07-01-14 AA
MISSISSIPPI 1.36%
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc 7.300 05/01/25 BBB- 4,000 4,117,240
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A 9.250 03/01/12 AAA 120 129,478
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Medical Foundation Proj 8.750 01-01-16 Baa*** 2,000 2,185,360
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj 7.000 04/01/22 BAA3*** 5,000 5,145,150
----------
11,577,228
NEBRASKA 0.15%
Omaha Public Power District,
Elec Sys Rev 1992 Ser B 6.200 02/01/17 AA 1,200 1,288,788
----------
1,288,788
NEVADA 1.91%
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj 6.500 12/01/33 BBB- 10,000 9,532,000
Nevada Housing Division,
Single Family Proj Sr Rev Ser 1989 Iss A-1 7.350 04-01-16 AA
Single Family Proj Sr Rev Ser 1990 Iss C-1 7.850 10-01-15 AA
Nevada, State of,
GO Ltd Tax Municipal Bond Bank Proj No. 38 Ser A 6.750 07-01-09 AA
GO Ltd Tax Municipal Bond Bank Proj No. 38 Prerefunded Ser A 6.750 07-01-07 AA
North Las Vegas, City of,
Local Imp Spec Improvement District No. 707 7.100 06-01-16 BB+*** 3,000 3,000,000
Reno, City of,
Hosp Rev St. Mary's Regional Medical Center Ser A 7.750 07-01-07 AAA
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market**
State - Issuer - Description Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Massachusetts State Water Resources Auth,
Gen Rev 1995 Ser B 3,105 3,333,621 3,105 3,333,621 5.80
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj 2,750 3,029,400 6.35
---------- ----------
14,157,346 50,595,299
MICHIGAN
Detroit, City of,
GO Unltd Ser 1995 A 1,315 1,388,009 1,315 1,388,009 6.40
Michigan Housing Development Auth,
Single Family Mtg Rev Ser A 1,415 1,489,231 1,415 1,489,231 7.10
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj 2,250 2,406,195 7.71
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group 1,250 1,356,437 5,500 5,968,324 7.46
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines Facil 6,355 6,388,682 6.71
---------- ----------
4,233,677 17,640,441
MINNESOTA
Minnesota Housing Finance Agency,
Single Family Mtg 1990 Ser C 260 274,313 260 274,313 7.30
---------- ----------
274,313 274,313
MISSISSIPPI
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc 4,000 4,117,240 7.09
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A 120 129,478 8.57
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Medical Foundation Proj 2,000 2,185,360 8.01
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj 5,000 5,145,150 6.80
----------
11,577,228
NEBRASKA
Omaha Public Power District,
Elec Sys Rev 1992 Ser B 1,200 1,288,788 5.77
----------
1,288,788
NEVADA
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj 10,000 9,532,000 6.82
Nevada Housing Division,
Single Family Proj Sr Rev Ser 1989 Iss A-1 940 972,891 940 972,891 7.10
Single Family Proj Sr Rev Ser 1990 Iss C-1 340 357,218 340 357,218 7.40
Nevada, State of,
GO Ltd Tax Municipal Bond Bank Proj No. 38 Ser A 25 27,337 25 27,337 6.10
GO Ltd Tax Municipal Bond Bank Proj No. 38 Prerefunded Ser A 975 1,076,254 975 1,076,254 6.10
North Las Vegas, City of,
Local Imp Spec Improvement District No. 707 3,000 3,000,000 7.10
Reno, ity of,
Hosp Rev St. Mary's Regional Medical Center Ser A 480 516,298 480 516,298 7.20
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hosp Rev St. Mary's Regional Medical Center Prerefunded Ser A 7.750 07-01-21 AAA
----------
12,532,000
NEW JERSEY 1.86%
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj 9.875 01-01-21 BB+*** 1,100 1,099,978
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens 8.500 11-01-16 BB+*** 3,630 3,610,543
Rev Poll Control General Motors Corp Proj 5.350 04-01-09 A- 1,500 1,448,760
Rev Ref Ind'l Development Newark Airport Marriott Hotel Proj 7.000 10-01-14 BB*** 4,000 3,986,760
Rev Ref Ser J Holt Hauling Proj 8.500 11-01-23 BBB*** 2,500 2,501,850
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 10.375 01/01/03 AAA 1,740 2,082,797
Ser 1991 C 6.500 01/01/16 AAA
----------
14,730,688
NEW YORK 13.65%
Islip Community Development Agency
Dev Rev NY Institute of Technology Proj 7.500 03-01-26 BB-*** 2,500 2,504,225
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1 8.500 07-01-17 AAA 1,000 1,067,150
Transit Facil Rev Ser J 6.500 07-01-18 AAA
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj 7.950 01/01/28 BB*** 3,250 3,348,767
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp 6.875 04/01/19 A 8,700 9,573,132
Rev Ser 1991 C 7.000 04-01-10 A
New York State Dormitory Auth,
City Univ Ref Iss 1988B 8.125 07/01/08 BBB 1,000 1,088,160
Cornell Univ Rev Ser 1990A 7.375 07/01/30 AA 1,000 1,109,420
State Univ Ed Facil Rev Iss Ser 1990B 7.500 05/15/11 BBB+ 500 576,845
City Univ Sys Consol Rev 2nd Generation Ser 1993A 5.750 07-01-09 BBB
City Univ Sys Consol Rev 2nd Generation Ser 1993A 6.000 07-01-20 BBB
City Univ Sys Consol Rev Ser 1995A 5.625 07-01-16 BBB
State Univ Ed Facil Rev Ser 1990B 7.000 05-15-16 BBB+
State Univ Ed Facil Rev Ser 1993A 5.500 05-15-13 BBB+
State Univ Ed Facil Rev Ser 1993A 5.500 05-15-19 BBB+
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj 7.150 06/01/20 BB+ 6,000 5,902,380
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj 7.500 01/01/26 A+ 2,000 2,142,040
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A 7.500 06/15/12 A 3,770 4,147,264
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A 8.000 05/01/11 AAA 2,000 2,435,700
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B 7.875 08/15/08 BBB+ 500 558,575
Mental Hlth Serv Facil Imp Rev 1990 Ser B 7.875 08/15/20 BBB+ 460 514,068
Mental Hlth Serv Facil Imp Rev 1991 Ser A 7.750 08/15/11 BBB+ 540 602,122
Mental Hlth Serv Facil Imp Rev 1991 Ser A 7.750 08/15/11 AAA 1,460 1,670,094
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market**
State - Issuer - Description Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hosp Rev St. Mary's Regional Medical Center Prerefunded Ser A 720 780,818 720 780,818 7.10
--------- ----------
3,730,816 16,262,816
NEW JERSEY
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj 1,100 1,099,978 9.88
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens 3,630 3,610,543 8.55
Rev Poll Control General Motors Corp Proj 1,500 1,448,760 5.54
Rev Ref Ind'l Development Newark Airport Marriott Hotel Proj 4,000 3,986,760 7.02
Rev Ref Ser J Holt Hauling Proj 2,500 2,501,850 8.49
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 1,740 2,082,797 8.67
Ser 1991 C 1,000 1,103,470 1,000 1,103,470 5.80
--------- ----------
1,103,470 15,834,158
NEW YORK
Islip Community Development Agency
Dev Rev NY Institute of Technology Proj 2,500 2,504,225 7.49
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1 1,000 1,067,150 7.97
Transit Facil Rev Ser J 1,000 1,045,630 1,000 1,045,630 6.20
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj 3,250 3,348,767 7.72
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp 2,000 2,200,720 10,700 11,773,852 6.25
Rev Ser 1991 C 2,000 2,197,160 2,000 2,197,160 6.30
New York State Dormitory Auth,
City Univ Ref Iss 1988B 1,000 1,088,160 7.47
Cornell Univ Rev Ser 1990A 1,000 1,109,420 6.65
State Univ Ed Facil Rev Iss Ser 1990B 500 576,845 6.50
City Univ Sys Consol Rev 2nd Generation Ser 1993A 1,000 982,940 1,000 982,940 5.80
City Univ Sys Consol Rev 2nd Generation Ser 1993A 1,000 980,070 1,000 980,070 6.10
City Univ Sys Consol Rev Ser 1995A 1,000 940,030 1,000 940,030 5.90
State Univ Ed Facil Rev Ser 1990B 5,000 5,285,500 5,000 5,285,500 6.60
State Univ Ed Facil Rev Ser 1993A 3,000 2,805,720 3,000 2,805,720 5.80
State Univ Ed Facil Rev Ser 1993A 2,000 1,841,340 2,000 1,841,340 5.90
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj 6,000 5,902,380 7.27
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj 2,000 2,142,040 7.00
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A 600 660,042 4,370 4,807,306 6.82
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A 2,000 2,435,700 6.57
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B 500 558,575 7.05
Mental Hlth Serv Facil Imp Rev 1990 Ser B 460 514,068 7.05
Mental Hlth Serv Facil Imp Rev 1991 Ser A 540 602,122 6.95
Mental Hlth Serv Facil Imp Rev 1991 Ser A 1,460 1,670,094 6.78
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2 7.950 10/01/15 AA*** 1,135 1,193,294
New York State Power Auth,
Gen Purpose Ser V 7.875 01/01/13 AAA 2,400 2,585,664
Gen Purpose Ser V 8.000 01/01/17 AA 1,850 1,995,040
New York State Urban Development Corp,
Rev Ref Center for Ind'l Innovation Proj 5.500 01-01-13 BBB
Rev Ref Correctional Cap Facil Ser A 5.500 01-01-16 BBB
New York, City of,
GO Fiscal 1991 Ser D 8.000 08-01-04 BBB+ 250 277,782
GO Fiscal 1991 Ser F 8.200 11-15-03 BBB+ 1,250 1,406,175
GO Fiscal 1992 Ser A 7.750 08-15-12 BBB+ 2,000 2,209,040
GO Fiscal 1992 Ser D 7.700 02-01-09 BBB+ 1,000 1,109,050
GO Fiscal 1992 Ser H 7.000 02-01-08 BBB+ 2,000 2,135,860
GO Fiscal 1995 Ser B 7.000 08-15-16 BBB+ 3,000 3,138,150
GO Fiscal 1996 Ser A 6.250 08-01-09 BBB 3,150 3,124,800
GO Fiscal 1996 Ser A 6.250 08-01-10 BBB+ 2,000 1,974,100
GO Rev Ref Ad Valorem Property Tax Ser D 5.750 08-15-13 BBB+ 3,170 2,941,665
Port Authority of New York and New Jersey,
Consol Rev Seventy Second Ser 1992 7.350 10-01-27 AA-
Spec Proj Ser 4 5th Installment KIAC Partners Proj 6.750 10-01-19 BBB+*** 9,350 9,303,063
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L 8.125 01/01/12 A+ 1,750 1,877,698
Gen Purpose Rev Ser R 7.375 01/01/16 AAA 1,600 1,764,992
Spec Oblig Ref Ser 1991B 6.875 01/01/15 A- 2,300 2,504,079
Gen Purpose Rev Zero 01-01-21 AAA
Gen Purpose Rev Ser X 6.500 01-01-19 A+
Gen Purpose Rev Ser Y 6.125 01-01-21 A+
Rev Ref Ser 1987 L 8.000 01-01-07 A+
---------
76,780,394
NORTH CAROLINA 2.57%
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A 5.750 01-01-19 BBB+ 4,000 3,665,880
Pwr Sys Rev Ref Ser 1993B 6.000 01-01-22 BBB+ 2,000 1,909,700
Pwr Sys Rev Ref Ser 1993C 5.000 01-01-21 BBB+ 5,000 4,193,850
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 5.750 01-01-15 AAA 7,410 7,335,085
Catawba Elec Rev Ser 1993 5.000 01-01-15 AAA 5,220 4,744,354
----------
21,848,869
OHIO 4.08%
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A 7.000 11-15-24 AAA 6,200 6,847,404
Elec Sys Rev First Mtg Ser 1994A 7.000 11-15-16 AAA
Cuyahoga County of,
Hosp Imp Rev Deaconess Hosp Of Cleveland Proj Ser 1985 B 7.450 10-01-18 A1***
Hosp Rev Meridia Hlth Sys Ser 1991 7.000 08-15-23 A
Franklin, County of,
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
% of (000's Market (000's Market Market**
State - Issuer - Description Net Assets Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2 560 588,762 1,695 1,782,056 7.56
New York State Power Auth,
Gen Purpose Ser V 2,400 2,585,664 7.31
Gen Purpose Ser V 1,850 1,995,040 7.42
New York State Urban Development Corp,
Rev Ref Center for Ind'l Innovation Proj 3,125 2,925,437 3,125 2,925,437 5.80
Rev Ref Correctional Cap Facil Ser A 3,000 2,732,610 3,000 2,732,610 6.00
New York, City of,
GO Fiscal 1991 Ser D 250 277,782 7.20
GO Fiscal 1991 Ser F 1,250 1,406,175 7.29
GO Fiscal 1992 Ser A 2,000 2,209,040 7.02
GO Fiscal 1992 Ser D 1,000 1,109,050 6.94
GO Fiscal 1992 Ser H 2,000 2,135,860 6.55
GO Fiscal 1995 Ser B 3,000 3,138,150 6.69
GO Fiscal 1996 Ser A 3,150 3,124,800 6.30
GO Fiscal 1996 Ser A 2,000 1,974,100 6.33
GO Rev Ref Ad Valorem Property Tax Ser D 3,170 2,941,665 6.20
Port Authority of New York and New Jersey,
Consol Rev Seventy Second Ser 1992 2,000 2,287,540 2,000 2,287,540 6.40
Spec Proj Ser 4 5th Installment KIAC Partners Proj 4,500 4,477,410 13,850 13,780,473 6.78
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L 1,750 1,877,698 7.57
Gen Purpose Rev Ser R 1,600 1,764,992 6.69
Spec Oblig Ref Ser 1991B 2,300 2,504,079 6.31
Gen Purpose Rev 4,985 1,155,722 4,985 1,155,722 6.10
Gen Purpose Rev Ser X 1,250 1,318,950 1,250 1,318,950 6.10
Gen Purpose Rev Ser Y 4,000 4,195,840 4,000 4,195,840 5.80
Rev Ref Ser 1987 L 500 535,355 500 535,355 7.40
---------- -----------
39,156,778 115,937,172
NORTH CAROLINA 2.57%
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A 4,000 3,665,880 6.27
Pwr Sys Rev Ref Ser 1993B 2,000 1,909,700 6.28
Pwr Sys Rev Ref Ser 1993C 5,000 4,193,850 5.96
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 7,410 7,335,085 5.81
Catawba Elec Rev Ser 1993 5,220 4,744,354 5.50
-----------
21,848,869
OHIO 4.08%
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A 6,200 6,847,404 6.34
Elec Sys Rev First Mtg Ser 1994A 5,860 6,471,901 5,860 6,471,901 6.30
Cuyahoga County of,
Hosp Imp Rev Deaconess Hosp Of Cleveland Proj Ser 1985 B 750 845,085 750 845,085 6.60
Hosp Rev Meridia Hlth Sys Ser 1991 750 803,670 750 803,670 6.50
Franklin, County of,
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United Methodist 7.600 05-15-20 AAA 1,000 1,117,570
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj 8.625 02-01-22 BBB- 3,600 3,899,844
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj 6.250 12-01-20 Baa2*** 4,500 4,459,140
Rev Coll Ser A Cleveland Elec Illum Proj 7.000 09-01-09 BB 1,975 1,914,091
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1989A Ohio Edison Co Proj 7.625 07-01-23 BB+ 2,500 2,621,300
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co Proj 7.700 08-01-25 BB 2,800 2,837,576
Ohio, State of,
Solid Waste Rev Republic Engineered Steels Inc 9.000 06-01-21 B*** 1,500 1,514,970
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan 8.875 08-01-08 BBB-*** 1,305 1,325,358
----------
26,537,253
OKLAHOMA 0.47%
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 7.875 01-01-21 A+ 1,745 1,913,986
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc 7.375 12-01-20 BB+ 2,000 2,103,640
----------
4,017,626
OREGON 0.58%
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj 7.125 01/01/21 BB-*** 4,800 4,912,944
----------
4,912,944
PENNSYLVANIA 7.27%
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt 7.000 06-01-22 BBB 1,500 1,513,470
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj 6.700 12-01-20 BB+ 10,000 10,114,800
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A Toledo Edison Co Beaver 7.750 05-01-20 BB 2,200 2,246,574
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co Proj 7.375 04-01-21 BBB+ 6,095 6,456,616
Northumberland County Auth,
Commonwealth Lease Rev Ser 1991 6.250 10-15-09 AAA
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A 6.700 09-01-14 BBB- 4,950 5,245,317
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj 7.125 12-01-15 BBB- 7,000 7,348,670
Rev Ser D Colver Proj 7.150 12-01-18 BBB-
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N 6.500 12-01-13 AAA 2,840 2,960,132
Turnpike Rev Ser K 7.625 12-01-09 AAA
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj 8.625 07-01-21 BB*** 2,700 2,789,181
Hosp Rev 1992 Ser A Childrens Sea Shore House Proj 7.000 08-15-12 A- 1,250 1,320,338
Hosp Rev Children's Hosp Philadelphia Proj Ser A 7.875 07-01-08 AA
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
% of (000's Market (000's Market Market**
State - Issuer - Description Net Assets Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United Methodist 1,000 1,117,570 6.80
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj 3,600 3,899,844 7.96
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj 4,500 4,459,140 6.31
Rev Coll Ser A Cleveland Elec Illum Proj 1,975 1,914,091 7.22
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1989A Ohio Edison Co Proj 2,500 2,621,300 7.27
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co Proj 2,800 2,837,576 7.60
Ohio, State of,
Solid Waste Rev Republic Engineered Steels Inc 1,500 1,514,970 8.91
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan 1,305 1,325,358 8.74
--------- ----------
8,120,656 34,657,909
OKLAHOMA 0.47%
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 1,745 1,913,986 7.18
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc 2,000 2,103,640 7.01
----------
4,017,626
OREGON 0.58%
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj 4,800 4,912,944 6.76
----------
4,912,944
PENNSYLVANIA 7.27%
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt 1,500 1,513,470 6.94
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj 10,000 10,114,800 6.62
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A Toledo Edison Co Beaver 2,200 2,246,574 7.59
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co Proj 6,095 6,456,616 6.96
Northumberland County Auth,
Commonwealth Lease Rev Ser 1991 1,000 1,043,280 1,000 1,043,280 5.90
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A 4,950 5,245,317 6.32
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj 7,000 7,348,670 6.79
Rev Ser D Colver Proj 5,000 5,258,450 5,000 5,258,450 6.80
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N 2,840 2,960,132 6.24
Turnpike Rev Ser K 500 557,140 500 557,140 6.80
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj 2,700 2,789,181 8.35
Hosp Rev 1992 Ser A Childrens Sea Shore House Proj 1,250 1,320,338 6.63
Hosp Rev Children's Hosp Philadelphia Proj Ser A 500 527,380 500 527,380 7.40
</TABLE>
Page 9
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hosp Rev Ser 1993A Temple Univ Hosp Proj 6.625 11-15-23 A-
Philadelphia Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia Airport
Hotel Proj 7.750 12-01-17 B+*** 3,250 3,379,935
Philadelphia, City of,
Wtr & Swr Rev 16th Ser 7.500 08-01-10 AAA 3,000 3,414,840
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj 7.600 07-15-20 BBB- 3,000 3,075,990
York County Solid Waste And Refuse Auth,
Adj Tender Ind'l Dev Rev Ser of 1985 Resource Recovery Proj 8.200 12-01-14 AA- 1,000 1,064,650
----------
50,930,513
PUERTO RICO 5.03%
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico 6.000 07-01-11 AAA 200 209,080
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico 8.220# 07-01-11 AAA 5,500 5,995,000
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Floater Ser 1992A 7.784# 07-01-08 AAA 2,700 2,821,500
GO Pub Imp Inverse Floater Ser 1996 8.220# 07-01-11 A 14,000 15,260,000
Puerto Rico Electric Power Auth,
Pwr Rev Ref Ser 1995 Z 5.500 07-01-12 A-
Puerto Rico Highway and Transportation Auth,
Highway Rev Rites PA Rte 114 8.705# 07-01-11 A 13,130 14,590,713
----------
38,876,293
SOUTH CAROLINA 2.36%
Florence, County of,
Ind Dev Rev Stone Container Proj 7.375 02-01-07 BB 5,000 5,086,450
James Island Public Service District,
Charleston County Swr Sys Ref 7.500 06-01-18 AAA
Lexington County School District No. 1,
Cert of Part 1989 Ser B Pelion High School Proj 7.650 09-01-09 AAA
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys 5.375 01-01-25 AAA 9,305 8,732,091
Richland, County of,
Poll Control Rev Union Camp Corp Proj Ser 1992 B 6.625 05-01-22 A
Poll Control Rev Union Camp Corp Proj Ser C 6.550 11-01-20 A
----------
13,818,541
SOUTH DAKOTA 0.25%
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss 7.625 11/01/13 AA- 925 1,009,490
Rev Ser 1989 Sioux Valley Hosp Iss prerefunded 7.625 11-01-13 AA-
----------
1,009,490
TENNESSEE 2.84%
Eastside Utility District of Hamilton,
Waterworks Rev Iss 6.750 11-01-11 BBB+
Humphreys County Industrial Development Board,
Solid Waste Disposal Rev E.I. Dupont Denemours And Co. Proj 6.700 05-01-24 AA
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj 6.500 09-01-24 A- 9,000 9,242,190
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
% of (000's Market (000's Market Market**
State - Issuer - Description Net Assets Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hosp Rev Ser 1993A Temple Univ Hosp Proj 3,375 3,399,266 3,375 3,399,266 6.50
Philadelphia Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia Airport
Hotel Proj 3,250 3,379,935 7.45
Philadelphia, City of,
Wtr & Swr Rev 16th Ser 3,000 3,414,840 6.59
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj 3,000 3,075,990 7.41
York County Solid Waste And Refuse Auth,
Adj Tender Ind'l Dev Rev Ser of 1985 Resource Recovery Proj 1,000 1,064,650 7.70
---------- ----------
10,785,516 61,716,029
PUERTO RICO 5.03%
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico 2,000 2,090,800 2,200 2,299,880 5.74
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico 5,500 5,995,000 7.54
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Floater Ser 1992A 2,700 2,821,500 7.45
GO Pub Imp Inverse Floater Ser 1996 14,000 15,260,000 7.54
Puerto Rico Electric Power Auth,
Pwr Rev Ref Ser 1995 Z 1,885 1,800,062 1,885 1,800,062 5.70
Puerto Rico Highway and Transportation Auth,
Highway Rev Rites PA Rte 114 13,130 14,590,713 7.83
---------- ----------
3,890,862 42,767,155
SOUTH CAROLINA 2.36%
Florence, County of,
Ind Dev Rev Stone Container Proj 5,000 5,086,450 7.25
James Island Public Service District,
Charleston County Swr Sys Ref 1,250 1,374,675 1,250 1,374,675 6.80
Lexington County School District No. 1,
Cert of Part 1989 Ser B Pelion High School Proj 1,145 1,257,611 1,145 1,257,611 6.90
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys 9,305 8,732,091 5.73
Richland, County of,
Poll Control Rev Union Camp Corp Proj Ser 1992 B 2,460 2,562,607 2,460 2,562,607 6.30
Poll Control Rev Union Camp Corp Proj Ser C 1,000 1,043,040 1,000 1,043,040 6.20
---------- ----------
6,237,933 20,056,474
SOUTH DAKOTA 0.25%
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss prerefunded 925 1,009,489 1,850 2,018,979 6.99
Rev Ser 1989 Sioux Valley Hosp Iss 75 76,218 75 76,218 7.50
---------- ----------
1,085,707 2,095,197
TENNESSEE 2.84%
Eastside Utility District of Hamilton,
Waterworks Rev Iss 1,000 1,014,010 1,000 1,014,010 6.60
Humphreys County Industrial Development Board,
Solid Waste Disposal Rev E.I. Dupont Denemours And Co. Proj 6,500 6,844,695 6,500 6,844,695 6.30
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj 9,000 9,242,190 6.33
</TABLE>
Page 10
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp 6.750 09-01-12 BBB 4,000 4,144,680
Metropolitan Nashville and Davidson County Health and Education
Facility Board, Rev Ref Vanderbilt Univ Ser A 7.625 05-01-16 AA
Tennessee Housing Development Agency,
Homeownership Program Proj J 7.750 07-01-17 A+
----------
13,386,870
TEXAS 5.45%
Austin, City of,
Utility Sys Rev Ref Ser B 7.800 11-15-12 A
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj 8.250 05-01-15 A 2,000 2,139,420
Corpus Christi Housing Finance Corp,
Single Family Mtg Sr Rev Ref Ser 1991 A 7.700 07-01-11 AAA
Dallas-Fort Worth International Airport Facility Improvement,
Rev American Airlines Inc 7.250 11-01-30 BB+ 10,250 10,786,280
Rev Delta Air Lines Inc 7.600 11-01-11 BB 3,000 3,200,670
Ector County Hospital District,
Hosp Rev 1992 7.300 04-15-12 A- 4,000 4,425,960
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds 1991 Ser A 8.750 10-01-11 A***
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj 7.750 03-01-12 B 1,410 1,385,353
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj 8.250 02/15/08 AAA 1,000 1,118,550
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp Proj 6.625 02-01-24 BBB+ 1,000 1,017,200
Harris, County of,
Toll Road Untld Tax & Sub Lien Rev Ref 8.100 08-01-08 AA+
Toll Road Untld Tax & Sub Lien Rev Ref 8.125 08-01-15 AA+
Houston, City of,
Wtr & Swr Sys Rev Ref Jr Lien Ser C Zero 12-01-11 AAA
Wtr & Swr Sys Rev Ref Prior Lien Ser B 6.750 12-01-08 A
North Central Texas Health Facilities Development,
Hospital Rev Baylor University Medical Center Ser 1991 A 9.968# 05-15-16 AA
Texas Housing Agency,
Mtg Rev Single Family Ser A 8.250 03-01-17 A+
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996 5.000 01-01-10 AAA 7,000 6,352,710
Dallas North Thruway Rev Ref Ser 1996 5.500 01-01-15 AAA 5,000 4,631,700
Texas, State of,
Veterans' Land Board GO 7.125 12-01-09 AA
Veterans' Land Board GO Prerefunded 8.250 12-01-10 AAA
----------
35,057,843
UTAH 0.98%
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon Development Corp 9.000 07-01-12 BBB-*** 1,000 1,045,430
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market**
State - Issuer - Description Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp 4,000 4,144,680 6.51
Metropolitan Nashville and Davidson County Health and Education
Facility Board, Rev Ref Vanderbilt Univ Ser A 1,750 1,858,150 1,750 1,858,150 7.10
Tennessee Housing Development Agency,
Homeownership Program Proj J 1,000 1,053,800 1,000 1,053,800 7.30
---------- ----------
10,770,655 24,157,525
TEXAS
Austin, City of,
Utility Sys Rev Ref Ser B 1,000 1,087,120 1,000 1,087,120 7.10
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj 2,000 2,139,420 7.71
Corpus Christi Housing Finance Corp,
Single Family Mtg Sr Rev Ref Ser 1991 A 650 693,881 650 693,881 7.20
Dallas-Fort Worth International Airport Facility Improvement,
Rev American Airlines Inc 10,250 10,786,280 6.89
Rev Delta Air Lines Inc 3,000 3,200,670 7.12
Ector County Hospital District,
Hosp Rev 1992 4,000 4,425,960 6.60
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds 1991 Ser A 605 652,880 605 652,880 8.10
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj 1,410 1,385,353 7.89
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj 1,475 1,649,861 2,475 2,768,411 7.38
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp Proj 1,000 1,017,200 6.51
Harris, County of,
Toll Road Untld Tax & Sub Lien Rev Ref 250 273,930 250 273,930 7.30
Toll Road Untld Tax & Sub Lien Rev Ref 250 274,052 250 274,052 7.40
Houston, City of,
Wtr & Swr Sys Rev Ref Jr Lien Ser C 4,000 1,611,880 4,000 1,611,880 6.00
Wtr & Swr Sys Rev Ref Prior Lien Ser B 1,500 1,623,150 1,500 1,623,150 6.20
North Central Texas Health Facilities Development,
Hospital Rev Baylor University Medical Center Ser 1991 A 1,000 1,193,750 1,000 1,193,750 8.30
Texas Housing Agency,
Mtg Rev Single Family Ser A 400 402,928 400 402,928 8.10
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996 7,000 6,352,710 5.51
Dallas North Thruway Rev Ref Ser 1996 5,000 4,631,700 5.94
Texas, State of,
Veterans' Land Board GO 1,000 1,071,510 1,000 1,071,510 6.60
Veterans' Land Board GO Prerefunded 610 680,803 610 680,803 7.30
---------- ----------
11,215,745 46,273,588
UTAH
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon Development Corp 1,000 1,045,430 8.61
</TABLE>
Page 11
<PAGE>
<TABLE>
<CAPTION>
------------------------
TAX FREE BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermountain Power Agency,
Pwr Supply Rev Ref Ser 1986 B 5.000 07-01-16 AA-
Pwr Supply Rev Ref Ser A 5.000 07-01-21 AA-
Salt Lake City Hospital,
Rev Ref IHC Hosp Inc VRDN/RIBS 9.566# 05-15-20 AAA
Rev Ref IHC Hosp Inc Ser B 8.000 05-15-07 AA
Rev Ref Ser A 8.125 05-15-15 AAA
Utah Housing Finance Agency,
Single Family Mtg Sr Bonds 1990 Iss B-2 7.700 07-01-15 AA
Single Family Mtg Sr Bonds 1991 Iss B-1 7.500 07-01-16 AA
----------
1,045,430
VIRGINIA 0.94%
Arlington County Industrial Development Auth,
Hosp Facil Rev Arlington Hosp Ser 1991 A 7.125 09-01-21 AAA
Fairfax County Industrial Develpment Auth,
Rev RITES 9.687# 08-29-23 AA-
Fredericksburg Industrial Auth,
Hosp Facil Rev 9.316# 08-15-23 AAA
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil 7.550 01-01-19 BB*** 4,500 4,639,770
----------
4,639,770
WASHINGTON 3.56%
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj 9.125 01-01-26 BB-*** 11,000 10,458,910
Seattle, City of,
Municipal Light & Pwr Rev 1994 6.625 07-01-16 AA 3,600 3,797,928
Tacoma Electric System,
Rev VRDN/RIBS Iss of 1991 8.972# 01-02-15 AAA
University of Washington,
Housing & Dining Sys Rev Ser 1991 7.000 12-01-21 AAA
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A Unref Bal 7.500 07-01-15 AA 1,455 1,568,635
Nuclear Proj No. 1 Ref Rev Ser 1989B 7.125 07-01-16 AA 1,500 1,663,335
Nuclear Proj No. 1 Ref Rev Ser 1991A 6.875 07-01-17 AA 1,250 1,309,637
Nuclear Proj No. 2 Ref Rev Ser 1990C 7.625 07-01-10 AAA 5,000 5,651,600
Nuclear Proj No. 3 Ref Rev Ser 1989B 7.250 07-01-15 AAA 2,500 2,749,875
Washington, State of,
GO Ser A of 1990 6.750 02-01-15 AA
----------
27,199,920
WISCONSIN 0.66%
Sturgeon Bay Combined Utilities,
Door County Combined Util Mtg Rev Ser 1990 7.500 01-01-10 AAA
Door County Combined Util Mtg Rev Prerefunded Ser 1990 7.500 01-01-10 AAA
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A 7.400 07-01-20 AAA 4,000 4,453,360
----------
4,453,360
<CAPTION>
------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
% of (000's Market (000's Market Market**
State - Issuer - Description Net Assets Omitted) Value* Omitted) Value* %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermountain Power Agency,
Pwr Supply Rev Ref Ser 1986 B 1,935 1,684,863 1,935 1,684,863 5.70
Pwr Supply Rev Ref Ser A 2,000 1,701,460 2,000 1,701,460 5.80
Salt Lake City Hospital,
Rev Ref IHC Hosp Inc VRDN/RIBS 1,500 1,663,125 1,500 1,663,125 8.60
Rev Ref IHC Hosp Inc Ser B 350 378,595 350 378,595 7.40
Rev Ref Ser A 1,000 1,189,460 1,000 1,189,460 6.80
Utah Housing Finance Agency,
Single Family Mtg Sr Bonds 1990 Iss B-2 320 332,685 320 332,685 7.40
Single Family Mtg Sr Bonds 1991 Iss B-1 300 316,965 300 316,965 7.10
--------- ----------
7,267,153 8,312,583
VIRGINIA 0.94%
Arlington County Industrial Development Auth,
Hosp Facil Rev Arlington Hosp Ser 1991 A 500 561,225 500 561,225 6.30
Fairfax County Industrial Develpment Auth,
Rev RITES 1,000 1,196,250 1,000 1,196,250 8.10
Fredericksburg Industrial Auth,
Hosp Facil Rev 1,500 1,629,375 1,500 1,629,375 8.50
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil 4,500 4,639,770 7.32
--------- ----------
3,386,850 8,026,620
WASHINGTON 3.56%
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj 11,000 10,458,910 9.60
Seattle, City of,
Municipal Light & Pwr Rev 1994 3,600 3,797,928 6.28
Tacoma Electric System,
Rev VRDN/RIBS Iss of 1991 1,000 1,071,250 1,000 1,071,250 8.30
University of Washington,
Housing & Dining Sys Rev Ser 1991 750 821,430 750 821,430 6.30
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A Unref Bal 1,455 1,568,635 6.96
Nuclear Proj No. 1 Ref Rev Ser 1989B 1,500 1,663,335 6.43
Nuclear Proj No. 1 Ref Rev Ser 1991A 1,250 1,309,637 6.56
Nuclear Proj No. 2 Ref Rev Ser 1990C 5,000 5,651,600 6.75
Nuclear Proj No. 3 Ref Rev Ser 1989B 2,500 2,749,875 6.59
Washington, State of,
GO Ser A of 1990 1,000 1,116,890 1,000 1,116,890 6.00
--------- ----------
3,009,570 30,209,490
WISCONSIN 0.66%
Sturgeon Bay Combined Utilities,
Door County Combined Util Mtg Rev Ser 1990 230 254,095 230 254,095 6.70
Door County Combined Util Mtg Rev Prerefunded Ser 1990 770 859,143 770 859,143 6.70
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A 4,000 4,453,360 6.65
--------- ----------
1,113,238 5,566,598
</TABLE>
Page 12
<PAGE>
<TABLE>
<CAPTION>
---------------------
TAX FREE BOND
- ---------------------------------------------------------------------------------------------------------------------------------
Par Value
% of Interest Maturity S+P (000's Market
State - Issuer - Description Net Assets Rate % Date Rating** Omitted) Value*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WYOMING 0.31%
Sweetwater, County of,
Poll Control Rev Idaho Pwr Co. Ser A 7.625 12-01-14 A
Poll Control Rev Idaho Pwr Co. Ser B 7.625 12-01-13 A
Poll Control Rev Idaho Pwr Co. Ser B 7.625 12-01-13 AAA
-----------
TOTAL TAX EXEMPT LONG TERM BONDS 101.16% 692,545 659,724,715
-----------
(Cost $825,007,692)
<CAPTION>
Number
Expiration of Market
Date Contracts Value
---- --------- -----
OPTIONS 0.10%
U.S. Treasury Bond Option 114 USU6C 08-24-96 2,450 842,188
-----------
TOTAL OPTIONS 842,188
(Cost $363,901) 0.10%
660,566,903
===========
TOTAL INVESTMENTS 101.25% 660,566,903
===========
(Cost $825,371,593) 0
-----------
COMBINED NET ASSETS 650,489,968
-----------
<CAPTION>
-------------------------------------------------
MANAGED TAX EXEMPT COMBINED
- ----------------------------------------------------------------------------------------------------------------------------
Par Value Par Value Yield at
(000's Market (000's Market Market**
State - Issuer - Description Omitted) Value* Omitted) Value* %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WYOMING
Sweetwater, County of,
Poll Control Rev Idaho Pwr Co. Ser A 500 518,625 500 518,625 7.30
Poll Control Rev Idaho Pwr Co. Ser B 1,000 1,037,250 1,000 1,037,250 7.30
Poll Control Rev Idaho Pwr Co. Ser B 1,000 1,042,100 1,000 1,042,100 7.30
----------- -----------
2,597,975 2,597,975
----------- -----------
TOTAL TAX EXEMPT LONG TERM BONDS 212,580 200,876,649 905,125 860,601,364
----------- -----------
(Cost $825,007,692)
OPTIONS
U.S. Treasury Bond Option 114 USU6C 2,450 842,188
-----------
TOTAL OPTIONS 842,188
(Cost $363,901)
200,876,649 861,443,552
=========== ===========
TOTAL INVESTMENTS 200,876,649
===========
(Cost $825,371,593) 0
----------- -----------
COMBINED NET ASSETS 198,981,567 849,471,535
----------- -----------
NOTES TO SCHEDULE OF INVESTMENTS
* Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or, at fair
value as determined in good faith in accordance with procedures approved by
the Trustees. Short-term debt investments maturing within 60 days are
valued at amortized cost which approximates market value.
** The yield is not calculated with guidelines established by the U.S.
Securities Exchange Commission and is unaudited.
*** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available
and are unaudited.
</TABLE>
Page 13
<PAGE>
John Hancock Funds
Managed
Tax-Exempt
Fund
SEMI-ANNUAL REPORT
April 30, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
William A. Barron, III*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
William F. Glavin*
Patrick Grant*
Anne C. Hodsdon
Ralph Lowell, Jr.*
John A Moore*
Patti McGill Peterson*
John W. Pratt*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President, Assistant Secretary and
Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 will
be a tough act to follow in 1996. In fact, we've already seen greater
market volatility this year, particularly among last year's leaders --
technology stocks. That's to be expected after a year that saw market
indexes soar, including the Standard & Poor's 500-Stock Index's 37%
advance. While many of the same economic conditions that fostered the
stellar 1995 market are still in place -- slow economic growth, muted
inflation and decent corporate earnings -- it would be unrealistic to
expect the market to stage a repeat in 1996. The old saying "trees don't
grow to the sky" comes to mind. Shareholders would do well to temper
expectations of investment returns and perhaps revisit their investment
allocations with their financial advisor to determine if
rebalancing their portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John
Hancock Funds, we never stop working to find ways to sustain and improve
the quality of information and assistance we provide you. Our commitment
to this task is no less than John Hancock's loyalty was to his fledgling
country when he is said to have uttered, "if it does the public good,
burn Boston." We won't go that far, of course, but we share our
namesake's dedication to putting the public before all else.
In our case, that public is you, our shareholders. We take very
seriously the role you have entrusted to us, that of helping you achieve
your financial goals. Part of that will always involve good customer
service. So please do not hesitate to call your Customer Service
Representative at 1-800-225-5291 if you have any questions or need
information. We take pride in helping you with the same spirit that John
Hancock displayed at the dawning of America.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By Frank Lucibella, Portfolio Manager
John Hancock
Managed Tax-Exempt Fund
Indications of strengthening economy
cause bonds to languish
Municipal bonds faced a classic good news/bad news scenario during the
six-month period ended April 30, 1996. Bonds spent most of 1995 rallying
on the heels of weak economic growth and subdued inflation. That
strength continued into November and December and investors entered the
new year believing that the economy would produce more of the same: slow
but steady growth, low inflation and declining interest rates. However,
evidence that the economy was strengthening fanned inflationary concerns
and sent bond yields higher and bond prices lower. Bond holders dislike
any indication of inflation since it erodes the value of their fixed-
income payments. Additionally, stronger-than-expected growth raised the
specter that the Federal Reserve Board might have to raise interest rate
in order to stave off inflation.
Now, for the good news: fears of a flat tax started to wane. With that,
municipals turned in a stronger performance than Treasuries. Investors
became less focused on the flat tax and focused instead on munis'
attractiveness relative to Treasuries, helping municipal bonds
outperform taxable bonds during the period.
"... municipals
turned in
a stronger
performance
than Treasuries."
A look at performance
For the six months ended April 30, 1996, John Hancock Managed Tax-Exempt
Fund's Class A and Class B shares posted total returns of 1.47% and
1.04%, respectively, at net asset value. Those returns outpaced the
average general municipal bond fund's return of 0.67% for the same
period, according to Lipper Analytical Services.1
A 2 1/4" x 3 1/4" photo of the portfolio management team. Caption reads:
Frank Lucibella (seated) and Fund management team members Tom Goggins
and Dianne Sales-Singer.
Pie Chart entitled Portfolio Diversification at top left hand column.
The chart is divided into 10 sections. From left to right: Water & Sewer
7%; General Obligations 5%; Education 9%; Electric Power 6%; Health 18%;
Housing 11%; Industrial Development Bonds 7%; Other Revenue Bonds 14%;
Pollution Control 13%; Transportation 8%.
The primary reason the Fund beat its competitors was because of how we
managed duration during this period of shifting investor sentiment and
market conditions. Duration measures how sensitive a bond's share price
is to changes in interest rates. Generally speaking, the longer a bond's
duration, the more its price will rise when interest rates fall, and
conversely, fall when interest rates rise. In the last two months of
1995, the Fund's duration was longer than many of its peers. That proved
to be effective because interest rates were falling and bond prices were
rising during those months. In late January, however, we began to see
signs that the economy was gathering steam. So we became more defensive
and shortened our duration.
We shortened our duration using a number of measures. First, we kept
more of the Fund's assets in cash and short-term investments. Next, we
traded in some very long-term bonds with maturities of 30 years for
shorter-term bonds with maturities in the 20-year range. Our more
defensive posture was a plus during the spring when interest rates began
to rise.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investment"; the header for the right column is
"Recent performance ... and what's behind the numbers. The first listing
is New York agency issues followed by an up arrow and the phrase
"Attractive level of income, tightening supply." The second listing is
Cleveland Public Power followed by an up arrow and the phrase "Rally
from relatively cheap levels." The third listing is Michigan Hospital
Financing Authority followed by a down arrow and the phrase "Weak
health care environment." Footnote below reads: "See "Schedule of
Investments." Investment holdings are subject to change."
As a part of our more defensive stance, we also sold some discount
bonds. These bonds trade below face value because they offer lower
coupons (the interest rate that the issuer promises to pay the holder
until maturity) than bonds issued at current interest rates, which are
known as current coupon bonds. When interest rates fall and the market
rallies, discount bonds perform well. But when interest rates rise and
the market stalls, discount bonds tend to underperform par bonds (those
that trade at face value) and premium bonds (those that offer coupons
higher than current interest rates).
Portfolio changes
During the past six months we continued to concentrate on generating
additional yield for the fund. Of course, we resisted the temptation to
buy the highest-yielding securities just for the sake of adding yield.
Rather, we selectively chose high-yielding securities that offered an
attractive risk/reward profile. Securities issued by New York state
agencies, rated the lowest investment grade, Baa, were one example. We
bought non-callable securities issued by the state of New York at a time
when the supply of New York securities was abundant, and as a result,
their prices were cheap compared to what we thought their potential
value was. As supply tightened, these bonds appreciated and performed
well.
"... we
continued to
concentrate
on generating
additional yield ..."
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the six months ended April 30,
1996." The chart is scaled in increments of 1% from top to bottom, with
2% at the top and 0% at the bottom. Within the chart, there are three
solid bars. The first represents the 1.47% total return for John Hancock
Managed Tax-Exempt Fund: Class A. The second represents the 1.04% total
return for John Hancock Managed Tax-Exempt Fund: Class B. The third
represents the 0.67% total return for the average general municipal bond
fund. Footnote below reads: "Total returns for John Hancock Managed Tax-
Exempt Fund are at net asset value with all distributions reinvested.
The average general municipal bond fund is tracked by Lipper Analytical
Services.(1) See following page for historical performance information."
Outlook and strategy
The economy's first quarter 1996 growth was a lot stronger than most
experts had anticipated. However, we don't believe that this rate of
growth will be sustained throughout the balance of the year. The
economic data suggests that there is no indication of wage inflation,
and employment growth remains fairly subdued.
Over the short term, the upcoming presidential election process may have
an important effect on the bond markets. If a candidate embraces the
flat tax, which could cause further problems for the municipal market.
Some observers suggest that "blue collar" workers could be a major
battleground for votes. If that is the case, candidates may try to make
inroads with this group by offering up economically stimulative
proposals such as an increase in benefits, a tax cut or others measures.
The rhetoric surrounding these stimulative, and possibly inflationary,
proposals could present problems for the market. Until we have more
definitive indications about the direction of the economy and interest
rates, we'll continue to keep the Fund somewhat defensive by maintaining
a duration that is in line with the market as a whole, or perhaps a bit
shorter.
Barring negative political developments, municipals are positioned to
perform well versus Treasuries over the long term. So far in 1996, the
supply of municipal bonds has remained tight. We don't see any reason
for that to change much now that interest rates are higher. Many issuers
may remain on the sidelines and delay issuing new debt until interest
rates turn more favorable. Disappointingly, demand for municipals has
remained somewhat weak in response to rising interest rates and earlier
fears of a flat tax. If the demand for municipals picks up and supply
remains tight, municipals could offer the potential for attractive
returns relative to other fixed-income investments.
"... we'll
continue to
keep the
Fund
somewhat
defensive ..."
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Managed Tax-Exempt
Fund. Total return is a performance measure that equals the sum of all
income and capital gain distributions, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 4.50%
for Class A shares. The effect of the maximum contingent deferred sales
charge for Class B shares (maximum 5% and declining to 0% over six
years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will
perform in the future. Also, keep in mind that the total return and
share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost,
depending on when you sell them. Please note that a portion of the
Fund's income may be subject to federal, state, or local taxes.
A portion of the Fund's income may be taxable. Some investors may be
subject to the Alternative Minimum Tax. Capital gains are taxable.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1996
One Five Life of
Year Years Fund
------- ---------- ---------
John Hancock Managed
Tax-Exempt Fund: Class A(1) 2.62% 26.51% N/A
John Hancock Managed
Tax-Exempt Fund: Class B(2) 1.77% 40.01% 100.57%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1996
One Five Life of
Year Years Fund
------- ---------- ---------
John Hancock Managed
Tax-Exempt Fund: Class A(1,3) 2.62% 5.70% N/A
John Hancock Managed
Tax-Exempt Fund: Class B(2,3) 1.77% 6.90% 8.10%
YIELDS
As of April 30, 1996
SEC 30-Day
Yield
------------
John Hancock Managed
Tax-Exempt Fund: Class A 4.96%
John Hancock Managed
Tax-Exempt Fund: Class B 4.49%
Notes to Performance
(1) Class A shares commenced on January 3, 1992.
(2) Class B shares commenced on April 22, 1987.
(3) The Adviser voluntarily waived a portion of the management fee
during the period. Without the waiver of expenses, the average
annualized total return for the one-year period and since inception
for Class A shares would have been 2.57% and 5.55%, respectively.
The average annualized total returns for the one-year and five-year
periods and since inception for Class B shares would have been
1.72%, 6.73% and 7.69%, respectively.
WHAT HAPPENED TO A $10,000 INVESTMENT...
* No contingent deferred sales charge applicable.
The charts on the right show how much a $10,000 investment in the John
Hancock Managed Tax-Exempt Fund would be worth on April 30, 1996,
assuming you had invested on the day each class of shares started and
reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Lehman Municipal Bond Index -- an unmanaged
index that includes approximately 15,000 bonds and is commonly used as a
measure of municipal bond performance.
Managed Tax-Exempt Fund
Class A shares
Line chart with the heading Managed Tax-Exempt Fund: Class A,
representing the growth of a hypothetical $10,000 investment
over the life of the fund. Within the chart are three lines.
The first line represents the value of the Lehman Municipal
Bond Index and is equal to $13,407 as of April 30, 1996.
The second line represents the value of the hypothetical
$10,000 investment made in the Managed Tax-Exempt Fund on January
3, 1992, before sales charge, and is equal to $13,191 as of
April 30, 1996. The third line represents the Managed Tax-Exempt
Fund after sales charge and is equal to $12,597 as of April 30, 1996.
Managed Tax-Exempt Fund
Class B shares
Line chart with the heading Managed Tax-Exempt Fund: Class B*,
representing the growth of a hypothetical $10,000 investment
over the life of the fund. Within the chart are two lines.
The first line represents the value of the hypothetical $10,000
investment made in the Managed Tax-Exempt Fund on April 22,
1987, before contingent deferred sales charge, and is equal
to $19,960 as of April 30, 1996. The second line represents the
value of the Lehman Municipal Bond Index and is equal to $19,511
as of April 30, 1996.
*No contingent deferred sales charge applicable.
Financial Statements
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
The Statement of Assets and Liabilities is the Fund's balance sheet and shows the
value of what the Fund owns, is due and owes on April 30, 1996. You'll also find
the net asset value and the maximum offering price per share as of that date.
Statement of Assets and Liabilities
April 30, 1996 (Unaudited)
- -------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $189,910,865) $198,581,176
Receivable for shares sold 21,392
Receivable for investments sold 2,000,256
Receivable for futures variation margin - Note A 68,750
Interest receivable 4,135,926
Segregated assets for financial futures contracts 200,000
Other assets 35,956
-----------
Total Assets 205,043,456
- -------------------------------------------------------------------
Liabilities:
Dividend payable 28,672
Temporary overdraft of cash 1,350,825
Payable for shares repurchased 40,431
Payable for investments purchased 1,001,307
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 125,862
Accounts payable and accrued expenses 44,120
-----------
Total Liabilities 2,591,217
- -------------------------------------------------------------------
Net Assets:
Capital paid-in 192,665,717
Accumulated net realized gain on
investments
and financial futures contracts 823,140
Net unrealized appreciation of
investments and financial
futures contracts 8,892,853
Undistributed net investment income 70,529
-----------
Net Assets $202,452,239
===================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $40,060,833 / 3,542,623 $11.31
===================================================================
Class B - $162,391,406 / 14,356,132 $11.31
===================================================================
Maximum Offering Price Per Share*
Class A - ($11.31 x 104.71%) $11.84
===================================================================
* On single retail sales of less than $100,000. On sales of $100,000
or more and on group sales the offering price is reduced.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment
income earned and expenses incurred in operating the Fund. It
also shows net gains (losses) for the period stated.
Statement of Operations
Six months ended April 30, 1996 (Unaudited)
- -------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $6,856,915
------------
Expenses:
Distribution/service fee - Note B
Class A 62,329
Class B 837,702
Investment management fee - Note B 640,433
Transfer agent fee - Note B 78,492
Custodian fee 39,719
Auditing fee 22,932
Trustees' fee 20,719
Printing 19,860
Registration and filing fees 12,513
Legal fees 5,443
Miscellaneous 4,058
Less Management Fee Reduction - Note B (53,372)
------------
Total Expenses 1,690,828
- -------------------------------------------------------------------
Net Investment Income 5,166,087
- -------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts:
Net realized gain on investments sold 1,353,567
Net realized gain on financial futures contracts 86,588
Change in net unrealized appreciation/depreciation
of investments (4,048,947)
Change in net unrealized appreciation/depreciation
of financial futures contracts 221,875
------------
Net Realized and Unrealized Loss
on Investments and Financial
Futures Contracts (2,386,917)
- -------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $2,779,170
===================================================================
See notes to financial statments
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $5,166,087 $11,372,882
Net realized gain on investments
sold and financial futures contracts 1,440,155 2,418,782
Change in net unrealized appreciation/
depreciation of investments and financial
futures contracts (3,827,072) 13,159,135
------------ ------------
Net Increase in Net Assets Resulting
from Operations 2,779,170 26,950,799
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.3109 and $0.6282 per
share, respectively) (1,119,549) (1,545,018)
Class B - ($0.2720 and $0.5516 per
share, respectively) (4,046,538) (9,827,864)
Distributions from net realized gain on
investments sold and financial
futures contracts
Class A - ($0.1114 and none per
share, respectively) (401,231) --
Class B - ($0.1114 and none per
share, respectively) (1,673,817) --
------------ ------------
Total Distributions to Shareholders (7,241,135) (11,372,882)
------------ ------------
From Fund Share Transactions - Net* (13,471,784) (33,226,056)
------------ ------------
Net Assets:
Beginning of period 220,385,988 238,034,127
------------ ------------
End of period (including undistributed
net investment income $70,529 for both
periods, respectively) $202,452,239 $220,385,988
============ ============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A
Shares sold 94,591 $1,092,642 2,334,618 $26,534,395
Shares issued to shareholders
in reinvestment of distributions 77,519 900,213 84,320 947,287
---------- ------------ ---------- ------------
172,110 1,992,855 2,418,938 27,481,682
Less shares repurchased (295,304) (3,429,050) (695,912) (7,619,563)
---------- ------------ ---------- ------------
Net increase (decrease) (123,194) ($1,436,195) 1,723,026 $19,862,119
========== ============ ========== ============
CLASS B
Shares sold 390,016 $4,527,315 1,012,904 $11,296,871
Shares issued to shareholders
in reinvestment of distributions 256,757 2,983,413 444,432 4,959,344
---------- ------------ ---------- ------------
646,773 7,510,728 1,457,336 16,256,215
Less shares repurchased (1,681,886) (19,546,317) (6,179,061) (69,344,390)
---------- ------------ ---------- ------------
Net decrease (1,035,113) ($12,035,589) (4,721,725) ($53,088,175)
========== ============ ========== ============
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has
changed since the end of the previous fiscal period. The difference reflects earnings
less expenses, any investment gains and losses, distributions paid to shareholders,
and any increase or decrease in money shareholders invested in the Fund. The footnote
illustrates the number of Fund shares sold, reinvested and redeemed during the last
two periods, along with the corresponding dollar values.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
The Financial Highlights summarizes the impact of the following factors
on a single share for the periods indicated: the net investment income,
gains (losses), distributions and total investment returns of the Fund.
It shows how the Fund's net asset value for a share has changed since
the end of the previous period. Additionally, important relationships
between some items presented in the financial statements are expressed
in ratio form.
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout
the period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS END YEAR ENDED OCTOBER 31,
APRIL 30,1996 ---------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(a) 1991
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning
of Period $11.56 $10.79 $12.13 $11.12 $11.25
-------- -------- -------- -------- --------
Net Investment Income 0.31 0.63 0.64 0.70 0.55
Net Realized and Unrealized
Gain (Loss) on Investments
and Financial Futures Contracts (0.14) 0.77 (1.25) 1.05 (0.11)
-------- -------- -------- -------- --------
Total from Investment Operations 0.17 1.40 (0.61) 1.75 0.44
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment
Income (0.31) (0.63) (0.64) (0.70) (0.53)
Distributions from Net Realized
Gain on Investments Sold
and Financial Futures Contracts (0.11) -- (0.09) (0.04) (0.04)
-------- -------- -------- -------- --------
Total Distributions (0.42) (0.63) (0.73) (0.74) (0.57)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $11.31 $11.56 $10.79 $12.13 $11.12
======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value (c) 1.47%(e) 13.30% (5.22%) 16.10% 4.74%*
Total Adjusted Investment Return
at Net Asset Value (b)(d) 1.45%(e) 13.28% (5.29%) 15.77% 4.51%*
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $40,061 $42,384 $20,968 $14,244 $9,589
Ratio of Expenses to Average Net
Assets** 1.04%* 1.06% 0.95% 0.70% 0.78%*
Ratio of Adjusted Expenses to Average
Net Assets (b) 1.09%* 1.11% 1.02% 1.03% 1.01%*
Ratio of Net Investment Income to Average
Net Assets** 5.39%* 5.53% 5.52% 5.98% 6.24%*
Ratio of Adjusted Net Investment Income
to Average Net Assets (b) 5.34%* 5.48% 5.42% 5.65% 6.01%*
Portfolio Turnover Rate 44% 104% 59% 23% 23%
** Expense Reimbursement Per Share $0.00 $0.01 $0.01 $0.04 $0.02
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $11.57 $10.79 $12.13 $11.12 $11.12 $10.61
-------- -------- -------- -------- -------- -------
Net Investment Income 0.27 0.55 0.56 0.64 0.66 0.68
Net Realized and Unrealized Gain
(Loss) on Investments and
Financial Futures Contracts (0.15) 0.78 (1.25) 1.05 0.04 0.61
-------- -------- -------- -------- -------- -------
Total from Investment Operations 0.12 1.33 (0.69) 1.69 0.70 1.29
-------- -------- -------- -------- -------- -------
Less Distributions:
Dividends from Net Investment
Income (0.27) (0.55) (0.56) (0.64) (0.64) (0.72)
Distributions from Net Realized
Gain on Investments Sold and
Financial Futures Contracts (0.11) -- (0.09) (0.04) (0.06) (0.06)
-------- -------- -------- -------- -------- -------
Total Distributions (0.38) (0.55) (0.65) (0.68) (0.70) (0.78)
-------- -------- -------- -------- -------- -------
Net Asset Value, End of Period $11.31 $11.57 $10.79 $12.13 $11.12 $11.12
======== ======== ======== ======== ======== =======
Total Investment Return at Net
Asset Value (c) 1.04%(e) 12.63% (5.85%) 15.51% 6.39% 12.55%
Total Adjusted Investment Return
at Net Asset Value (b)(d) 1.02%(e) 12.61% (5.92%) 15.18% 6.20% 12.24%
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $162,391 $178,002 $217,066 $256,342 $226,943 $199,955
Ratio of Expenses to Average Net
Assets** 1.72%* 1.73% 1.62% 1.23% 1.35% 1.19%
Ratio of Adjusted Expenses to Average
Net Assets (b) 1.77%* 1.78% 1.69% 1.56% 1.54% 1.50%
Ratio of Net Investment Income to
Average Net Assets** 4.71%* 4.92% 4.84% 5.49% 5.74% 6.19%
Ratio of Adjusted Net Investment
Income to Average Net Assets (b) 4.66%* 4.87% 4.77% 5.16% 5.55% 5.88%
Portfolio Turnover Rate 44% 104% 59% 23% 23% 30%
** Expense Reimbursement Per Share $0.00 $0.01 $0.01 $0.04 $0.02 $0.04
* On an annualized basis.
(a) Class A shares commenced operations on January 3, 1992.
(b) On an unreimbursed basis.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect
of sales charges.
(d) An estimated total return calculation which takes into consideration fees and
expenses waived or borne by the Adviser during the periods shown.
(e) Not annualized.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
April 30, 1996 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities
owned by Managed Tax-Exempt Fund on April 30, 1996. It has one main
category: tax-exempt long-term bonds. The tax-exempt long-term
bonds are broken down by state. Under each state is a list of the securities
owned by the fund.
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
Alabama (2.46%)
Birmingham, City of,
GO Iss of 1989 7.350% 3/1/14 A1 $750 $812,092 6.79%
Citronelle Industrial
Development Board,
Poll Control Rev Stauffer
Chemical Co Proj 1982 8.000 12/1/12 A1 500 554,020 7.22
Mobile Industrial
Development Board,
Solid Waste Disp Rev
Ref Mobile Energy
Serv Co. Proj 1995 6.950 1/1/20 BBB- 3,500 3,624,320 6.71
------------
4,990,432
------------
Alaska (1.82%)
Alaska Housing
Finance Corp,
Coll Home Mtg Ser A-3
GNMA/FNMA Coll 7.700 12/1/13 AAA 305 305,445 7.69
Coll Home Mtg Ser B-1
GNMA Coll 7.650 6/1/24 AAA 2,000 2,093,860 7.31
Coll Home Mtg Ser B-2
GNMA Coll 7.875 6/1/24 AAA 200 200,588 7.85
Valdez Alaska Marine
Terminal,
Rev Ref Sohio Pipe Line
Co. Proj Ser 1985 7.125 12/1/25 AA- 1,000 1,079,590 6.60
------------
3,679,483
------------
Arizona (1.16%)
Arizona Municipal
Financing Program,
Cert of Part Ser 25 7.875 8/1/14 AAA 1,000 1,259,200 6.25
Pima, County of,
Swr Rev Ref Ser 1991 6.750 7/1/15 AAA 460 506,856 6.13
Swr Rev Ref Ser 1991 6.750 7/1/15 AAA 540 574,792 6.34
------------
2,340,848
------------
Arkansas (0.33%)
Arkansas Development
Finance Auth,
Single Family Mtg Rev
Ref Ser 1991 A 8.000 8/15/11 AA 620 666,829 7.44
------------
California (6.51%)
Central Valley
Financing Auth,
Cogeneration Proj Rev
Carson Ice Gen Proj
Ser 1993 6.200 7/1/20 BBB- 2,000 1,932,800 6.42
Sacramento Cogeneration
Auth, Cogeneration Proj
Rev Proctor & Gamble Proj 6.500 7/1/21 BBB- 4,500 4,528,935 6.46
Sacramento Municipal
Utilities District,
Ind'l Devel Rev Ref San
Diego Gas & Electric
Ser C Inflos 8.818# 8/15/18 AAA 1,000 1,038,750 8.49
San Joaquin Hills
Transportation
Corridor Agency,
Toll Road Rev Sr
Lien Cap Apprec Zero 1/1/14 BBB 5,000 1,560,450 6.70
California (continued)
Toll Road Rev Sr Lien
Cap Apprec Zero 1/1/19 BBB* $5,000 1,110,150 6.75%
Toll Road Rev Sr Lien
Cap Apprec Zero 1/1/22 BBB 5,000 896,250 6.81
Santa Ana Financing
Auth,
Lease Rev Police Admin
& Holding Facil Ser A 6.250% 7/1/19 AAA 2,000 2,119,000 5.90
------------
13,186,335
------------
Colorado (4.62%)
Arapahoe County Capital
Improvement Trust Fund,
Highway Rev Current Ser
E-470 Remarketed 8-31-1995 6.950 8/31/20 Baa* 6,000 6,262,200 6.66
Colorado Housing Finance
Auth, Single Family Prog
Sr Iss A-2 7.625 8/1/17 AA 985 1,031,571 7.28
Single Family Residential
Rev Ser C 8.750 9/1/17 AA 435 459,664 8.28
Douglas County School
District No. Re. 1,
Douglas and Elbert Counties
Imp Ser 1994A 6.400 12-15-11 AAA 1,500 1,600,890 6.00
------------
9,354,325
------------
Delaware (1.06%)
Delaware State Economic
Development Auth,
Rev Ref Poll Control
Delmarva Pwr Proj Ser B 6.750 5/1/19 AAA 2,000 2,152,040 6.27
------------
Florida (6.78%)
Broward, County of,
Resource Recovery Rev
Ser 1984 SES Broward Co.,
L.P. South Proj 7.950 12/1/08 A 4,430 4,871,184 7.23
Citrus, County of,
Poll Control Ref Rev Ser
1992A Florida Pwr Corp
Crystal Rvr Pwr Plant Proj 6.625 1/1/27 A+ 1,250 1,308,113 6.33
Hernando, County of,
Criminal Justice Complex
Rev Ser 1986 7.650 7/1/16 AAA 500 620,095 6.17
Lee, County of,
Hosp Board of Directors
Hosp Rev Inflos 9.418# 4/1/20 AAA 2,000 2,180,000 8.64
Orange County Health
Facilities Auth,
Hosp Rev Orlando Regional
Medical Center 8.908# 10-29-21 AAA 1,000 1,042,500 8.54
Tampa, City of,
Cap Imp Prog Rev Ser
B Iss of 1988 8.375 10/1/18 BBB 3,500 3,710,980 7.90
------------
13,732,872
------------
Illinois (2.94%)
Illinois Health Facilities
Auth, Rev Methodist Hlth
Serv Corp Ser 1991 B 9.770# 5/1/21 AAA 1,000 1,121,250 8.71
Rev Swedish-American Hosp 7.400 4/1/20 AAA 750 837,788 6.62
Metropolitan Pier and
Exposition Auth,
Hosp Facil Rev Ser 1996A
McCormick Place
Convention Complex 7.000 7/1/26 BBB- 3,750 4,000,275 6.56
------------
5,959,313
------------
Kansas (1.11%)
Sedgwick, County of,
GNMA Coll Mtg Ln Rev Ser C 8.625 11/1/18 AAA 2,120 2,247,878 8.13
------------
Louisiana (3.06%)
Calcasieu Parish Public
Trust Auth,
Mtg Rev Ref 1991 Ser A 7.75% 6/1/12 A $540 $579,107 7.23%
De Soto, Parish of,
Rev Environ Impt Rev Int'l
Paper Co Proj Ser A 7.700 11/1/18 A- 2,750 3,078,955 6.88
Rev Environ Impt Rev Int'l
Paper Co Proj Ser B 6.550 4/1/19 A- 2,500 2,530,850 6.47
------------
6,188,912
------------
Maine (0.65%)
Maine State Housing Auth,
Mtg Purchase Ser A-3 7.800 11-15-16 AA- 1,250 1,315,650 7.41
------------
Massachusetts (6.99%)
Massachusetts Health and
Educational Facilities Auth,
Rev St. Elizabeth's Hosp
of Boston Ser E 9.631# 8/15/21 AAA 1,000 1,085,000 8.88
Rev Worcester Polytechnic
Institute Ser E 6.750 9/1/11 A+ 1,840 1,993,750 6.23
Massachusetts Housing
Finance Agency,
Hsg Rev Insured Rental
Ser A 6.650 7/1/19 AAA 5,500 5,638,160 6.49
Single Family Hsg Ser 8 7.700 6/1/17 A+ 1,000 1,058,240 7.28
Massachusetts State Water
Pollution Abatement Trust,
Wtr Poll Rev South Essex
Swr District Loan Proj 1994 Ser A 6.375 2/1/15 AA- 1,000 1,045,290 6.10
Massachusetts State Water
Resources Auth,
Gen Rev 1995 Ser B 6.250 12/1/12 AAA 3,105 3,338,465 5.81
------------
14,158,905
------------
Michigan (4.27%)
Detroit, City of,
GO Unltd Ser 1995 A 6.800 4/1/15 BBB 1,315 1,363,103 6.56
Michigan Housing Development
Auth, Single Family Mtg Rev
Ser A 7.500 6/1/15 AA+ 1,415 1,491,948 7.11
Michigan State Hospital
Finance Auth,
Hosp Rev Ref Ser 1995 Sinai
HospitalProj 6.700 1/1/26 Baa* 4,500 4,439,520 6.79
Hosp Rev Ref Ser 1995A
Genesys Hlth Sys Oblig Group 8.100 10/1/13 BBB 1,250 1,358,450 7.45
------------
8,653,021
------------
Minnesota (0.14%)
Minnesota Housing Finance
Agency, Single Family Mtg
1990 Ser C 7.700 7/1/14 AA 260 274,305 7.30
------------
Nevada (1.85%)
Nevada Housing Division,
Single Family Proj Sr Rev
Ser 1989 Iss A-1 7.350 4/1/16 AA 940 972,317 7.11
Single Family Proj Sr Rev
Ser 1990 Iss C-1 7.850 10/1/15 AA 340 357,133 7.47
Nevada, State of,
GO Ltd Tax Municipal Bond Bank
Proj No. 38 Ser A 6.750 7/1/09 AA 975 1,083,781 6.07
GO Ltd Tax Municipal Bond Bank
Proj No. 38 Ser A 6.750 7/1/09 AA 25 27,175 6.21
Reno, City of,
Hosp Rev St. Mary's Regional
Medical Center Ser A 7.750 7/1/07 AAA 720 786,197 7.10
Hosp Rev St. Mary's Regional
Medical Center Ser A 7.750 7/1/07 AAA 480 516,634 7.20
------------
3,743,237
------------
New Jersey (0.54%)
New Jersey Turnpike Auth,
Turnpike Rev 1991 Ser C 6.500% 1/1/16 AAA $1,000 $1,087,560 5.98%
------------
New York (16.52%)
Metropolitan Transportation
Auth, Transit Facil Rev Ser J 6.500 7/1/18 AAA 1,000 1,041,630 6.24
New York Local Government
Assistance Corp,
Ser 1992 A Pub Benefit Corp 6.875 4/1/19 A 2,000 2,183,220 6.30
Rev Ser 1991 C 7.000 4/1/10 A 2,000 2,179,080 6.42
New York State Dormitory
Auth, City Univ Sys Consol
Rev 2nd Generation Ser 1993A 5.750 7/1/09 BBB 1,000 974,700 5.90
City Univ Sys Consol Rev 2nd
Generation Ser 1993A 6.000 7/1/20 BBB 1,000 976,240 6.15
City Univ Sys Consol Rev
Ser 1995A 5.625 7/1/16 BBB 1,000 936,410 6.01
State Univ Ed Facil Rev
Ser 1990B 7.000 5/15/16 BBB+ 5,000 5,301,900 6.60
State Univ Ed Facil Rev
Ser 1993A 5.500 5/15/13 BBB+ 3,000 2,795,760 5.90
State Univ Ed Facil Rev
Ser 1993A 5.500 5/15/19 BBB+ 2,000 1,831,720 6.01
New York State Environmental
Facilities Corp,
State Wtr Poll Control Revolving
Fund Rev Ser 1990 A 7.500 6/15/12 A 600 661,080 6.81
New York State Mortgage
Agency, Homeowner Mtg
Rev Ser BB-2 7.950 10/1/15 AA 560 590,738 7.54
New York State Urban
Development Corp,
Rev Ref Center for Ind'l
Innovation Proj 5.500 1/1/13 BBB 1,500 1,396,125 5.91
New York, City of,
GO Fiscal 1996 Ser G 5.750 2/1/14 BBB+ 3,000 2,791,530 6.18
Port Authority of New York
and New Jersey,
Consol Rev Seventy Second
Ser 1992 7.350 10/1/27 AA- 2,000 2,294,020 6.41
Triborough Bridge and
Tunnel Auth, Rev Ref
Ser 1987 L 8.000 1/1/07 A+ 500 536,320 7.46
Gen Purpose Rev Zero 1/1/21 AAA 6,485 1,475,921 6.09
Gen Purpose Rev Ser X 6.500 1/1/19 A+ 1,250 1,315,725 6.18
Gen Purpose Rev Ser Y 6.125 1/1/21 A+ 4,000 4,152,960 5.90
------------
33,435,079
------------
Ohio (4.02%)
Cleveland Ohio Public
Power System,
Elec Sys Rev First Mtg
Ser 1994A 7.000 11-15-16 AAA 5,860 6,496,572 6.31
Cuyahoga County of,
Hosp Imp Rev Deaconess Hosp
Of Cleveland Proj
Ser 1985 B 7.450 10/1/18 A1* 750 852,900 6.55
Hosp Rev Meridia Hlth Sys
Ser 1991 7.000 8/15/23 A 750 797,618 6.58
------------
8,147,090
------------
Pennsylvania (5.34%)
Northumberland County Auth,
Commonwealth Lease Rev
Ser 1991 6.250 10-15-09 AAA 1,000 1,047,860 5.96
Pennsylvania Economic Development
Financing Auth,
Rev Ser D Colver Proj 7.150 12/1/18 BBB- 5,000 5,235,050 6.83
Pennsylvania (continued)
Pennsylvania Turnpike
Commission, Turnpike Rev
Ser K 7.625% 12/1/09 AAA $500 $560,240 0.07
Philadelphia Hospitals and
Higher Education Facilities Auth,
Hosp Rev Children's Hosp
Philadelphia Proj Ser A 7.875 7/1/08 AA 500 530,470 7.42
Hosp Rev Ser 1993A Temple
Univ Hosp Proj 6.625 11-15-23 A- 3,375 3,440,542 6.50
------------
10,814,162
------------
Puerto Rico (1.03%)
Puerto Rico Aqueduct and
Sewer Auth, Ref Linked
Pars & Inflos Ser 1995 Gtd
By The Commonwealth of
Puerto Rico 600.0% 7/1/11 AAA 2,000 2,078,760 5.77
------------
South Carolina (3.08%)
James Island Public Service
District, Charleston County
Swr Sys Ref 7.500 6/1/18 AAA 1,250 1,382,475 6.78
Lexington County School
District No. 1,
Cert of Part 1989 Ser B Pelion
High School Proj 7.650 9/1/09 AAA 1,145 1,263,736 6.93
Richland, County of,
Poll Control Rev Union Camp
Corp Proj Ser 1992 B 6.625 5/1/22 A 2,460 2,546,789 6.40
Poll Control Rev Union Camp
Corp Proj Ser C 6.550 11/1/20 A 1,000 1,036,210 6.32
------------
6,229,210
------------
South Dakota (0.54%)
South Dakota Health and Educational
Facilities Auth, Rev Ser 1989
Sioux Valley Hosp Iss 7.625 11/1/13 AA- 75 76,176 7.51
Rev Ser 1989 Sioux Valley
Hosp Iss 7.625 11/1/13 AA- 925 1,015,502 6.95
------------
1,091,678
------------
Tennessee (5.34%)
Eastside Utility District
of Hamilton,
Waterworks Rev Iss 6.750 11/1/11 BBB+ 1,000 1,040,500 6.49
Humphreys County Industrial
Development Board,
Solid Waste Disposal Rev E.I.
Dupont Denemours
And Co. Proj 6.700 5/1/24 AA 6,500 6,838,520 6.37
Metropolitan Nashville and
Davidson County Health and
Education Facility Board,
Rev Ref Vanderbilt
Univ Ser A 7.625 5/1/16 AA 1,750 1,873,777 7.12
Tennessee Housing Development
Agency, Homeownership Program
Proj J 7.750 7/1/17 A+ 1,000 1,054,840 7.35
------------
10,807,637
------------
Texas (7.27%)
Alliance Airport Auth Inc,
Spec Facil Rev Ser 1996 Fed Express
Corp Proj 6.375 4/1/21 BBB 3,500 3,439,765 6.49
Austin, City of,
Utility Sys Rev Ref Ser B 7.800 07-01-11 A 1,000 1,086,420 7.18
Corpus Christi Housing Finance
Corp, Single Family Mtg Sr Rev
Ref Ser 1991 A 7.700 7/1/11 AAA 695 744,137 7.19
Texas (continued)
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds
1991 Ser A 8.750% 10/1/11 A $625 $677,525 8.07%
Harris County Health Facilities
Development Corp,
Hosp Rev Ser 1988A Saint Luke's
Episcopal Hospital Proj 8.250 2/15/08 AAA 1,475 1,662,944 7.32
Harris, County of,
Toll Road Untld Tax & Sub Lien
Rev Ref 8.100 8/1/08 AA+ 250 275,448 7.35
Toll Road Untld Tax & Sub Lien
Rev Ref 8.125 8/1/15 AA+ 250 275,582 7.37
Houston, City of,
Wtr & Swr Sys Rev Ref Prior
Lien Ser B 6.750 12/1/08 A 1,500 1,614,195 6.27
Wtr & Swr Sys Rev Ref Jr Lien
Ser C Zero 12/1/11 AAA 4,000 1,579,840 6.05
North Central Texas Health
Facilities Development,
Hospital Rev Baylor University
Medical Center Ser 1991 A 9.769# 5/15/16 AA 1,000 1,213,750 8.05
Texas Housing Agency,
Mtg Rev Single Family
Ser A 8.250 3/1/17 A+ 400 402,928 8.19
Texas, State of,
Veterans' Land Board GO 7.125 12/1/09 AA 1,000 1,067,620 6.67
Veterans' Land Board GO
Prerefunded 8.250 12/1/10 AAA 610 685,585 7.34
------------
14,725,739
------------
Utah (3.67%)
Intermountain Power
Agency,
Pwr Supply Rev Ref Ser
1986 B 5.000 7/1/16 AA- 1,935 1,683,682 5.75
Pwr Supply Rev Ref
Ser A 5.000 7/1/21 AA- 2,000 1,691,500 5.91
Salt Lake City Hospital,
Ref Ref IHC Hosp Inc
VRDN/RIBS 9.621# 5/15/20 AAA 1,500 1,698,750 8.50
Rev Ref IHC Hosp Inc
Ser B 8.000 5/15/07 AA 350 379,593 7.38
Rev Ref Ser A 8.125 5/15/15 AAA 1,000 1,189,380 6.83
Utah Housing Finance
Agency, Single Family Mtg
Sr Bonds 1990 Iss B-2 7.700 7/1/15 AA 385 399,952 7.41
Single Family Mtg Sr Bonds
1991 Iss B-1 7.500 7/1/16 AA 365 385,400 7.10
------------
7,428,257
------------
Virginia (1.67%)
Arlington County Industrial
Development Auth,
Hosp Facil Rev Arlington
Hosp Ser 1991 A 7.125 9/1/21 AAA 500 564,145 6.31
Fairfax County Industrial
Develpment Auth,
Rev RITES 9.877# 8/29/23 AA- 1,000 1,207,500 8.18
Fredericksburg Industrial
Auth, Hosp Facil Rev 9.418# 8/15/23 AAA 1,500 1,601,250 8.82
------------
3,372,895
------------
Washington (1.48%)
Tacoma Electric System,
Rev VRDN/RIBS Iss of 1991 9.134# 1/2/15 AAA 1,000 1,067,500 8.56
University of Washington,
Housing & Dining Sys Rev
Ser 1991 7.000 12/1/21 AAA 750 819,435 6.41
Washington, State of,
GO Ser A of 1990 6.750 2/1/15 AA 1,000 1,105,180 6.11
------------
2,992,115
------------
Wisconsin (0.55%)
Sturgeon Bay Combined
Utilities, Door County
Combined Util Mtg Rev
Prerefunded Ser 1990 7.500% 1/1/10 AAA $770 $865,203 6.67%
Door County Combined Util
Mtg Rev Unrefunded Ser 1990 7.500 1/1/10 AAA 230 254,056 6.79
------------
1,119,259
------------
Wyoming (1.29%)
Sweetwater, County of,
Poll Control Rev Idaho Pwr
Co. Ser A 7.625 12/1/14 A- 500 520,120 7.33
Poll Control Rev Idaho Pwr
Co. Ser B 7.625 12/1/13 A- 1,000 1,040,240 7.33
Poll Control Rev Idaho Pwr
Co. Ser B 7.625 12/1/13 AAA 1,000 1,046,990 7.28
------------
2,607,350
------------
TOTAL TAX-EXEMPT
LONG-TERM BONDS
(COST $189,910,865) (98.09%) $198,581,176
====== ============
* Credit Ratings are rated by Moody's Investor Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
+ The yield shown is the current yield which represents the annual
interest earned divided by the market price. This calculation is not
representative of the guidelines established by the United States
Securities Exchange Commission. Zero coupon bond yields are at yield to maturity.
# Represents rate in effect on April 30, 1996.
The percentages shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
Portfolio Concentration (Unaudited)
- -------------------------------------------------------------------
The Managed Tax-Exempt Fund invests primarily in securities issued
by the various states and their various political subdivisions.
The performance of the Fund is closely tied to economic conditions
within the applicable states and the financial condition of the states
and their agencies and municipalities. The concentration of
investments by states and credit ratings for individual securities
held by the Fund are shown in the schedule of investments.
In addition, the concentration of investments can be aggregated
by various sector categories.
The table below shows the percentages of the Fund's investments at
April 30, 1996 assigned to the various sector categories.
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------------------------------------------
General Obligation 5.25%
Revenue Bonds - Education 9.14
Revenue Bonds - Electric Power 6.45
Revenue Bonds - Health 17.52
Revenue Bonds - Housing 11.34
Revenue Bonds - Industrial Development Bond 6.77
Revenue Bonds - Other 13.75
Revenue Bonds - Pollution Control Facilities 12.88
Revenue Bonds - Transportation 7.61
Revenue Bonds - Water & Sewer 7.38
---------
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.09%
=========
Notes to Financial Statements
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company
Act of 1940. The Trust consists of six series portfolios: John Hancock
Managed Tax-Exempt Fund (the "Fund"), John Hancock Regional Bank Fund,
John Hancock Sovereign U.S. Government Income Fund, John Hancock
Disciplined Growth Fund, John Hancock Gold & Government Fund and John
Hancock Financial Industries Fund, which commenced operations on
March 14, 1996. Prior to April 1, 1996, John Hancock Disciplined Growth
Fund was known as John Hancock Sovereign Achievers Fund. The investment
objective of the Fund is to seek as high a level of current income
exempt from Federal income tax as is consistent with preservation of
capital, by investing primarily in municipal securities.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A and Class B shares. The shares of
each class represent an interest in the same portfolio of investments of
the Fund and have equal rights to voting, redemptions, dividends, and
liquidation, except that certain expenses subject to the approval of the
Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under terms of a distribution
plan, have exclusive voting rights regarding such distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or, at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which
approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, may participate in a joint repurchase
agreement. Aggregate cash balances are invested in one or more
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is required.
DIVIDENDS, interest and Distributions Interest income on investment
securities is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principals. Dividends paid by
the Fund with respect to each class of shares will be calculated in the
same manner, at the same time and will be in the same amount, except for
the effect of expenses that may be applied differently to each class as
explained previously.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the
amount paid in excess of par value on securities purchased from either
the date of purchase or date of issue to date of sale, maturity or to
next call date, if applicable. The Fund accretes original issue discount
from par value on securities purchased from either the date of issue or
the date of purchase over the life of the security, as required by the
Internal Revenue Code. The Fund records market discount on bonds
purchased after April 30, 1993 at time of disposition.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in securities
prices, interest rates, and other market conditions and for speculative
purposes. At the time the Fund enters into a financial futures contract,
it will be required to deposit with its custodian a specified amount of
cash or U.S. government securities, known as "initial margin", equal to
a certain percentage of the value of the financial futures contract
being traded. Each day, the futures contract is valued at the official
settlement price on the board of trade or U.S. commodities exchange.
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. Daily variation margin adjustments, arising from
this "mark to market", will be recorded by the Fund as unrealized gains
or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there
may be an illiquid market and/or that a change in the value of the
contracts may not correlate with changes in the value of the underlying
securities. In addition, the Fund could be prevented from opening or
realizing the benefits of closing out futures positions because of
position limits or limits on daily price fluctuation imposed by an
exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures
contracts.
At April 30, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- ------------------ -------- ------------
JUN 1996 100 U.S. Treasury Bonds SHORT $221,875
------------
At April 30, 1996, the Fund has deposited in a segregated account
$200,000 to cover margin requirements on open financial futures
contracts.
NOTE B --
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.60% of the
first $250,000,000 of the Fund's average daily net asset value, (b)
0.50% of the next $500,000,000, and (c) 0.45% of the Fund's average
daily net asset value in excess of $750,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares, the fee payable
to the Adviser will be reduced to the extent of such excess, and the
Adviser will make additional arrangements necessary to eliminate any
remaining excess expenses. The current limits are 2.5% of the first
$30,000,000 of the Fund's average daily net asset value, 2.0% of the
next $70,000,000, and 1.5% of the remaining average daily net asset
value.
The Adviser has agreed to limit its management fee to 0.55% of the
Fund's average daily net assets. Accordingly, the reduction in the
Adviser's fee amounted to $53,372 for the period ended April 30, 1996.
The Adviser reserves the right to terminate this limitation in the
future.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-
Distributors for shares of the Fund. For the period ended April 30,
1996, net sales charges received with regard to sales of Class A shares
amounted to $57,111. Out of this amount, $5,391 was retained and used
for printing prospectuses, advertising, sales literature and other
purposes, $2,279 was paid as sales commissions to unrelated broker-
dealers and $49,441 was paid as sales commissions to sales personnel of
John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony,
Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of
which are broker dealers. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries, which include FDC, Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended April 30, 1996, the contingent
deferred sales charges paid to JH Funds amounted to $213,900.
In addition, to reimburse the Co-Distibutors for the services they
provide as distributors of shares of the Fund, the Fund has adopted
Distribution Plans with respect to Class A and Class B pursuant to Rule
12b-1 under the Investment Company Act of 1940. Accordingly, the Fund
will make payments to the Co-Distributors for distribution and service
expenses, at an annual rate not to exceed 0.30% of Class A average daily
net assets and 1.00% of Class B average daily net assets to reimburse
the Co-Distibutors for their distribution/service costs. Up to a maximum
of 0.25% of such payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain
circumstances. In order to comply with this Rule, the 12b-1 fee on Class
B shares was reduced to 0.95% effective December 1, 1995 and was
increased to 1.00% effective March 1, 1996.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. The Fund pays Investor Services a fee
based on the number of shareholder accounts and certain out-of-pocket
expenses.
Mr. Edward J. Boudreau, Jr. and Ms. Anne C. Hodsdon are directors and/or
officers of the Adviser and/or its affiliates, as well as Trustees of
the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. Effective with the fees paid for 1995, the unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The
Fund makes investments into other John Hancock funds, as applicable, to
cover its liability for the deferred compensation. Investments to cover
the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the
related other asset are always equal and are marked to market on a
periodic basis to reflect any income earned by the investment as well as
any unrealized gains or losses. At April 30, 1996, the Fund's
investments to cover the deferred compensation liability had unrealized
appreciation of $667.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations
of the U.S. government and its agencies and short-term securities,
during the period ended April 30, 1996, aggregated $93,871,230 and
$110,597,191, respectively. There were no purchases or sales of
obligations of the U.S. government and its agencies during the period
ended April 30, 1996.
The cost of investments owned at April 30, 1996 for federal income tax
purposes was $189,910,865. Gross unrealized appreciation and
depreciation of investments aggregated $9,403,185 and $732,874,
respectively, resulting in net unrealized appreciation of $8,670,311.
[BLANK PAGE]
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the
page. A box sectioned in quadrants with a triangle in upper left, a
circle in upper right, a cube in lower left and a diamond in lower
right. A tag line reads:
"A Global Investment Management Firm."
John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 582
This report is for the information of shareholders of the John Hancock
Managed Tax-Exempt Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which
details charges, investment objectives and operating policies.
A Recycled logo in lower left hand corner with the caption
"Printed on Recycled Paper"
070SA 4/96
6/96
<PAGE>
John Hancock Funds
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Managed
Tax-Exempt
Fund
ANNUAL REPORT
October 31, 1995
<PAGE>
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
William A. Barron, III*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
William F. Glavin*
Patrick Grant*
Ralph Lowell, Jr.*
John A. Moore*
Patti McGill Peterson*
John W. Pratt*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President, Assistant Secretary and
Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse llp
160 Federal Street
Boston, Massachusetts 02110
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief Executive Officer,
flush right, next to second paragraph.]
Investors around the world have been watching Wall Street in awe for the better
part of 1995. Through October, the Standard & Poor's 500-Stock Index, a
widely-used barometer of stock performance, had grown by more than 25%.
Investors who stayed in the market after a disappointing 1994 have been
rewarded.
On another street, Pennsylvania Avenue, one of the hot topics many people are
watching is Medicare reform. While there's no clear-cut solution on the horizon,
today's Medicare debate should serve as another wake-up call to all Americans
about the need to have a financial plan and to save for retirement. Whether or
not the government changes the way health-care benefits are allotted to senior
citizens, the message is clear: your future security and well-being lies in your
own hands -- not Uncle Sam's.
We know you've heard it a hundred times. Pick up almost any financial
periodical today, and you'll see cover stories on retirement. Many of them will
perhaps scare you or make you think that the task of saving for retirement is
just too daunting. But take heart. We don't believe that and neither do many
financial experts.
Yet retirement planning is not to be taken lightly. To live the way you want
to -- the way you deserve to after all those years of hard work -- you need to
plan and save now, on a regular basis, no matter what your other costs, no
matter how small the amount, no matter what your current age. It may be easier
if you start earlier, but it's never too late.
Building a secure nest egg is indeed doable. Talk to your financial adviser
about establishing your retirement planning roadmap, if you haven't already. And
educate yourself by reading some of the many articles about how to save for
retirement. Take control of your future by saving today. That way, when it comes
time for retirement, you shouldn't have to think about any street but Easy
Street.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
BY FRANK LUCIBELLA, SECOND VICE PRESIDENT AND
PORTFOLIO MANAGER
JOHN HANCOCK
MANAGED
TAX-EXEMPT FUND
Falling interest rates, low supply buoy municipal
bond market; further decline in rates and
continued low supply could extend rally
[A 2 1/2" x 3 1/2" photo of Frank Lucibella, bottom right. Caption reads: "Frank
Lucibella, Portfolio Manager]
During the first eight months of 1995, municipal bonds made up most of the
ground they lost in 1994. In hindsight, it's evident that the municipal bond
market reached a bottom late last year after suffering from rising interest
rates and relatively weak demand. This year, the opposite held true. Falling
interest rates and a low supply of municipal bonds relative to demand ignited a
healthy rebound for the municipal bond market.
While municipals outperformed Treasury securities in the first quarter of
1995, a flurry of media coverage about various flat-tax proposals in the second
quarter gave the municipal market an excuse to consolidate. The market hit
another hurdle in late June, when Orange County, California voters failed to
approve a sales tax increase that would have helped to deal with the county's
substantial investment losses. And even though the Federal Reserve Board cut
interest rates in July, the euphoria was somewhat short-lived
[CAPTION]
"DURING THE FIRST EIGHT MONTHS OF 1995, MUNICIPAL BONDS MADE UP MOST OF THE
GROUND THEY LOST IN 1994."
3
<PAGE>
John Hancock Funds - Managed Tax-Exempt Fund
[Pie chart with the heading `Portfolio Diversification" at top of left hand
column. The chart is divided into 10 sections. Going from top left to right:
Transportation 11%, Pollution Control 15%, Education 11%, Housing 11%, Water &
Sewer 5%, Industrial Revenue 5%, Health 14%, General Obligation 5%, Electric 9%,
Other 14%. Footnote below reads: "As a percentage of net assets on October 31,
1995."]
because investors worried that there wouldn't be more of the same to come. All
in all, municipals gave up some ground against Treasuries in the summer. But the
overall environment continued to be positive for bonds, as evidence of a slowing
economy and muted inflation pushed fixed-income markets higher.
The municipal market's strong performance was reflected in John Hancock
Managed Tax-Exempt Fund's performance. For the year ended October 31, 1995, the
Fund's Class A and Class B shares posted total returns of 13.30% and 12.63%,
respectively, at net asset value. That compared to the average general municipal
bond fund's return of 13.35%, according to Lipper Analytical Services.1
The primary reason the Fund slightly lagged its competitors was its
shorter-than-average duration. Duration measures how sensitive a fund's share
price is to changes in interest rates. Generally speaking, the longer a fund's
duration, the more its share price will rise when interest rates fall, and
conversely, fall when interest rates rise. Coming out of 1994, the worst year
for bonds in recent memory, we deliberately took a conservative stance. We did
lengthen the duration later in the year, but not soon enough to benefit from the
market's strongest-performing period. But because we think that interest rates
can continue to fall over the long term, we've kept the Fund's duration on the
longer side.
PORTFOLIO CHANGES
In addition to modifying the Fund's duration, we also made other strategic
changes to the portfolio. During the past six months, market conditions allowed
us to place a greater emphasis on generating additional yield for the fund.
Prior to that, the difference in yield between high- and low-quality bonds was
quite small, so we emphasized higher-quality bonds. Since the yield spread -- or
difference in yields -- was so narrow, we were able to do that without
sacrificing a lot of the yield that lower-quality bonds normally offer. But as
the market's rally wore on, we found opportunities to sell some of our
higher-quality issues at relatively high prices, and replace them once again
with cheaper, lower-quality issues that offered higher yields. As a result of
this change in strategy, the Fund's stake in BBB-rated bonds, which are
lower-rated but still investment-grade, grew to 25% from 16% six months earlier.
It's important to note that we aren't just chasing yield when we buy these
lower-rated
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers. The first listing is
Foothill/Eastern Transportation followed by an up arrow and the phrase "Fall in
interest rates provides gains." The second listing is Sacramento Co-Generation
Project followed by an up arrow and the phrase "Strong corporate sponsorship."
The third listing is De Soto Parish/International Paper followed by a down arrow
and the phrase "Acquisition put pressure on earnings." Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."]
[CAPTION]
"...MARKET CONDITIONS ALLOWED US TO PLACE A GREATER EMPHASIS ON GENERATING
ADDITIONAL YIELD..."
4
<PAGE>
John Hancock Funds - Managed Tax-Exempt Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended October 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 15% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
13.30% total return for the John Hancock Managed Tax-Exempt Fund, Class A. The
second represents the 12.63% total return for the John Hancock Managed
Tax-Exempt Fund, Class B. The third represents the 13.35% total return for the
average general municipal bond fund. A footnote below reads: "Total returns for
the John Hancock Managed Tax-Exempt Fund are at net asset value with all
distributions reinvested. Total return for the average general municipal bond
fund is tracked by Lipper Analytical Services. (1) See following page for
historical performance information."]
securities. We buy BBB-rated bonds only when we think the issuing entity has
sound fundamentals. One example is the Foothill/Eastern Transportation Corridor
Agency, which will fund the construction of a toll road in California where the
projections for traffic and revenues are quite good. What's more, we bought them
at a time when their prices were cheap. These bonds appreciated during the
market's rally.
Finally, we modified our holdings across states over the past year,
concentrating on buying those with upside potential. While New York remained our
top state concentration, we traded in and out of these bonds as market
conditions warranted. In some cases, we sold New York bonds to buy California
insured bonds when they were cheap. Throughout the past 12 months, we increased
our holdings in Florida when supply was heavy and prices were cheap.
OUTLOOK
Over the longer term, we believe that interest rates can fall even further from
today's levels. Inflation remains in check, economic growth is slow but steady,
and Congress appears to be making a serious attempt to cut the federal budget
deficit. The Federal Reserve Board has indicated its willingness to cut interest
rates if Congress is successful in that effort.
Over the short term, however, worry about the future of tax reform and its
potential effect on municipal bonds could cause some volatility in the market,
as it did briefly in the spring when the idea was first introduced. But we don't
believe that any major tax reform will be enacted before 1997. By the end of
October, municipal bond prices looked relatively cheap compared to U.S. Treasury
securities. The municipal market has done quite well so far this year. In light
of that, it's not unreasonable to believe that eventually the market will pause
and decide what it will do from here. That depends on the economy's strength
over the next several months. Also, demand for municipals is relatively stable
and supply is limited. That should bode well for municipal bond prices over the
next six months.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance
is lower.
5
[CAPTION]
"...DEMAND FOR MUNICIPALS IS RELATIVELY STABLE AND SUPPLY IS LIMITED."
<PAGE>
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Managed Tax-Exempt Fund. Total return is a
performance measure that equals the sum of all dividends and capital gains,
assuming reinvestment of these distributions and the change in the price of the
Fund's shares, expressed as a percentage of the Fund's average net assets.
Performance figures include the maximum applicable sales charge of 4.50% for
Class A shares. The effect of the maximum contingent deferred sales charge for
Class B shares (maximum 5% and declining to 0% over six years) is included in
Class B performance. Remember that all figures represent past performance and
are no guarantee of how the Fund will perform in the future. Also, keep in mind
that the total return and share price of the Fund's investments will fluctuate.
As a result, your Fund's shares may be worth more or less than their original
cost, depending on when you sell them. Please note that a portion of the Fund's
income may be subject to federal, state, or local taxes.
CUMULATIVE TOTAL RETURNS
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
LIFE
ONE FIVE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
John Hancock Managed Tax-Exempt
Fund: Class A 4.44% 22.21%(1) N/A
John Hancock Managed Tax-Exempt
Fund: Class B 3.61% 45.62% 94.40%(2)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIOD ENDED SEPTEMBER 30, 1995(3)
<TABLE>
<CAPTION>
LIFE
ONE FIVE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
John Hancock Managed Tax-Exempt
Fund: Class A 4.44% 5.51%(1) N/A
John Hancock Managed Tax-Exempt
Fund: Class B 3.61% 7.81% 8.28%(2)
</TABLE>
YIELDS
AS OF OCTOBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
-----
<S> <C>
John Hancock Managed Tax-Exempt Fund: Class A 4.74%
John Hancock Managed Tax-Exempt Fund: Class B 4.32%
</TABLE>
NOTES TO PERFORMANCE
(1) Class A shares started on January 3, 1992.
(2) Class B shares started on April 22, 1987.
(3) The Adviser voluntarily waived a portion of the management fee and
reduced a portion of the custodian fees during the period. Without the
waiver of expenses, the average annualized total return for the one-year
period and since inception for Class A shares would have been 4.37% and
5.34%, respectively. The average annualized total returns for the one-year
and five-year periods and since inception for Class B shares would have been
3.54%, 7.61%, and 7.92%, respectively.
Note: Participant-directed defined-contribution plans with at least 100 eligible
employees at inception of the Fund account may purchase Class A shares without
an initial sales charge as of March 15, 1995. If those shares are redeemed,
however, during the year following the calendar year end during which they were
purchased, a contingent deferred sales charge will be assessed.
6
<PAGE>
The charts on the right show how much a $10,000 investment in the John Hancock
Managed Tax-Exempt Fund would be worth on October 31, 1995, assuming you had
invested on the day each class of shares started and reinvested all
distributions. For comparison, we've shown the same $10,000 investment in the
Lehman Municipal Bond Index -- an unmanaged index that includes approximately
15,000 bonds and is commonly used as a measure of municipal bond performance.
[Line chart with the heading Managed Tax-Exempt Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines.]
[The first line represents the value of the Lehman Municipal Bond Index and is
equal to $13,259 as of October 31, 1995. The second line represents the value of
the hypothetical $10,000 investment made in the Managed Tax-Exempt Fund on
January 3, 1992, before sales charge, and is equal to $13,000 as of October 31,
1995. The third line represents the Managed Tax-Exempt Fund after sales charge
and is equal to $12,415 as of October 31, 1995.]
[Line chart with the heading Managed Tax-Exempt Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.]
[The first line represents the value of the hypothetical $10,000 investment made
in the Managed Tax-Exempt Fund on April 22, 1987, before contingent deferred
sales charge, and is equal to $19,758 as of October 31, 995. The second line
represents the value of the Lehman Municipal Bond Index and is equal to $19,296
as of October 31, 1995..]
*No contingent deferred sales charge applicable.
7
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON OCTOBER 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF
THAT DATE.
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
- --------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $205,317,165) ..... $218,037,090
Joint repurchase agreement (cost - $1,831,000) ....... 1,831,000
Corporate savings account............................. 6,384
------------
219,874,474
Receivable for shares sold............................. 76,327
Receivable for investments sold........................ 6,599,793
Interest receivable.................................... 4,467,268
Other assets........................................... 29,126
------------
Total Assets.................... 231,046,988
-------------------------------------------------
LIABILITIES:
Dividend payable....................................... 30,668
Payable for shares repurchased......................... 119,581
Payable for investments purchased...................... 10,315,544
Payable to John Hancock Advisers, Inc. and
affiliates - Note B................................... 132,394
Accounts payable and accrued expenses.................. 62,813
------------
Total Liabilities............... 10,661,000
-------------------------------------------------
NET ASSETS:
Capital paid-in........................................ 206,137,501
Accumulated net realized gain on investments and
financial futures contracts........................... 1,458,033
Net unrealized appreciation of investments 12,719,925
Undistributed net investment income.................... 70,529
------------
Net Assets...................... $220,385,988
=================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $42,383,912/3,665,817........................ $ 11.56
========================================================================
Class B - $178,002,076/15,391,245...................... $ 11.57
========================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($11.56 x 104.71%)........................... $ 12.10
========================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
</TABLE>
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended October 31, 1995
- --------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................... $ 15,060,119
------------
Expenses:
Distribution/service fee - Note B
Class A............................................. 83,379
Class B............................................. 1,967,708
Investment management fee - Note B.................... 1,360,930
Transfer agent fee - Note B........................... 178,923
Trustees' fees........................................ 50,267
Auditing fee.......................................... 41,800
Registration and filing fees.......................... 34,829
Printing.............................................. 29,725
Custodian fee......................................... 74,206
Legal fees............................................ 15,127
Miscellaneous......................................... 11,736
Less Management Fee Reduction - Note B (113,411)
------------
Total Expenses.................. 3,735,219
Less Expense Reductions -
Note B.......................... (47,982)
-------------------------------------------------
Net Expenses.................... 3,687,237
-------------------------------------------------
Net Investment Income........... 11,372,882
-------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FINANCIAL FUTURES CONTRACTS:
Net realized gain on investments sold.................. 4,782,526
Net realized loss on financial futures contracts....... (2,363,744)
Change in net unrealized appreciation/depreciation
of investments........................................ 13,312,666
Change in net unrealized appreciation/depreciation of
financial futures contracts........................... (153,531)
------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts..... 15,577,917
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations....... $ 26,950,799
=================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income................................................................ $ 11,372,882 $ 12,831,192
Net realized gain (loss) on investments sold and financial futures contracts......... 2,418,782 (739,886)
Change in net unrealized appreciation (depreciation) of investments and financial
futures contracts ................................................................... 13,159,135 (27,862,425)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations..................... 26,950,799 (15,771,119)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($0.6282 and $0.6387 per share, respectively)............................. (1,545,018) (1,070,853)
Class B - ($0.5516 and $0.5610 per share, respectively)............................. (9,827,864) (11,760,339)
Distributions from net realized gain on investments sold and financial futures
contracts
Class A - (none and $0.0898 per share, respectively)................................ --- (120,420)
Class A - (none and $0.0898 per share, respectively)................................ --- (1,901,276)
------------ ------------
Total Distributions to Shareholders............................................... (11,372,882) (14,852,888)
------------ ------------
FROM FUND SHARE TRANSACTIONS-- NET*.................................................... (33,226,056) (1,927,851)
------------ ------------
NET ASSETS:
Beginning of period.................................................................. 238,034,127 270,585,985
------------ ------------
End of period (including undistributed net investment income of $70,529 and none,
respectively) ....................................................................... $220,385,988 $238,034,127
============ ============
</TABLE>
<TABLE>
<CAPTION>
* ANALYSIS OF FUND SHARE TRANSACTIONS: YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1995 1994
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
CLASS A
Shares sold.................................................. 2,334,618 $ 26,534,395 1,179,686 $13,702,193
Shares issued to shareholders in reinvestment of
distributions ............................................... 84,320 947,287 60,754 696,640
--------- ------------ --------- -----------
2,418,938 27,481,682 1,240,440 14,398,833
Less shares repurchased...................................... (695,912) (7,619,563) (472,296) (5,404,052)
--------- ------------ --------- -----------
Net increase................................................. 1,723,026 $ 19,862,119 768,144 $ 8,994,781
========= ============ ========= ===========
CLASS B
Shares sold.................................................. 1,012,904 $ 11,296,871 2,722,911 $31,724,838
Shares issued to shareholders in reinvestment of
distributions ............................................... 444,432 4,959,344 586,954 6,775,123
--------- ------------ --------- -----------
1,457,336 16,256,215 3,309,865 38,499,961
Less shares repurchased...................................... (6,179,061) (69,344,390) (4,333,843) (49,422,593)
--------- ------------ --------- -----------
Net decrease................................................. (4,721,725) $(53,088,175) (1,023,978) ($10,922,632)
========= ============ ========= ===========
</TABLE>
THE STATEMENT OF CHANGES IN NET ASSETS SHOWS HOW THE VALUE OF THE FUND'S NET
ASSETS HAS CHANGED SINCE THE END OF THE PREVIOUS FISCAL PERIOD. THE DIFFERENCE
REFLECTS EARNINGS LESS EXPENSES, ANY INVESTMENT GAINS AND LOSSES, DISTRIBUTIONS
PAID TO SHAREHOLDERS, AND ANY INCREASE OR DECREASE IN MONEY SHAREHOLDERS
INVESTED IN THE FUND. THE FOOTNOTE ILLUSTRATES THE NUMBER OF FUND SHARES SOLD,
REINVESTED AND REDEEMED DURING THE LAST TWO PERIODS, ALONG WITH THE
CORRESPONDING DOLLAR VALUES.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1995 1994 1993 1992(a)
---------- --------- -------- -----------
<S> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period.................................... $ 10.79 $ 12.13 $ 11.12 $ 11.25
------- ------- ------- -------
Net Investment Income................................................... 0.63 0.64 0.70 0.55
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts........................................ 0.77 ( 1.25) 1.05 ( 0.11)
------- ------- ------- -------
Total from Investment Operations..................................... 1.40 ( 0.61) 1.75 0.44
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income.................................... ( 0.63) ( 0.64) ( 0.70) ( 0.53)
Distributions from Net Realized Gain on Investments Sold
and Financial Futures Contracts........................................ --- ( 0.09) ( 0.04) ( 0.04)
------- ------- ------- -------
Total Distributions.................................................. ( 0.63) ( 0.73) ( 0.74) ( 0.57)
------- ------- ------- -------
Net Asset Value, End of Period.......................................... $ 11.56 $ 10.79 $ 12.13 $ 11.12
======= ======= ======= =======
Total Investment Return at Net Asset Value (c).......................... 13.30% ( 5.22%) 16.10% 4.74%*
Total Adjusted Investment Return at Net Asset Value (b)(d).............. 13.28% ( 5.29%) 15.77% 4.51%*
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)............................... $42,384 $20,968 $14,244 $ 9,589
Ratio of Expenses to Average Net Assets**............................... 1.06% 0.95% 0.70% 0.78%*
Ratio of Adjusted Expenses to Average Net Assets (b).................... 1.11% 1.02% 1.03% 1.01%*
Ratio of Net Investment Income to Average Net Assets**.................. 5.53% 5.52% 5.98% 6.24%*
Ratio of Adjusted Net Investment Income to Average Net Assets (b)....... 5.48% 5.42% 5.65% 6.01%*
Portfolio Turnover Rate................................................. 104% 59% 23% 23%
** Expense Reimbursement Per Share...................................... $ 0.01 $ 0.01 $ 0.04 $ 0.02
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIODS INDICATED: THE NET INVESTMENT INCOME, GAINS
(LOSSES), DISTRIBUTIONS AND TOTAL INVESTMENT RETURNS OF THE FUND. IT SHOWS HOW
THE FUND'S NET ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS
PERIOD. ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS
PRESENTED IN THE FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period......................... $ 10.79 $ 12.13 $ 11.12 $ 11.12 $ 10.61
-------- -------- -------- -------- --------
Net Investment Income........................................ 0.55 0.56 0.64 0.66 0.68
Net Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts................................. 0.78 ( 1.25) 1.05 0.04 0.61
-------- -------- -------- -------- --------
Total from Investment Operations.......................... 1.33 ( 0.69) 1.69 0.70 1.29
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income......................... ( 0.55) ( 0.56) ( 0.64) ( 0.64) ( 0.72)
Distributions from Net Realized Gain on Investments Sold and
Financial Futures Contracts................................. --- ( 0.09) ( 0.04) ( 0.06) ( 0.06)
-------- -------- -------- -------- --------
Total Distributions....................................... ( 0.55) ( 0.65) ( 0.68) ( 0.70) ( 0.78)
-------- -------- -------- -------- --------
Net Asset Value, End of Period............................... $ 11.57 $ 10.79 $ 12.13 $ 11.12 $ 11.12
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (c)............... 12.63% ( 5.85%) 15.51% 6.39% 12.55%
Total Adjusted Investment Return at Net Asset Value (b)(d)... 12.61% ( 5.92%) 15.18% 6.20% 12.24%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).................... $178,002 $217,066 $256,342 $226,943 $199,955
Ratio of Expenses to Average Net Assets**.................... 1.73% 1.62% 1.23% 1.35% 1.19%
Ratio of Adjusted Expenses to Average Net Assets (b)......... 1.78% 1.69% 1.56% 1.54% 1.50%
Ratio of Net Investment Income to Average Net Assets**....... 4.92% 4.84% 5.49% 5.74% 6.19%
Ratio of Adjusted Net Investment Income to Average Net Assets
(b) ......................................................... 4.87% 4.77% 5.16% 5.55% 5.88%
Portfolio Turnover Rate...................................... 104% 59% 23% 23% 30%
** Expense Reimbursement Per Share........................... $ 0.01 $ 0.01 $ 0.04 $ 0.02 $ 0.04
</TABLE>
* On an annualized basis.
(a) Class A shares commenced operations on January 3, 1992.
(b) On an unreimbursed basis.
(c) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(d) An estimated total return calculation which takes into consideration fees
and expenses waived or borne by the Adviser during the periods shown.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
SCHEDULE OF INVESTMENTS
October 31, 1995
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
MANAGED TAX-EXEMPT FUND ON OCTOBER 31, 1995. IT HAS TWO MAIN CATEGORIES:
TAX-EXEMPT LONG-TERM BONDS AND SHORT-TERM INVESTMENTS. THE TAX-EXEMPT BONDS ARE
FURTHER BROKEN DOWN BY STATE. UNDER EACH STATE IS A LIST OF THE SECURITIES OWNED
BY THE FUND. SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S "CASH" POSITION,
ARE LISTED LAST.
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA (2.27%)
Birmingham, City of,
GO Iss of 1989.......................................... 7.350% 03-01-14 A1** $ 750 $ 824,235 6.69%
Citronelle Industrial Development Board,
Stauffer Chemical Co Proj 1982.......................... 8.000 12-01-12 NR** 500 563,435 7.10
Mobile Industrial Development Board,
Mobile Energy Serv Co Proj 1995......................... 6.950 01-01-20 BBB- 3,500* 3,623,270 6.71
----------
5,010,940
----------
ALASKA (1.86%)
Alaska Housing Finance Corp,
Coll Home Mtg Ser A-3 GNMA/FNMA Coll.................... 7.700 12-01-13 AAA 495 522,997 7.29
Coll Home Mtg Ser B-1 GNMA Coll......................... 7.650 06-01-24 AAA 2,000 2,153,560 7.1
Coll Home Mtg Ser B-2 GNMA Coll......................... 7.875 06-01-24 AAA 305 322,196 7.45
Valdez Alaska Marine Terminal,
Rev Ref Sohio Pipe Line Co. Proj Ser 1985............... 7.125 12-01-25 AA- 1,000 1,089,850 6.54
----------
4,088,603
----------
ARIZONA (3.23%)
Arizona Municipal Financing Program,
Cert of Part Ser 25..................................... 7.875 08-01-14 AAA 1,000 1,275,560 6.17
Navajo, County of,
Poll Control Corp Rev Ref Arizona Pub Serv Co Ser A..... 5.875 08-15-28 BBB 5,000 4,739,350 6.20
Pima, County of,
Swr Rev Ref Ser 1991.................................... 6.750 07-01-15 AAA 460 516,028 6.02
Pima, County of,
Swr Rev Ref Ser 1991.................................... 6.750 07-01-15 AAA 540 588,217 6.20
----------
7,119,155
----------
ARKANSAS (0.33%)
Arkansas Development Finance Auth,
Single Family Mtg Rev Ref Ser 1991 A.................... 8.000 08-15-11 AA 660 721,710 7.32
----------
CALIFORNIA (9.50%)
Central Valley Finance Agency,
California Cogeneration Proj Rev Carson Ice Gen Proj.... 6.100 07-01-13 BBB- 2,900 2,884,224 6.13
California Cogeneration Proj Rev Carson Ice Gen Proj.... 6.200 07-01-20 BBB- 2,000 1,989,780 6.23
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
Foothill/Eastern Transportation Corridor Agency,
Toll Road Rev Ser A................................. 6.000% 01-01-34 BBB- $6,025* $ 5,690,010 6.35%
Sacramento Cogeneration Auth,
Cogeneration Proj Rev Procter & Gamble Proj......... 6.500 07-01-21 BBB- 4,500* 4,580,505 6.39
Sacramento Municipal Utilities District,
Elec Rev Ref Ser 1992 A Inflos...................... 8.615# 08-15-18 AAA 1,000 1,078,750 7.99
Santa Ana Financing Auth,
Lease Rev Police Administration & Holding Facil
Ser A............................................... 6.250 07-01-19 AAA 2,000* 2,160,860 5.78
University of California,
Cert of Part Rev Ref UCLA Central Chiller/
Cogeneration Project................................ 5.600 11-01-20 Aa** 2,700* 2,541,132 5.95
-----------
20,925,261
-----------
COLORADO (4.33%)
Arapahoe County Cap Imp Trust Fund
Highway Revenue Ser. E-470.......................... 6.950 08-31-20 Baa** 6,000* 6,322,860 6.60
Colorado Housing Finance Auth,
Single Family Prog Sr Iss A-2....................... 7.625 08-01-17 AA 1,035 1,095,237 7.21
Single Family Residential Rev Ser C................. 8.750 09-01-17 Aa** 465 497,764 8.17
Douglas County School District No. Re. 1,
Douglas and Elbert Counties CO, GO Improvement Ser
1994A............................................... 6.400 12-15-11 AAA 1,500 1,626,195 5.90
-----------
9,542,056
-----------
CONNECTICUT (0.78%)
Connecticut Health & Educational Facilities Auth,
Rev Quinnipiac College Ser D......................... 6.000 07-01-23 BBB- 1,890 1,728,632 6.56
-----------
DELAWARE (0.98%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Delmarva Pwr Ser B.............. 6.750 05-01-19 AAA 2,000* 2,160,920 6.25
-----------
FLORIDA (7.75%)
Broward, County of,
Resource Recovery SES Broward Co., L.P. South Proj... 7.950 12-01-08 A 4,580 5,143,706 7.08
Citrus, County of,
Poll Control Rev Ref Ser 199A Florida Pwr Corp
Crystal River Pwr Plant Proj......................... 6.625 01-01-27 A+ 1,250* 1,315,375 6.30
Dade, County of,
Water & Swr Sys Rev Ser 1995......................... 5.500 10-01-18 AAA 3,000* 2,942,400 5.61
Hernando, County of,
Criminal Justice Complex Rev Ser 1986................ 7.650 07-01-16 AAA 500 634,615 6.03
Lee, County of,
Hosp Board of Directors Hosp Rev Inflos.............. 9.144# 04-01-20 AAA 2,000 2,215,000 8.26
Orange County Health Facilities Auth,
Hosp Rev Orlando Regional Medical Center............. 8.688# 10-29-21 AAA 1,000 1,085,000 8.01
Tampa, City of,
Cap Imp Prog Rev Ser B Iss of 1988................... 8.375 10-01-18 BBB 3,500 3,733,555 7.85
-----------
17,069,651
-----------
</TABLE>
See notes to financial statements.
13
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS (1.37%)
Illinois Health Facilities Auth,
Rev Methodist Hlth Serv Corp Ser 1991 B.............. 9.538%# 05-01-21 AAA $1,000 $ 1,161,250 8.21%
Rev Methodist Medical Center Illinois Ref A.......... 8.000 10-01-14 BBB 1,000 1,002,720 7.98
Rev Swedish-American Hosp............................ 7.400 04-01-20 AAA 750 852,412 6.51
-----------
3,016,382
-----------
INDIANA (0.37%)
Hammond Local Public Improvement,
Bond Bank Ser A Township of Schererville
Multi-Financing Prog................................. 7.000 03-15-09 AAA 750 821,663 6.39
-----------
KANSAS (1.13%)
Sedgwick, County of,
GNMA Coll Mtg Ln Rev Ser C........................... 8.625 11-01-18 AAA 2,295 2,483,098 7.97
-----------
LOUISIANA (2.83%)
Calcasieu Parish Public Trust Auth,
Mtg Rev Ref 1991 Ser A............................... 7.750 06-01-12 A** 540 589,939 7.09
De Soto, Parish of,
Environ Imp Rev Int'l Paper Co Proj Ser A............ 7.700 11-01-18 A- 2,750* 3,091,495 6.85
De Soto, Parish of,
Environ Imp Rev Int'l Paper Co Proj Ser B............ 6.550 04-01-19 A- 2,500* 2,563,275 6.39
-----------
6,244,709
-----------
MAINE (0.61%)
Maine State Housing Auth,
Mtg Purchase Ser A-3................................. 7.800 11-15-15 AA- 1,250 1,332,325 7.32
-----------
MASSACHUSETTS (10.44%)
Greater New Bedford Regional Refuse Management
District, Mass GO Landfill........................... 5.875 05-01-13 Baa** 750 708,150 6.22
Massachusetts Health & Educational Facilities Auth,
Rev St. Elizabeth's Hosp of Boston Ser E............. 9.746# 08-15-21 AAA 1,000 1,140,000 8.55
Rev Ref Worcester Polytech Institute Ser E........... 6.750 09-01-11 A+ 1,840* 2,023,540 6.14
Massachusetts Housing Finance Agency,
Insured Rental Ser A................................. 6.650 07-01-19 AAA 5,500 5,690,465 6.43
Single Family Hsg Ser 8.............................. 7.700 06-01-17 A+ 1,000 1,075,930 7.16
Massachusetts Municipal Wholesale Electric Co.,
Pwr Supply Rev Ser A................................. 5.000 07-01-14 AAA 3,000* 2,792,970 5.37
Massachusetts Municipal Wholesale Electric Co.,
Pwr Supply Rev Ser B................................. 5.000 07-01-13 AAA 2,390* 2,215,076 5.39
Massachusetts Turnpike Authority,
Turnpike Rev Ser A................................... 5.000 01-01-20 A+ 7,000* 6,326,880 5.53
Massachusetts Water Pollution Abatement Trust,
Wtr Poll Abatement Rev (SESD Ln Prog) 1994 Ser A..... 6.375 02-01-15 AA- 1,000 1,044,640 6.10
-----------
23,017,651
-----------
</TABLE>
See notes to financial statements.
14
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
MICHIGAN (1.93%)
Detroit, City of,
GO UnLtd Ser A 1995.................................. 6.800% 04-01-15 BBB $1,315* $ 1,383,722 6.46%
Michigan Housing Development Auth,
Single Family Mtg Rev Ser A.......................... 7.500 06-01-15 AA+ 1,415 1,515,140 7.00
Michigan State Hospital Financing Auth,
Rev Ref Hosp Genesys Hlth Sys Ser A.................. 8.100 10-01-13 BBB 1,250* 1,357,675 7.46
-----------
4,256,537
-----------
MINNESOTA (0.13%)
Minnesota Housing Finance Agency
Single Family Mtg 1990 Ser C......................... 7.700 07-01-14 AA 265 282,736 7.22
-----------
NEVADA (1.73%)
Nevada Housing Division,
Single Family Proj Sr Rev Ser 1989 Iss A-1........... 7.350 04-01-16 AA 940 982,450 7.03
Single Family Proj Sr Rev Ser 1990 Iss C-1........... 7.850 10-01-15 AA 355 376,641 7.40
Nevada, State of,
GO Ltd Tax Municipal Bond Bank Proj No. 38........... 6.750 07-01-09 NR 975 1,101,906 5.97
GO Ltd Tax Municipal Bond Bank Proj No. 38........... 6.750 07-01-09 AA 25 27,056 6.24
Reno Hospital,
Rev St. Mary's Regional Medical Center Ser A......... 7.750 07-01-07 AAA 720 798,804 6.99
Rev St. Mary's Regional Medical Center Ser A......... 7.750 07-01-07 AAA 480 528,293 7.04
-----------
3,815,150
-----------
NEW JERSEY (0.51%)
New Jersey Turnpike Auth,
Turnpike Rev 1991 Ser C.............................. 6.500 01-01-16 AAA 1,000* 1,126,100 5.77
-----------
NEW YORK (12.44%)
Metropolitan Transportation Auth,
Transit Rev Ser J.................................... 6.500 07-01-18 AAA 1,000* 1,063,860 6.11
New York, State of
GO UnLtd. 1995....................................... 5.800 10-01-12 A- 1,365* 1,392,000 5.69
New York Local Assistance Corp.,
Ser C, 1991.......................................... 7.000 04-01-10 A 2,000* 2,217,260 6.31
New York Local Government Assistance Corp.,
Ser A, 1992.......................................... 6.875 04-01-19 A 2,000* 2,180,800 6.31
New York State Dormitory Authority,
City Univ Sys 2nd Gen Rev Ser A...................... 5.750 07-01-09 BBB 1,000 991,510 5.80
State Univ Ed Facil Rev Ser 1990B.................... 7.000 05-15-16 BBB+ 5,000 5,342,350 6.55
State Univ Ed Facil Rev Ser 1993A.................... 5.500 05-15-19 BBB+ 2,000* 1,877,120 5.86
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A,
NYC Municipal Wtr Fin Auth Proj...................... 7.500 06-15-12 A 600 672,846 6.69
New York State Mortgage Agency,
Rev Homeownership Ser BB-2........................... 7.950 10-01-15 Aa** 560 591,646 7.52
New York Urban Development Auth.
Ref Correctional Cap Facil Ser A..................... 5.250 01-01-21 BBB 3,000* 2,684,460 5.87
</TABLE>
See notes to financial statements.
15
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK (CONTINUED)
Port Authority of New York and New Jersey,
Cons Seventy Second Ser 1992......................... 7.350% 10-01-27 AA- $2,000* $ 2,289,860 6.42%
Triborough Bridge & Tunnel Auth,
Rev Ref Ser 1987 L................................... 8.000 01-01-07 A+ 500 548,710 7.29
Rev Gen Purpose Ser X................................ 6.500 01-01-19 A+ 1,250 1,325,638 6.13
Rev Gen Purpose Ser Y................................ 6.125 01-01-21 A+ 4,000* 4,242,000 5.78
-----------
27,420,060
-----------
OHIO (3.80%)
Cleveland, City of,
Pub Pwr Sys First Mtg Ser 1994A...................... 7.000 11-15-16 AAA 5,860* 6,704,895 6.12
Cuyahoga, County of,
Hosp Imp Rev Deaconess Hosp of Cleveland Proj
Ser 1985 B........................................... 7.450 10-01-18 A1** 750 867,547 6.44
Hosp Rev Meridia Hlth Sys Ser 1991................... 7.000 08-15-23 A 750 793,642 6.62
-----------
8,366,084
-----------
OKLAHOMA (0.77%)
Tulsa County Industrial Auth,
Hlth Care Rev St. Francis Hosp Inc................... 6.900 12-15-05 AA 1,500 1,701,135 6.08
-----------
PENNSYLVANIA (6.65%)
Northumberland County Auth,
Commonwealth Lease Rev Ser 1991...................... 6.250 10-15-09 AAA 1,000 1,060,500 5.89
Pennsylvania Economic Development Financing Auth,
Colver Proj. Ser D................................... 7.150 12-01-18 BBB- 5,000* 5,217,400 6.85
Pennsylvania Turnpike Commission,
Turnpike Rev Ser K................................. 7.625 12-01-09 AAA 500 571,250 6.67
Philadelphia Hospital & Higher Education Facilities
Auth, Hosp Rev Children's Hosp Philadelphia Proj
Ser A.............................................. 7.875 07-01-08 AA 500 538,005 7.32
Hosp Rev Temple Univ Hosp Ser A.................... 6.625 11-15-23 A- 3,375 3,409,324 6.56
Philadelphia School District,
GO UnLtd. Ser. B................................... 5.500 09-01-25 AAA 4,000* 3,863,320 5.69
-----------
14,659,799
-----------
SOUTH CAROLINA (2.86%)
James Island Public Service District,
Charleston County Swr Sys Ref...................... 7.500 06-01-18 AAA 1,250 1,405,600 6.67
Lexington County School District No. 1,
Cert of Part 1989 Ser B Pelion High School Proj.... 7.650 09-01-09 AAA 1,145 1,284,999 6.82
Richland, County of,
Poll Control Rev Union Camp Corp Proj Ser 1992 B... 6.625 05-01-22 A 2,460 2,572,865 6.33
Poll Control Rev Union Camp Corp Proj Ser C........ 6.550 11-01-20 A 1,000 1,042,760 6.28
-----------
6,306,224
-----------
</TABLE>
See notes to financial statements.
16
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
SOUTH DAKOTA (0.50%)
South Dakota Health & Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss................... 7.625% 11-01-13 AA- $ 925 $ 1,030,321 6.85%
Rev Ser 1989 Sioux Valley Hosp Iss................... 7.625 11-01-13 AA- 75 78,809 7.26
-----------
1,109,130
-----------
TENNESSEE (4.92%)
Eastside Utility District of Hamilton,
Waterworks Rev Iss................................... 6.750 11-01-11 BBB+ 1,000 1,051,640 6.42
Humphreys, County of,
Indl Devel Board Solid Waste Disp Rev (E.I.
DuPont DeNemours & Co.).............................. 6.700 05-01-24 AA 6,500 6,788,925 6.41
Metropolitan Nashville & Davidson County Health &
Education Facility Board, Rev Ref Vanderbilt
Univ Ser A........................................... 7.625 05-01-16 AA 1,750 1,939,175 6.88
Tennessee Housing Development Agency,
Homeownership Prog Proj J............................ 7.750 07-01-17 A+ 1,000 1,068,040 7.26
-----------
10,847,780
-----------
TEXAS (4.93%)
Austin, City of,
Utility Sys Rev Ref Ser B............................ 7.800 11-15-12 A 1,000 1,109,900 7.03
Corpus Christi Housing Finance Corp,
Single Family Mtg Sr Rev Ref Ser 1991 A.............. 7.700 07-01-11 AAA 730 793,495 7.08
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds 1991 Ser A........... 8.750 10-01-11 A** 665 739,300 7.87
Harris County Health Facilities Development Corp,
Hospital Rev Saint Luke's Episcopal.................. 8.250 02-15-08 AAA 1,475 1,695,041 7.18
Harris, County of,
Toll Road Unltd Tax & Sub Lien Rev Ref............... 8.100 08-01-08 AA+ 250 279,890 7.23
Toll Road Unltd Tax & Sub Lien Rev Ref............... 8.125 08-01-15 AA+ 250 280,045 7.25
Houston Water & Sewer System,
Rev Ref Prior Lien Ser B............................. 6.750 12-01-08 A 1,500 1,652,535 6.13
North Central Texas Health Facility Development Corp,
Hospital Rev Baylor Univ Medical Center Ser 1991 A... 9.614# 05-15-16 AA 1,000 1,114,560 8.63
Texas Housing Agency,
Mtg Rev Single Family Ser A.......................... 8.250 03-01-17 A+ 990 1,025,145 7.97
Texas, State of,
Veterans' Land Board GO.............................. 7.125 12-01-09 AA 1,000 1,078,490 6.61
Veterans' Land Board GO.............................. 8.250 12-01-10 AA 390 399,894 8.05
Veterans' Land Board GO Prerefunded.................. 8.250 12-01-10 AAA 610 700,506 7.18
-----------
10,868,801
-----------
UTAH (3.48%)
Intermountain Power Agency,
Pwr Supply Rev Ref Ser A............................. 5.000 07-01-21 AA- 2,000 1,756,180 5.69
Pwr Supply Spec Oblig-Registered-1st Crossover Ser... 5.000 07-01-16 AA- 1,935 1,732,676 5.58
</TABLE>
See notes to financial statements.
17
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
UTAH (CONTINUED)
Salt Lake City Hospital,
Rev Ref IHC Hosp Inc Ser B........................... 8.000% 05-15-07 AA $ 350 $ 386,215 7.25%
Rev Ref IHC Hosp Inc VRDN/RIBS....................... 9.287# 05-15-20 AAA 1,500 1,708,125 8.16
Rev Ref Ser A........................................ 8.125 05-15-15 AAA 1,000 1,212,390 6.70
Utah Housing Finance Agency,
Single Family Mtg Sr Bonds 1990 Iss B-2.............. 7.700 07-01-15 AA 425 444,941 7.35
Single Family Mtg Sr Bonds 1991 Iss B-1.............. 7.500 07-01-16 AA 405 434,205 7.00
------------
7,674,732
------------
VIRGINIA (1.59%)
Arlington County Industrial Development Auth,
Hosp Facil Rev Arlington Hosp Ser 1991 A............. 7.125 09-01-21 AAA** 500 575,750 6.19
Fairfax County Industrial Development Auth,
Rev RITES............................................ 9.528# 08-29-23 AA- 1,000 1,266,250 7.52
Fredericksburg Industrial Auth,
Hosp Facil Rev....................................... 9.144# 08-15-23 AAA 1,500 1,659,375 8.27
------------
3,501,375
------------
WASHINGTON (1.89%)
Tacoma Electric System,
Rev Iss of 1989...................................... 7.375 01-01-08 AAA 1,000 1,118,510 6.59
Rev VRDN/RIBS Iss of 1991............................ 8.790# 01-02-15 AAA 1,000 1,095,000 8.03
University of Washington,
Housing & Dining Sys Rev Ser 1991.................... 7.000 12-01-21 AAA 750 832,230 6.31
Washington, State of,
GO Ser A of 1990..................................... 6.750 02-01-15 AA 1,000 1,125,430 6.00
------------
4,171,170
------------
WISCONSIN (0.52%)
Sturgeon Bay, City of,
Door County Combined Util Mtg Rev Ser 1990........... 7.500 01-01-10 AAA 770 884,283 6.53
Door County Combined Util Mtg Rev Ser 1990........... 7.500 01-01-10 AAA 230 258,653 6.67
------------
1,142,936
------------
WYOMING (1.20%)
Sweetwater County Pollution Control,
Rev Idaho Pwr Co. Ser A.............................. 7.625 12-01-14 A- 500 525,165 7.26
Rev Idaho Pwr Co. Ser B.............................. 7.625 12-01-13 A- 1,000 1,050,330 7.26
Rev Idaho Pwr Co. Ser B MBIA......................... 7.625 12-01-13 AAA 1,000 1,063,490 7.17
------------
2,638,985
------------
OTHER - PUERTO RICO (1.30%)
University of Puerto Rico,
Univ Rev Ser M....................................... 5.250 06-01-25 AAA 3,000* 2,865,600 5.50
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $205,317,165) (98.93%) 218,037,090
------ ------------
</TABLE>
See notes to financial statements.
18
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000'S MARKET
STATE, ISSUER, DESCRIPTION RATE OMITTED) VALUE
- -------------------------- ---- -------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (0.83%)
Investment in a joint repurchase
agreement with SBC Capital
Markets Dated 10-31-95,
Due 11-01-95 (secured by
U.S. Treasury Bonds 8.75%
Due 05-15-17 and U.S. Treasury
Note 5.75% Due 09-30-97).................................... 5.890% $1,831 $ 1,831,000
CORPORATE SAVINGS ACCOUNT (0.0%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 3.0%........................................... 6,384
------------
TOTAL SHORT-TERM INVESTMENTS ( 0.83%) 1,837,384
------ ------------
TOTAL INVESTMENTS (99.76%) $219,874,474
====== ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities, other than short-term investments, newly added to the portfolio
during the period ended October 31, 1995.
** Rated by Moody's Investors Services or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available. NR Security is not rated.
*** Credit ratings are unaudited.
+ The yield is unaudited and not calculated in accordance with guidelines
established by the U.S. Securities and Exchange Commission.
# Represents rate in effect on October 31, 1995.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
PORTFOLIO CONCENTRATION (UNAUDITED)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE JOHN HANCOCK MANAGED TAX-EXEMPT FUND INVESTS PRIMARILY IN SECURITIES ISSUED
BY VARIOUS STATES AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF
THE FUND IS CLOSELY TIED TO THE ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATES
AND THE FINANCIAL CONDITION OF THE STATES AND THEIR AGENCIES AND MUNICIPALITIES.
THE CONCENTRATION OF INVESTMENTS BY STATES AND CREDIT RATINGS FOR INDIVIDUAL
SECURITIES HELD BY THE FUND IS SHOWN IN THE SCHEDULE OF INVESTMENTS. IN
ADDITION, THE CONCENTRATION OF INVESTMENTS CAN BE AGGREGATED BY VARIOUS SECTOR
CATEGORIES.
THE TABLE BELOW SHOWS THE PERCENTAGES OF THE FUND'S INVESTMENTS AT OCTOBER 31,
1995 ASSIGNED TO THE VARIOUS SECTOR CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
------------------- -------------------------------
<S> <C>
General Obligation .......................................... 4.42%
Revenue Bonds - Electric .................................... 8.90
Revenue Bonds - Health/Education ............................ 25.00
Revenue Bonds - Housing ..................................... 11.23
Revenue Bonds - Industrial .................................. 5.32
Revenue Bonds - Pollution Control ........................... 14.45
Revenue Bonds - Transportation .............................. 10.65
Revenue Bonds - Water & Sewer ............................... 4.69
Revenue Bonds - Other ....................................... 14.27
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.93%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust (the "Trust") is a an open-end investment management
company, registered under the Investment Company Act of 1940. The Trust consists
of five series portfolios: John Hancock Managed Tax-Exempt Fund (the "Fund"),
John Hancock Gold & Government Fund, John Hancock Regional Bank Fund, John
Hancock Sovereign U.S. Government Income Fund and John Hancock Sovereign
Achievers Fund. Prior to January 1, 1995, John Hancock Gold & Government Fund
was known as John Hancock Freedom Gold & Government Fund and John Hancock
Regional Bank Fund was known as John Hancock Freedom Regional Bank Fund.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B.The shares of each class represent an interest
in the same portfolio of investments of the Fund and have equal rights to
voting, redemption, dividends, and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission. Shareholders of a class which bears distribution/service
expenses under the terms of a distribution plan, have exclusive voting rights
regarding such distribution plan. Significant accounting policies of the Fund
are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class as explained previously.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes. Transfer
agent expenses and distribution/service fees if any, are calculated daily at the
class level based on the appropriate net assets of each class and the specific
expense rate(s) applicable to each class.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The premium amortization reduces interest income. The Fund accretes original
issue discount from par value on securities purchased from either the date of
issue or the date of purchase over the life of the security, as required by the
Internal Revenue Code. The Fund records market discount on bonds purchased after
April 30, 1993 at time of disposition.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. 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," equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price of the
board of trade or U.S. commodities exchange. 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. Daily variation
margin adjustments, arising from this "mark to market," are recorded by the Fund
as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At October 31, 1995 there were no open positions in financial futures
contracts.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to John Hancock Advisers, Inc. (the "Adviser"), a wholly-owned
subsidiary of The Berkeley Financial Group, for a continuous investment program
equivalent, on an annual basis, to the sum of (a) 0.60% of the first
$250,000,000 of the Fund's average daily net asset value, (b) 0.50% of the next
$500,000,000, and (c) 0.45% of the Fund's average daily net asset value in
excess of $750,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess, and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are 2.5% of the first $30,000,000 of the
Fund's average daily net asset value, 2.0% of the next $70,000,000, and 1.5% of
the remaining average daily net asset value. Additionally, the Adviser may
reduce part or all of its management fee for a period under the terms of the
Advisory Agreement. For the period ended October 31, 1995 the Adviser reduced
the Fund's management fee by $113,411. This reduction may be discontinued at any
time. Furthermore, $47,982 of custodian fees have been reduced by balance
credits applied during the period ended October 31, 1995.
John Hancock Funds, Inc. ("JH Funds"), a wholly-owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-Distributors for
shares of the Fund. Prior to January 1, 1995, JH Funds was known as John Hancock
Broker Distribution Services, Inc. For the period ended October 31, 1995, net
sales charges received on sales of Class A shares of the Fund amounted to
$96,495. Out of this amount, $11,759 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $22,654 was paid
as sales commissions to unrelated broker-dealers and
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
$62,082 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker
Anthony") and Sutro & Co., Inc. ("Sutro"), all of which are broker-dealers. The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company, is the
indirect sole shareholder of Distributors and John Hancock Freedom Securities
Corporation and its subsidiaries, which include FDC, Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase are subject
to a contingent deferred sales charge ("CDSC") at declining rates beginning at
5.0% of the lesser of the current market value at the time of redemption or the
original purchase cost of the shares being redeemed. Proceeds from the CDSC are
paid to JH Funds and are used in whole or in part to defray its expenses related
to providing distribution related services to the Fund in connection with the
sales of Class B shares. For the period ended October 31, 1995 the contingent
deferred sales charges received by JH Funds amounted to $308,083.
In addition, to reimburse the Co-Distributors for the services they provide
as distributors of shares of the Fund, the Fund has adopted Distribution Plans
with respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to the
Co-Distributors for distribution and service expenses, at an annual rate not to
exceed 0.30% of Class A average daily net assets and 1.00% of Class B average
daily net assets to reimburse the Co-Distributors for their distribution/
service costs. Up to a maximum of 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances. In
order to comply with this rule, the 12b-1 fee on Class B shares was decreased to
0.90% effective August 1, 1995, increased to 1.00% effective September 1, 1995
and decreased to 0.95% effective October 1, 1995.
The Fund has a transfer agent agreement with John Hancock Investor
Services, Corp. ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. Prior to January 1, 1995, Investor Services was known as John
Hancock Fund Services, Inc. Prior to January 1, 1995, the Fund paid Investor
Services a monthly transfer agent fee equivalent, on an annual basis, to 0.03%
and 0.06% of the average daily net asset value of Class A and Class B shares of
the Fund, respectively, plus out of pocket expenses incurred by Investor
Services on behalf of the Fund. For the period January 1, 1995 and through
September 30, 1995 Class A and Class B shares paid transfer agent fees based on
the number of shareholder accounts and certain out-of-pocket expenses. For the
eleven months ended September 30, 1995 the transfer agent expense, calculated as
a class specific expense was $20,596 for Class A and $140,680 for Class B,
respectively. Effective October 1, 1995 transfer agent expense is being treated
as a fund expense based on the number of shareholder accounts in the Fund and
certain out-of-pocket expenses.
Edward J. Boudreau, Jr. is a director and officer of the Adviser and its
affiliates, as well as a Trustee of the Fund. The compensation of unaffiliated
Trustees is borne by the Fund.
Effective with the fees paid for 1995, the unaffiliated Trustees may elect
to defer for tax purposes their receipt of this compensation under the John
Hancock Group of Funds Deferred Compensation Plan. The Fund will make
investments into other John Hancock funds, as applicable, to cover its liability
with regard to the deferred compensation. Investments to cover the Fund's
deferred compensation liability will be recorded on the Fund's books as an other
asset. The deferred compensation liability will be marked to market on a
periodic basis and income earned by the investment will be recorded on the
Fund's books.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Managed Tax-Exempt Fund
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other then obligations of the
U.S. government and its agencies and short-term securities, during the period
ended October 31, 1995, aggregated $231,092,265 and $262,789,315, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended October 31, 1995.
The cost of investments owned at October 31, 1995 (including the joint
repurchase agreement) for Federal income tax purposes was $207,148,165. Gross
unrealized appreciation and depreciation of investments aggregated $13,077,991
and $358,066, respectively, resulting in net unrealized appreciation of
$12,719,925.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended October 31, 1995, the Fund has reclassified amounts to
reflect an increase in undistributed net investment income of $70,529, a
decrease in accumulated net realized gain on investments and financial futures
contracts of $67,819 and a decrease to capital paid-in of $2,710. This
represents the cumulative amount necessary to report these balances on a tax
basis, excluding certain temporary differences, as of October 31, 1995.
Additional adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the Fund, are
primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
24
<PAGE>
John Hancock Funds - Managed Tax-Exempt Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Managed Tax-Exempt Fund and the Trustees of
Freedom Investment Trust
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Managed Tax-Exempt
Fund (the "Fund") (a portfolio of Freedom Investment Trust) at October 31, 1995,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian and brokers, and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 18, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the taxable distributions of the Fund during its fiscal year ended
October 31, 1995.
It is anticipated that there will be a distribution from net realized gains
from sales of securities and financial futures contracts to shareholders of
record on December 22, 1995 and payable on December 28, 1995. Shareholders will
receive a 1995 U.S. Treasury Department Form 1099-DIV in January 1996
representing their proportionate share.
Income dividends for the Fund are 100% tax-exempt.
25
<PAGE>
NOTES
John Hancock Funds - Managed Tax-Exempt Fund
26
<PAGE>
NOTES
John Hancock Funds - Managed Tax-Exempt Fund
27
<PAGE>
Bulk Rate
[LOGO] JOHN HANCOCK FUNDS U.S. Postage
A GLOBAL INVESTMENT MANAGEMENT FIRM PAID
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603 Brockton, MA
Permit No. 582
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Managed Tax-Exempt Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
JHD 0700A 10/95
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Tax-Free Bond Trust (the "Registrant") on Form N-1A
under the Securities Act of 1933 and the Investment Company Act of 1940 (File
Nos. 33-32246 and 811-5968), which information is incorporated herein by
reference.
ITEM 16. EXHIBITS:
1.11 Registrant's Amended and Filed herewith as Exhibit
Restated Declaration of 1.11.
Trust dated July 1, 1996
2. By-Laws of Registrant. Filed as Exhibit 2 to
Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
3. Not applicable.
4. Form of Agreement and Plan of Filed herewith as Exhibit B
Reorganization between the to the Proxy Statement and
Registrant and John Hancock Prospectus included as Part
Managed Tax-Exempt Fund. A of this Registration
Statement.
5. Not applicable.
6. Investment Management Filed as Exhibit 5(a)(4)
Contract between the to Registrant's Registration
Registrant and John Hancock Statement on Form N-1A and
Advisers, Inc. incorporated herein by
reference.
7.1 Distribution Agreement Filed as Exhibit 6(a) to
between the Registrant Registrant's Registration
and John Hancock Funds, Statement on Form N-1A and
Inc. (formerly named incorporated herein by
John Hancock Broker reference.
Distribution Services,
Inc.).
<PAGE>
7.2 Form of Soliciting Dealer Filed as Exhibit 6(b) to
Agreement between John Registrant's Registration
Hancock Funds, Inc. and Statement on Form N-1A and
Selected Dealers. incorporated herein by
reference.
7.3 Form of Financial Institution Filed as Exhibit 6(c) to
Sales and Service Agreement Registrant's Registration
between John Hancock Funds, Statement on Form N-1A and
Inc. and Selected Financial incorporated herein by
Institutions. reference.
8. Not applicable.
9. Master Custodian Agreement Filed as Exhibit 8 to
between John Hancock Mutual Registrant's Registration
Funds (including Registrant) Statement on Form N-1A and
and Investors Bank and Trust. incorporated by reference
herein.
10.1 Amended Class A Filed herewith as Exhibit
Distribution Plan between 10.1.
Registrant and John Hancock
Funds, Inc.
10.2 Class B Distribution Plan Filed as Exhibit 15(b)(i)
between Registrant and to Registrant's Registration
John Hancock Funds, Inc. Statement on Form N-1A and
incorporated herein by
reference.
11. Opinion as to legality Filed herewith as Exhibit 11.
of shares, and consent.
12. Form of opinion as to Filed herewith as Exhibit 12.
tax matters, and consent.
13. Not applicable.
14. Consents of Ernst & Young Filed herewith as Exhibit 14.
LLP and Price Waterhouse,
LLP regarding the audited
financial statements and
highlights of Registrant
and John Hancock Managed
Tax-Exempt Fund.
15. Not applicable.
2
<PAGE>
16. Powers of Attorney. Filed as addendum to
signature pages of
Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
17. Declaration of the Registrant Filed herewith as Exhibit 17.
pursuant to Rule 24f-2 under
the Investment Company Act of
1940.
18. Prospectus of John Hancock Filed herewith as Exhibit 18.
Managed Tax-Exempt Fund
dated March 1, 1996.
18.1 Statement of Additional Filed herewith as Exhibit
Information of John Hancock B to Part B of this
Managed Tax-Exempt Fund Registration Statement.
dated March 1, 1996
18.2 Statement of Additional Filed herewith as Exhibit
Information of John Hancock A to Part B of this
Tax-Free Bond Fund dated Registration Statement.
September 30, 1996
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of 1933,
as amended (the "1933 Act"), the reoffering prospectus will contain the
information called for by the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file an executed version of the
tax opinion referenced above as Exhibit 12 in a post-effective amendment to the
Registration Statement.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 26th day of August, 1996.
JOHN HANCOCK TAX-FREE BOND TRUST
By: Edward J. Boudreau, Jr.*
------------------------
Edward J. Boudreau, Jr.
Chairman, Chief Executive Officer
and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
Edward J. Boudreau, Jr.* Chairman, Chief ) August 26, 1996
- ------------------------ Executive Officer and )
Edward J. Boudreau, Jr. Trustee (Principal )
Executive Officer) )
)
)
/s/James B. Little Senior Vice President ) August 26, 1996
- ------------------------ and Chief Financial )
James B. Little Officer (Principal )
Financial and )
Accounting Officer) )
)
Trustees:
James F. Carlin* Trustee
- ------------------------ )
James F. Carlin )
)
William H. Cunningham* Trustee )
- ------------------------
William H. Cunningham )
4
<PAGE>
Charles F. Fretz* Trustee )
- ------------------------
Charles F. Fretz )
)
Harold R. Hiser, Jr.* Trustee )
- ----------------------
Harold R. Hiser, Jr. )
)
Anne C. Hodsdon* Trustee )
- ------------------------
Anne C. Hodsdon )
)
Charles L. Ladner* Trustee )
- ------------------------
Charles L. Ladner )
)
Leo E. Linbeck, Jr.* Trustee )
- ------------------------
Leo E. Linbeck, Jr. )
)
Patricia P. McCarter* Trustee )
- ------------------------
Patricia P. McCarter )
)
Steven R. Pruchansky* Trustee )
- ------------------------
Steven R. Pruchansky )
)
Richard S. Scipione* Trustee )
- ------------------------
Richard S. Scipione )
)
Norman H. Smith* Trustee )
- ------------------------
Norman H. Smith )
)
John P. Toolan* Trustee )
- ------------------------
John P. Toolan )
*By: /s/Susan S. Newton August 26, 1996
-------------------
Susan S. Newton,
Attorney-in-fact
5
<PAGE>
<TABLE>
<S> <C>
John Hancock Bank and Thrift Opportunity Fund John Hancock Patriot Global Dividend Fund
John Hancock Bond Fund John Hancock Patriot Preferred Dividend Fund
John Hancock California Tax-Free Income Fund John Hancock Patriot Premium Dividend Fund I
John Hancock Cash Reserve, Inc. John Hancock Patriot Premium Dividend Fund II
John Hancock Current Interest John Hancock Patriot Select Dividend Trust
John Hancock Institutional Series Trust John Hancock Series, Inc.
John Hancock Investment Trust John Hancock Tax-Free Bond Fund
</TABLE>
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
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement.
Exhibit No. Description
- ----------- -----------
1.11 Amended and Restated Declaration of Trust dated July 1, 1996.
4. Agreement and Plan of Reorganization between the
Registrant and John Hancock Managed Tax-Exempt Fund (filed as
EXHIBIT B to Part A of this Registration Statement).
10.1 Amended Class A Rule 12b-1 Plan for Registrant.
11. Opinion as to legality of shares, and consent.
12. Form of opinion as to tax matters, and consent.
14. Consents of Ernst & Young, LLP and Price Waterhouse, LLP
regarding the audited financial statements and highlights of
the Registrant and John Hancock Managed Tax-Exempt Fund.
17. Declaration of the Registrant pursuant to Rule 24f-2 under the
Investment Company Act of 1940.
18. Prospectus of John Hancock Managed Tax-Exempt Fund dated
March 1, 1996, as supplemented August 27, 1996.
6
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
JOHN HANCOCK TAX-FREE BOND TRUST
(formerly John Hancock Tax-Free Bond Fund)
(formerly Transamerica Tax-Free Bond Fund)
101 Huntington Avenue
Boston, Massachusetts 02199
Dated July 1, 1996
AMENDED AND RESTATED DECLARATION OF TRUST made this 1st day of July, 1996
by the undersigned (together with all other persons from time to time duly
elected, qualified and serving as Trustees in accordance with the provisions of
Article II hereof, the "Trustees");
WHEREAS, pursuant to a declaration of trust executed and delivered on
November 13, 1989 (the "Original Declaration"), the Trustees established a trust
for the investment and reinvestment of funds contributed thereto;
WHEREAS, the Trustees divided the beneficial interest in the trust assets
into transferable shares of beneficial interest, as provided therein;
WHEREAS, the Trustees declared that all money and property contributed to
the trust established thereunder be held and managed in trust for the benefit of
the holders, from time to time, of the shares of beneficial interest issued
thereunder and subject to the provisions thereof;
WHEREAS, the Trustees desire to amend and restate the Original Declaration;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, the undersigned, being all of the Trustees of the
trust, hereby amend and restate the Original Declaration as follows:
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is "John Hancock
Tax-Free Bond Trust" (the "Trust").
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the contract
described in Section 3.3 hereof.
(b) "By-laws" means the By-laws referred to in Section 2.8 hereof, as
amended from time to time.
<PAGE>
(c) "Class" means any division of shares within a Series in accordance with
the provisions of Article V.
(d) The terms "Commission" and "Interested Person" have the meanings given
them in the 1940 Act. Except as such term may be otherwise defined by the
Trustees in conjunction with the establishment of any Series, the term "vote of
a majority of the Outstanding Shares entitled to vote" shall have the same
meaning as is assigned to the term "vote of a majority of the outstanding voting
securities" in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has custody of
any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time to
time. Reference in this Declaration of Trust to "Declaration," "hereof,"
"herein," and "hereunder" shall be deemed to refer to this Declaration rather
than exclusively to the article or section in which such words appear.
(g) "Distributor" means the party, other than the Trust, to the contract
described in Section 3.1 hereof.
(h) "Fund" or "Funds" individually or collectively, means the separate
Series of the Trust, together with the assets and liabilities assigned thereto.
(i) "Fundamental Restrictions" means the investment restrictions set forth
in the Prospectus and Statement of Additional Information for any Series and
designated as fundamental restrictions therein with respect to such Series.
(j) "His" shall include the feminine and neuter, as well as the masculine,
genders.
(k) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.
(l) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(m) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
(n) "Prospectus" means the Prospectuses and Statements of Additional
Information included in the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such Prospectuses and Statements of
Additional Information may be amended or supplemented and filed with the
Commission from time to time.
(o) "Series" individually or collectively means the separately managed
component(s) of the Trust (or, if the Trust shall have only one such component,
then that one) as may be established and designated from time to time by the
Trustees pursuant to Section 5.11 hereof.
2
<PAGE>
(p) "Shareholder" means a record owner of Outstanding Shares.
(q) "Shares" means the equal proportionate units of interest into which the
beneficial interest in the Trust shall be divided from time to time, including
the Shares of any and all Series or of any Class within any Series (as the
context may require) which may be established by the Trustees, and includes
fractions of Shares as well as whole Shares. "Outstanding" Shares means those
Shares shown from time to time on the books of the Trust or its Transfer Agent
as then issued and outstanding, but shall not include Shares which have been
redeemed or repurchased by the Trust and which are at the time held in the
treasury of the Trust.
(r) "Transfer Agent" means any Person other than the Trust who maintains
the Shareholder records of the Trust, such as the list of Shareholders, the
number of Shares credited to each account, and the like.
(s) "Trust" means John Hancock Tax-Free Bond Trust.
(t) "Trustees" means the persons who have signed this Declaration, so long
as they shall continue in office in accordance with the terms hereof, and all
other persons who now serve or may from time to time be duly elected, qualified
and serving as Trustees in accordance with the provisions of Article II hereof,
and reference herein to a Trustee or the Trustees shall refer to such person or
persons in this capacity or their capacities as trustees hereunder.
(u) "Trust Property" means any and all property, real or personal, tangible
or intangible, which is owned or held by or for the account of the Trust or the
Trustees, including any and all assets of or allocated to any Series or Class,
as the context may require.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without The Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
3
<PAGE>
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment company, and
exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To invest in, hold for investment, or reinvest in, cash; securities,
including common, preferred and preference stocks; warrants; subscription
rights; profit-sharing interests or participations and all other contracts for
or evidence of equity interests; bonds, debentures, bills, time notes and all
other evidences of indebtedness; negotiable or non-negotiable instruments;
government securities, including securities of any state, municipality or other
political subdivision thereof, or any governmental or quasi-governmental agency
or instrumentality; and money market instruments including bank certificates of
deposit, finance paper, commercial paper, bankers' acceptances and all kinds of
repurchase agreements, of any corporation, company, trust, association, firm or
other business organization however established, and of any country, state,
municipality or other political subdivision, or any governmental or
quasi-governmental agency or instrumentality; any other security, instrument or
contract the acquisition or execution of which is not prohibited by any
Fundamental Restriction; and the Trustees shall be deemed to have the foregoing
powers with respect to any additional securities in which the Trust may invest
should the Fundamental Restrictions be amended.
(c) To acquire (by purchase, subscription or otherwise), to hold, to trade
in and deal in, to acquire any rights or options to purchase or sell, to sell or
otherwise dispose of, to lend and to pledge any such securities, to enter into
repurchase agreements, reverse repurchase agreements, firm commitment
agreements, forward foreign currency exchange contracts, interest rate, mortgage
or currency swaps, and interest rate caps, floors and collars, to purchase and
sell options on securities, indices, currency, swaps or other financial assets,
futures contracts and options on futures contracts of all descriptions and to
engage in all types of hedging, risk management or income enhancement
transactions.
(d) To exercise all rights, powers and privileges of ownership or interest
in all securities and repurchase agreements included in the Trust Property,
including the right to vote thereon and otherwise act with respect thereto and
to do all acts for the preservation, protection, improvement and enhancement in
value of all such securities and repurchase agreements.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real or
personal, including cash or foreign currency, and any interest therein.
(f) To borrow money and in this connection issue notes or other evidence of
indebtedness; to secure borrowings by mortgaging, pledging or otherwise
subjecting as security the Trust Property; and to endorse, guarantee, or
undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
4
<PAGE>
(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
(h) To enter into a plan of distribution and any related agreements whereby
the Trust may finance directly or indirectly any activity which is primarily
intended to result in the distribution and/or servicing of Shares.
(i) To adopt on behalf of the Trust or any Series thereof an alternative
purchase plan providing for the issuance of multiple Classes of Shares (as
authorized herein at Section 5.11).
(j) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or arising out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
Notwithstanding any other provision herein, the Trustees shall have full
power in their discretion as contemplated in Section 8.5, without any
requirement of approval by Shareholders, to invest part or all of the Trust
Property (or part or all of the assets of any Series), or to dispose of part or
all of the Trust Property (or part or all of the assets of any Series) and
invest the proceeds of such disposition, in securities issued by one or more
other investment companies registered under the 1940 Act. Any such other
investment company may (but need not) be a trust (formed under the laws of any
state) which is classified as a partnership or corporation for federal income
tax purposes.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any Series of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
deemed appropriately protected. The right, title and interest of the Trustees in
the Trust Property and the Property of each Series of the Trust shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee he
5
<PAGE>
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees shall have the
power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the
provisions set forth in Articles VI and VII and Section 5.11 hereof, to apply to
any such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or property of the Trust or of the particular Series with
respect to which such Shares are issued, whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by the laws of The
Commonwealth of Massachusetts governing business corporations.
Section 2.5. Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or any
Series of the Trust or the names of the Trustees or otherwise as the Trustees
may deem expedient, to the same extent as such delegation is permitted by the
1940 Act.
Section 2.6. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 2.7. Expenses. The Trustees shall have the power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The Trustees
shall fix the compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided herein
or in the By-laws, any action to be taken by the Trustees may be taken by a
majority of the Trustees present at a meeting of Trustees, including any meeting
held by means of a conference telephone circuit or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, or by written consents of a majority of Trustees then in office. The
Trustees may adopt By-laws not inconsistent with this Declaration to provide for
the conduct of the business of the Trust and may amend or repeal such By-laws to
the extent such power is not reserved to the Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
6
<PAGE>
Section 2.9. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust or any Series thereof; (b) enter
into joint ventures, partnerships and any other combinations or associations;
(c) remove Trustees, fill vacancies in, add to or subtract from their number,
elect and remove such officers and appoint and terminate such agents or
employees as they consider appropriate, and appoint from their own number, and
terminate, any one or more committees which may exercise some or all of the
power and authority of the Trustees as the Trustees may determine; (d) purchase,
and pay for out of Trust Property or the property of the appropriate Series of
the Trust, insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, administrators, distributors, selected
dealers or independent contractors of the Trust against all claims arising by
reason of holding any such position or by reason of any action taken or omitted
by any such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (e) establish pension, profit-sharing, share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust; (f) to the extent permitted by law, indemnify any
person with whom the Trust or any Series thereof has dealings, including the
Investment Adviser, Administrator, Distributor, Transfer Agent and selected
dealers, to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year and taxable year of the Trust or any Series thereof and the method
by which its or their accounts shall be kept; and (i) adopt a seal for the
Trust, but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except for transactions not permitted
by the 1940 Act or rules and regulations adopted, or orders issued, by the
Commission thereunder, the Trustees may, on behalf of the Trust, buy any
securities from or sell any securities to, or lend any assets of the Trust or
any Series thereof to any Trustee or officer of the Trust or any firm of which
any such Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or Transfer Agent or with any
Interested Person of such Person; and the Trust or a Series thereof may employ
any such Person, or firm or company in which such Person is an Interested
Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing
agent or custodian upon customary terms.
Section 2.11. Litigation. The Trustees shall have the power to engage in
and to prosecute, defend, compromise, abandon, or adjust by arbitration, or
otherwise, any actions, suits, proceedings, disputes, claims, and demands
relating to the Trust, and out of the assets of the Trust or any Series thereof
to pay or to satisfy any debts, claims or expenses incurred in connection
therewith, including those of litigation, and such power shall include without
limitation the power of the Trustees or any appropriate committee thereof, in
the exercise of their or its good faith business judgment, to dismiss any
action, suit, proceeding, dispute, claim, or demand, derivative or otherwise,
brought by any person, including a Shareholder in its own name or the name of
the Trust, whether or not the Trust or any of the Trustees may be named
individually therein or the subject matter arises by reason of business for or
on behalf of the Trust.
Section 2.12. Number of Trustees. The initial Trustees shall be the persons
initially signing the Original Declaration. The number of Trustees (other than
the initial Trustees) shall be such number as shall be fixed from time to time
by vote of a majority of the Trustees, provided, however, that the number of
Trustees shall in no event be less than one (1).
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Section 2.13. Election and Term. Except for the Trustees named herein or
appointed to fill vacancies pursuant to Section 2.15 hereof, the Trustees may
succeed themselves and shall be elected by the Shareholders owning of record a
plurality of the Shares voting at a meeting of Shareholders on a date fixed by
the Trustees. Except in the event of resignations or removals pursuant to
Section 2.14 hereof, each Trustee shall hold office until such time as less than
a majority of the Trustees holding office has been elected by Shareholders. In
such event the Trustees then in office shall call a Shareholders' meeting for
the election of Trustees. Except for the foregoing circumstances, the Trustees
shall continue to hold office and may appoint successor Trustees.
Section 2.14. Resignation and Removal. Any Trustee may resign his trust
(without the need for any prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate
number of Trustees after such removal shall not be less than one) with cause, by
the action of two-thirds of the remaining Trustees or by action of two-thirds of
the outstanding Shares of the Trust (for purposes of determining the
circumstances and procedures under which any such removal by the Shareholders
may take place, the provisions of Section 16(c) of the 1940 Act (or any
successor provisions) shall be applicable to the same extent as if the Trust
were subject to the provisions of that Section). Upon the resignation or removal
of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of the resigning or removed Trustee. Upon the incapacity or death of
any Trustee, his legal representative shall execute and deliver on his behalf
such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.15. Vacancies. The term of office of a Trustee shall terminate
and a vacancy shall occur in the event of his death, retirement, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform the
duties of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill
such vacancy by the appointment of such other person as they in their discretion
shall see fit, made by vote of a majority of the Trustees then in office. Any
such appointment shall not become effective, however, until the person named in
the vote approving the appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
An appointment of a Trustee may be made in anticipation of a vacancy to occur at
a later date by reason of retirement, resignation or increase in the number of
Trustees, provided that such appointment shall not become effective prior to
such retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.15, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. The vote by a
majority of the Trustees in office, fixing the number of Trustees shall be
conclusive evidence of the existence of such vacancy.
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Section 2.16. Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration except as herein otherwise expressly provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their discretion
from time to time enter into an exclusive or non-exclusive distribution contract
or contracts providing for the sale of the Shares to net the Trust or the
applicable Series of the Trust not less than the amount provided for in Section
7.1 of Article VII hereof, whereby the Trustees may either agree to sell the
Shares to the other party to the contract or appoint such other party as their
sales agent for the Shares, and in either case on such terms and conditions, if
any, as may be prescribed in the By-laws, and such further terms and conditions
as the Trustees may in their discretion determine not inconsistent with the
provisions of this Article III or of the By-laws; and such contract may also
provide for the repurchase of the Shares by such other party as agent of the
Trustees.
Section 3.2. Advisory or Management Contract. The Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts or, if the Trustees establish multiple Series, separate
investment advisory or management contracts with respect to one or more Series
whereby the other party or parties to any such contracts shall undertake to
furnish the Trust or such Series management, investment advisory,
administration, accounting, legal, statistical and research facilities and
services, promotional or marketing activities, and such other facilities and
services, if any, as the Trustees shall from time to time consider desirable and
all upon such terms and conditions as the Trustees may in their discretion
determine. Notwithstanding any provisions of the Declaration, the Trustees may
authorize the Investment Advisers, or any of them, under any such contracts
(subject to such general or specific instructions as the Trustees may from time
to time adopt) to effect purchases, sales, loans or exchanges of portfolio
securities and other investments of the Trust on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of such Investment Advisers, or
any of them (and all without further action by the Trustees). Any such
purchases, sales, loans and exchanges shall be deemed to have been authorized by
all of the Trustees. The Trustees may, in their sole discretion, call a meeting
of Shareholders in order to submit to a vote of Shareholders at such meeting the
approval or continuance of any such investment advisory or management contract.
If the Shareholders of any one or more of the Series of the Trust should fail to
approve any such investment advisory or management contract, the Investment
Adviser may nonetheless serve as Investment Adviser with respect to any Series
whose Shareholders approve such contract.
Section 3.3. Administration Agreement. The Trustees may in their discretion
from time to time enter into an administration agreement or, if the Trustees
establish multiple Series or Classes, separate administration agreements with
respect to each Series or Class, whereby the other party to such agreement shall
undertake to manage the business affairs of the Trust or of a
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Series or Class thereof and furnish the Trust or a Series or a Class thereof
with office facilities, and shall be responsible for the ordinary clerical,
bookkeeping and recordkeeping services at such office facilities, and other
facilities and services, if any, and all upon such terms and conditions as the
Trustees may in their discretion determine.
Section 3.4. Service Agreement. The Trustees may in their discretion from
time to time enter into Service Agreements with respect to one or more Series or
Classes thereof whereby the other parties to such Service Agreements will
provide administration and/or support services pursuant to administration plans
and service plans, and all upon such terms and conditions as the Trustees in
their discretion may determine.
Section 3.5. Transfer Agent. The Trustees may in their discretion from time
to time enter into a transfer agency and shareholder service contract whereby
the other party to such contract shall undertake to furnish transfer agency and
shareholder services to the Trust. The contract shall have such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the Declaration. Such services may be provided by one or more Persons.
Section 3.6. Custodian. The Trustees may appoint or otherwise engage one or
more banks or trust companies, each having an aggregate capital, surplus and
undivided profits (as shown in its last published report) of at least two
million dollars ($2,000,000) to serve as Custodian with authority as its agent,
but subject to such restrictions, limitations and other requirements, if any, as
may be contained in the By-laws of the Trust. The Trustees may also authorize
the Custodian to employ one or more sub-custodians, including such foreign banks
and securities depositories as meet the requirements of applicable provisions of
the 1940 Act, and upon such terms and conditions as may be agreed upon between
the Custodian and such sub-custodian, to hold securities and other assets of the
Trust and to perform the acts and services of the Custodian, subject to
applicable provisions of law and resolutions adopted by the Trustees.
Section 3.7. Affiliations of Trustees or Officers, Etc. The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust or any
Series thereof is a shareholder, director, officer, partner, trustee,
employee, manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or for any
parent or affiliate of any organization, with which a contract of the
character described in Sections 3.1, 3.2, 3.3 or 3.4 above or for services
as Custodian, Transfer Agent or disbursing agent or for providing
accounting, legal and printing services or for related services may have
been or may hereafter be made, or that any such organization, or any parent
or affiliate thereof, is a Shareholder of or has an interest in the Trust,
or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in Sections
3.1, 3.2, 3.3 or 3.4 above or for services as Custodian, Transfer Agent or
disbursing agent or for related services may have been or may hereafter be
made also has any one or more of such contracts with one or more other
partnerships, corporations, trusts, associations or other organizations, or
has other business or interests,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
Section 3.8. Compliance with 1940 Act. Any contract entered into pursuant
to Sections 3.1 or 3.2 shall be consistent with and subject to the requirements
of Section 15 of the 1940 Act (including any amendment thereof or other
applicable Act of Congress hereafter enacted), as modified by any applicable
order or orders of the Commission, with respect to its continuance in effect,
its termination and the method of authorization and approval of such contract or
renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust or any Series thereof. No Trustee, officer, employee or agent of the Trust
or any Series thereof shall be subject to any personal liability whatsoever to
any Person, other than to the Trust or its Shareholders, in connection with
Trust Property or the affairs of the Trust, except to the extent arising from
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties with respect to such Person; and all such Persons shall look solely to
the Trust Property, or to the Property of one or more specific Series of the
Trust if the claim arises from the conduct of such Trustee, officer, employee or
agent with respect to only such Series, for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust or any Series
thereof, is made a party to any suit or proceeding to enforce any such liability
of the Trust or any Series thereof, he shall not, on account thereof, be held to
any personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general successor) out of
the Trust Property for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made only out of
assets of the one or more Series whose Shares were held by said Shareholder at
the time the act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this
Section 4.1 shall not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust or any Series thereof to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer, employee
or agent of the Trust or any Series thereof shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including without
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limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee, officer, employee or
agent of the Trust (including any individual who serves at its request as
director, officer, partner, trustee or the like of another organization in
which it has any interest as a shareholder, creditor or otherwise) shall be
indemnified by the Trust, or by one or more Series thereof if the claim
arises from his or her conduct with respect to only such Series, to the
fullest extent permitted by law against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust, a Series thereof or the
Shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interest of the Trust or a Series thereof;
(iii) in the event of a settlement or other disposition not involving
a final adjudication as provided in paragraph (b)(ii) resulting in a
payment by a Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office:
(A) by the court or other body approving the settlement or other
disposition;
(B) based upon a review of readily available facts (as opposed to
a full trial-type inquiry) by (x) vote of a majority of the
Non-interested Trustees acting on the matter (provided that a majority
of the Non-interested Trustees then in office act on the matter) or
(y) written opinion of independent legal counsel; or
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(C) by a vote of a majority of the Shares outstanding and
entitled to vote (excluding Shares owned of record or beneficially by
such individual).
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification to
which personnel of the Trust or any Series thereof other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 4.3 may be advanced by the Trust or a Series thereof prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust or Series
thereof shall be insured against losses arising out of any such advances;
or
(ii) a majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Non-interested Trustees act on the matter)
or an independent legal counsel in a written opinion shall determine, based
upon a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who (i) is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) is not involved in the claim, action, suit or proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be obligated to
give any bond or other security for the performance of any of his duties
hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc. No
purchaser, lender, transfer agent or other Person dealing with the Trustees or
any officer, employee or agent of the Trust or a Series thereof shall be bound
to make any inquiry concerning the validity of any transaction purporting to be
made by the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or a
Series thereof or undertaking, and every other act or thing whatsoever executed
in connection with the Trust shall be conclusively presumed to have been
executed or done by the executors thereof only in their capacity as Trustees
under this Declaration or in their capacity as officers, employees or agents of
the Trust or a Series thereof. Every written obligation, contract, instrument,
certificate, Share, other security of the Trust or a Series thereof or
undertaking made or issued by the Trustees may recite that the same is executed
or made by them not individually, but as Trustees under the Declaration, and
that the obligations
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of the Trust or a Series thereof under any such instrument are not binding upon
any of the Trustees or Shareholders individually, but bind only the Trust
Property or the Trust Property of the applicable Series, and may contain any
further recital which they may deem appropriate, but the omission of such
recital shall not operate to bind the Trustees individually. The Trustees shall
at all times maintain insurance for the protection of the Trust Property or the
Trust Property of the applicable Series, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or employee of
the Trust or a Series thereof shall, in the performance of his duties, be fully
and completely justified and protected with regard to any act or any failure to
act resulting from reliance in good faith upon the books of account or other
records of the Trust or a Series thereof, upon an opinion of counsel, or upon
reports made to the Trust or a Series thereof by any of its officers or
employees or by the Investment Adviser, the Administrator, the Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest
without par value. The number of such Shares of beneficial interest authorized
hereunder is unlimited. The Trustees shall have the exclusive authority without
the requirement of Shareholder approval to establish and designate one or more
Series of shares and one or more Classes thereof as the Trustees deem necessary
or desirable. Each Share of any Series shall represent an equal proportionate
Share in the assets of that Series with each other Share in that Series. Subject
to the provisions of Section 5.11 hereof, the Trustees may also authorize the
creation of additional Series of Shares (the proceeds of which may be invested
in separate, independently managed portfolios) and additional Classes of Shares
within any Series. All Shares issued hereunder including, without limitation,
Shares issued in connection with a dividend in Shares or a split in Shares,
shall be fully paid and nonassessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust Property of
every description and the right to conduct any business hereinbefore described
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than the beneficial interest conferred by their Shares,
and they shall have no right to call for any partition or division of any
property, profits, rights or interests of the Trust nor can they be called upon
to share or assume any losses of the Trust or suffer an assessment of any kind
by virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in this Declaration. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion or
exchange rights, except as the Trustees may determine with respect to any Series
or Class of Shares.
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Section 5.3. Trust Only. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion may, from
time to time without a vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times and on such terms as the Trustees may deem
best, except that only Shares previously contracted to be sold may be issued
during any period when the right of redemption is suspended pursuant to Section
6.9 hereof, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and Shares held in the treasury. The
Trustees may from time to time divide or combine the Shares of the Trust or, if
the Shares be divided into Series or Classes, of any Series or any Class thereof
of the Trust, into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust or in the Trust Property
allocated or belonging to such Series or Class. Contributions to the Trust or
Series thereof may be accepted for, and Shares shall be redeemed as, whole
Shares and/or 1/1000ths of a Share or integral multiples thereof.
Section 5.5. Register of Shares. A register shall be kept at the principal
office of the Trust or an office of the Transfer Agent which shall contain the
names and addresses of the Shareholders and the number of Shares held by them
respectively and a record of all transfers thereof. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as provided herein or
in the By-laws, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as to their use.
Section 5.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery the transfer shall be recorded on the
register of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to
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the Trustees or the Transfer Agent, but until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or registrar
nor any officer or agent of the Trust shall be affected by any notice of such
death, bankruptcy or incompetence, or other operation of law.
Section 5.7. Notices. Any and all notices to which any Shareholder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 5.8. Treasury Shares. Shares held in the treasury shall, until
resold pursuant to Section 5.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Section 2.13; (ii) with respect
to any investment advisory contract entered into pursuant to Section 3.2; (iii)
with respect to termination of the Trust or a Series or Class thereof as
provided in Section 8.2; (iv) with respect to any amendment of this Declaration
to the limited extent and as provided in Section 8.3; (v) with respect to a
merger, consolidation or sale of assets as provided in Section 8.4; (vi) with
respect to incorporation of the Trust to the extent and as provided in Section
8.5; (vii) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust or a Series thereof or the Shareholders of either; (viii) with
respect to any plan adopted pursuant to Rule 12b-1 (or any successor rule) under
the 1940 Act, and related matters; and (ix) with respect to such additional
matters relating to the Trust as may be required by this Declaration, the
By-laws or any registration of the Trust as an investment company under the 1940
Act with the Commission (or any successor agency) or as the Trustees may
consider necessary or desirable. As determined by the Trustees without the vote
or consent of shareholders, on any matter submitted to a vote of Shareholders
either (i) each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote or (ii) each dollar of net asset value (number of
Shares owned times net asset value per share of such Series or Class, as
applicable) shall be entitled to one vote on any matter on which such Shares are
entitled to vote and each fractional dollar amount shall be entitled to a
proportionate fractional vote. The Trustees may, in conjunction with the
establishment of any further Series or any Classes of Shares, establish
conditions under which the several Series or Classes of Shares shall have
separate voting rights or no voting rights. There shall be no cumulative voting
in the election of Trustees. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration or the By-laws to be taken by Shareholders. The By-laws may include
further provisions for Shareholders' votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. No annual or regular meetings of
Shareholders are required. Special meetings of the Shareholders, including
meetings involving only the holders of Shares of one or more but less than all
Series or Classes thereof, may be called at any time by the Chairman of the
Board, President, or any Vice-President of the Trust, and shall be called by the
President or the Secretary at the request, in writing or by resolution, of a
majority of the Trustees, or at the written request of the holder or holders of
ten percent (10%) or more of the
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total number of Outstanding Shares of the Trust entitled to vote at such
meeting. Meetings of the Shareholders of any Series shall be called by the
President or the Secretary at the written request of the holder or holders of
ten percent (10%) or more of the total number of Outstanding Shares of such
Series of the Trust entitled to vote at such meeting. Any such request shall
state the purpose of the proposed meeting.
Section 5.11. Series or Class Designation. (a) Without limiting the
authority of the Trustees set forth in Section 5.1 to establish and designate
any further Series or Classes, the Trustees hereby establish the following
Series, each of which consists of two Classes of Shares: John Hancock Tax-Free
Bond Fund and John Hancock High Yield Tax-Free Fund (the "Existing Series").
(b) The Shares of the Existing Series and Class thereof herein established
and designated and any Shares of any further Series and Classes thereof that may
from time to time be established and designated by the Trustees shall be
established and designated, and the variations in the relative rights and
preferences as between the different Series shall be fixed and determined, by
the Trustees (unless the Trustees otherwise determine with respect to further
Series or Classes at the time of establishing and designating the same);
provided, that all Shares shall be identical except that there may be variations
so fixed and determined between different Series or Classes thereof as to
investment objective, policies and restrictions, purchase price, payment
obligations, distribution expenses, right of redemption, special and relative
rights as to dividends and on liquidation, conversion rights, exchange rights,
and conditions under which the several Series or Classes shall have separate
voting rights, all of which are subject to the limitations set forth below. All
references to Shares in this Declaration shall be deemed to be Shares of any or
all Series or Classes as the context may require.
(c) As to any Existing Series and Classes herein established and designated
and any further division of Shares of the Trust into additional Series or
Classes, the following provisions shall be applicable:
(i) The number of authorized Shares and the number of Shares of each
Series or Class thereof that may be issued shall be unlimited. The Trustees may
classify or reclassify any unissued Shares or any Shares previously issued and
reacquired of any Series or Class into one or more Series or one or more Classes
that may be established and designated from time to time. The Trustees may hold
as treasury shares (of the same or some other Series or Class), reissue for such
consideration and on such terms as they may determine, or cancel any Shares of
any Series or Class reacquired by the Trust at their discretion from time to
time.
(ii) All consideration received by the Trust for the issue or sale of
Shares of a particular Series or Class, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors of such Series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series, the Trustees shall allocate them among any
one or more of the Series established and designated
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from time to time in such manner and on such basis as they, in their sole
discretion, deem fair and equitable. Each such allocation by the Trustees shall
be conclusive and binding upon the Shareholders of all Series for all purposes.
No holder of Shares of any Series shall have any claim on or right to any assets
allocated or belonging to any other Series.
(iii) The assets belonging to each particular Series shall be charged
with the liabilities of the Trust in respect of that Series or the appropriate
Class or Classes thereof and all expenses, costs, charges and reserves
attributable to that Series or Class or Classes thereof, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall be allocated
and charged by the Trustees to and among any one or more of the Series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all Series and Classes for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items are capital; and each
such determination and allocation shall be conclusive and binding upon the
Shareholders. The assets of a particular Series of the Trust shall under no
circumstances be charged with liabilities attributable to any other Series or
Class thereof of the Trust. All persons extending credit to, or contracting with
or having any claim against a particular Series or Class of the Trust shall look
only to the assets of that particular Series for payment of such credit,
contract or claim.
(iv) The power of the Trustees to pay dividends and make distributions
shall be governed by Section 7.2 of this Declaration. With respect to any Series
or Class, dividends and distributions on Shares of a particular Series or Class
may be paid with such frequency as the Trustees may determine, which may be
daily or otherwise, pursuant to a standing resolution or resolutions adopted
only once or with such frequency as the Trustees may determine, to the holders
of Shares of that Series or Class, from such of the income and capital gains,
accrued or realized, from the assets belonging to that Series, as the Trustees
may determine, after providing for actual and accrued liabilities belonging to
that Series or Class. All dividends and distributions on Shares of a particular
Series or Class shall be distributed pro rata to the Shareholders of that Series
or Class in proportion to the number of Shares of that Series or Class held by
such Shareholders at the time of record established for the payment of such
dividends or distribution.
(v) Each Share of a Series of the Trust shall represent a beneficial
interest in the net assets of such Series. Each holder of Shares of a Series or
Class thereof shall be entitled to receive his pro rata share of distributions
of income and capital gains made with respect to such Series or Class net of
expenses. Upon redemption of his Shares or indemnification for liabilities
incurred by reason of his being or having been a Shareholder of a Series or
Class, such Shareholder shall be paid solely out of the funds and property of
such Series of the Trust. Upon liquidation or termination of a Series or Class
thereof of the Trust, Shareholders of such Series or Class thereof shall be
entitled to receive a pro rata share of the net assets of such Series. A
Shareholder of a particular Series of the Trust shall not be entitled to
participate in a derivative or class action on behalf of any other Series or the
Shareholders of any other Series of the Trust.
(vi) On each matter submitted to a vote of Shareholders, all Shares of
all Series and Classes shall vote as a single class; provided, however, that (1)
as to any matter with respect to which a separate vote of any Series or Class is
required by the 1940 Act or is required by attributes applicable to any Series
or Class or is required by any Rule 12b-1 plan, such
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requirements as to a separate vote by that Series or Class shall apply, (2) to
the extent that a matter referred to in clause (1) above, affects more than one
Class or Series and the interests of each such Class or Series in the matter are
identical, then, subject to clause (3) below, the Shares of all such affected
Classes or Series shall vote as a single Class; (3) as to any matter which does
not affect the interests of a particular Series or Class, only the holders of
Shares of the one or more affected Series or Classes shall be entitled to vote;
and (4) the provisions of the following sentence shall apply. On any matter that
pertains to any particular Class of a particular Series or to any Class expenses
with respect to any Series which matter may be submitted to a vote of
Shareholders, only Shares of the affected Class or that Series, as the case may
be, shall be entitled to vote except that: (i) to the extent said matter affects
Shares of another Class or Series, such other Shares shall also be entitled to
vote, and in such cases Shares of the affected Class, as the case may be, of
such Series shall be voted in the aggregate together with such other Shares; and
(ii) to the extent that said matter does not affect Shares of a particular Class
of such Series, said Shares shall not be entitled to vote (except where
otherwise required by law or permitted by the Trustees acting in their sole
discretion) even though the matter is submitted to a vote of the Shareholders of
any other Class or Series.
(vii) Except as otherwise provided in this Article V, the Trustees
shall have the power to determine the designations, preferences, privileges,
payment obligations, limitations and rights, including voting and dividend
rights, of each Class and Series of Shares. Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the authority to provide
that the holders of Shares of any Series or Class shall have the right to
convert or exchange said Shares into Shares of one or more Series or Classes of
Shares in accordance with such requirements, conditions and procedures as may be
established by the Trustees.
(viii) The establishment and designation of any Series or Classes of
Shares shall be effective upon the execution by a majority of the then Trustees
of an instrument setting forth such establishment and designation and the
relative rights and preferences of such Series or Classes, or as otherwise
provided in such instrument. At any time that there are no Shares outstanding of
any particular Series or Class previously established and designated, the
Trustees may by an instrument executed by a majority of their number abolish
that Series or Class and the establishment and designation thereof. Each
instrument referred to in this section shall have the status of an amendment to
this Declaration.
Section 5.12. Assent to Declaration of Trust. Every Shareholder, by virtue
of having become a Shareholder, shall be held to have expressly assented and
agreed to the terms hereof and to have become a party hereto.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. (a) All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust. The
Trust may require any Shareholder to pay a sales charge to the Trust, the
underwriter, or any other person designated by the Trustees upon redemption or
repurchase of Shares in such amount and upon such conditions as shall be
determined from time to time by the Trustees.
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(b) The Trust shall redeem the Shares of the Trust or any Series or Class
thereof at the price determined as hereinafter set forth, upon the appropriately
verified written application of the record holder thereof (or upon such other
form of request as the Trustees may determine) at such office or agency as may
be designated from time to time for that purpose by the Trustees. The Trustees
may from time to time specify additional conditions, not inconsistent with the
1940 Act, regarding the redemption of Shares in the Trust's then effective
Prospectus.
Section 6.2. Price. Shares shall be redeemed at a price based on their net
asset value determined as set forth in Section 7.1 hereof as of such time as the
Trustees shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be based on the net
asset value of such Shares next determined as set forth in Section 7.1 hereof
after receipt of such application. The amount of any contingent deferred sales
charge or redemption fee payable upon redemption of Shares may be deducted from
the proceeds of such redemption.
Section 6.3. Payment. Payment of the redemption price of Shares of the
Trust or any Series or Class thereof shall be made in cash or in property to the
Shareholder at such time and in the manner, not inconsistent with the 1940 Act
or other applicable laws, as may be specified from time to time in the Trust's
then effective Prospectus(es), subject to the provisions of Section 6.4 hereof.
Notwithstanding the foregoing, the Trustees may withhold from such redemption
proceeds any amount arising (i) from a liability of the redeeming Shareholder to
the Trust or (ii) in connection with any Federal or state tax withholding
requirements.
Section 6.4. Effect of Suspension of Determination of Net Asset Value. If,
pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of the
determination of net asset value with respect to Shares of the Trust or of any
Series or Class thereof, the rights of Shareholders (including those who shall
have applied for redemption pursuant to Section 6.1 hereof but who shall not yet
have received payment) to have Shares redeemed and paid for by the Trust or a
Series or Class thereof shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his redemption right so
suspended may, during the period of such suspension, by appropriate written
notice of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any Share certificates
on deposit. The redemption price of Shares for which redemption applications
have not been revoked shall be based on the net asset value of such Shares next
determined as set forth in Section 7.1 after the termination of such suspension,
and payment shall be made within seven (7) days after the date upon which the
application was made plus the period after such application during which the
determination of net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
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Section 6.6. Redemption of Shareholder's Interest. The Trustees, in their
sole discretion, may cause the Trust to redeem all of the Shares of one or more
Series or Class thereof held by any Shareholder if the value of such Shares held
by such Shareholder is less than the minimum amount established from time to
time by the Trustees.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. (a) If the Trustees shall, at any
time and in good faith, be of the opinion that direct or indirect ownership of
Shares or other securities of the Trust has or may become concentrated in any
Person to an extent which would disqualify the Trust or any Series of the Trust
as a regulated investment company under the Internal Revenue Code of 1986, then
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or any Series of the Trust sufficient to
maintain or bring the direct or indirect ownership of Shares or other securities
of the Trust or any Series of the Trust into conformity with the requirements
for such qualification and (ii) to refuse to transfer or issue Shares or other
securities of the Trust or any Series of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust or any Series of the
Trust in question would result in such disqualification. The redemption shall be
effected at the redemption price and in the manner provided in Section 6.1.
(b) The holders of Shares or other securities of the Trust or any Series of
the Trust shall upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other securities of
the Trust or any Series of the Trust as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code of 1986, as amended, or to
comply with the requirements of any other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula. The Trust may also reduce the number of outstanding Shares
of the Trust or of any Series of the Trust pursuant to the provisions of Section
7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (ii)
during which trading on the New York Stock Exchange is restricted, (iii) during
which an emergency exists as a result of which disposal by the Trust or a Series
thereof of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Trust or a Series thereof fairly to determine the
value of its net assets, or (iv) during any other period when the Commission may
for the protection of Shareholders of the Trust by order permit suspension of
the right of redemption or postponement of the date of payment or redemption;
provided that applicable rules and regulations of the Commission shall govern as
to whether the conditions prescribed in clauses (ii), (iii), or (iv) exist. Such
suspension shall take effect at such time as the Trust shall specify but not
later than the close of business on the business day next following the
declaration of suspension, and thereafter there shall be no right of redemption
or payment on redemption until the Trust shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which said stock exchange shall have reopened or the period specified in (ii) or
(iii) shall have expired (as to which
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in the absence of an official ruling by the Commission, the determination of the
Trust shall be conclusive). In the case of a suspension of the right of
redemption, a Shareholder may either withdraw his request for redemption or
receive payment based on the net asset value existing after the termination of
the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The net asset value of each outstanding Share
of the Trust or of each Series or Class thereof shall be determined on such days
and at such time or times as the Trustees may determine. The value of the assets
of the Trust or any Series thereof may be determined (i) by a pricing service
which utilizes electronic pricing techniques based on general institutional
trading, (ii) by appraisal of the securities owned by the Trust or any Series of
the Trust, (iii) in certain cases, at amortized cost, or (iv) by such other
method as shall be deemed to reflect the fair value thereof, determined in good
faith by or under the direction of the Trustees. From the total value of said
assets, there shall be deducted all indebtedness, interest, taxes, payable or
accrued, including estimated taxes on unrealized book profits, expenses and
management charges accrued to the appraisal date, net income determined and
declared as a distribution and all other items in the nature of liabilities
which shall be deemed appropriate, as incurred by or allocated to the Trust or
any Series or Class of the Trust. The resulting amount which shall represent the
total net assets of the Trust or Series or Class thereof shall be divided by the
number of Shares of the Trust or Series or Class thereof outstanding at the time
and the quotient so obtained shall be deemed to be the net asset value of the
Shares of the Trust or Series or Class thereof. The net asset value of the
Shares shall be determined at least once on each business day, as of the close
of regular trading on the New York Stock Exchange or as of such other time or
times as the Trustees shall determine. The power and duty to make the daily
calculations may be delegated by the Trustees to the Investment Adviser, the
Administrator, the Custodian, the Transfer Agent or such other Person as the
Trustees by resolution may determine. The Trustees may suspend the daily
determination of net asset value to the extent permitted by the 1940 Act. It
shall not be a violation of any provision of this Declaration if Shares are
sold, redeemed or repurchased by the Trust at a price other than one based on
net asset value if the net asset value is affected by one or more errors
inadvertently made in the pricing of portfolio securities or in accruing income,
expenses or liabilities.
Section 7.2. Distributions to Shareholders. (a) The Trustees shall from
time to time distribute ratably among the Shareholders of the Trust or of a
Series or Class thereof such proportion of the net profits, surplus (including
paid-in surplus), capital, or assets of the Trust or such Series held by the
Trustees as they may deem proper. Such distributions may be made in cash or
property (including without limitation any type of obligations of the Trust or
Series or Class or any assets thereof), and the Trustees may distribute ratably
among the Shareholders of the Trust or Series or Class thereof additional Shares
of the Trust or Series or Class thereof issuable hereunder in such manner, at
such times, and on such terms as the Trustees may deem proper. Such
distributions may be among the Shareholders of the Trust or Series or Class
thereof at the time of declaring a distribution or among the Shareholders of the
Trust or Series or Class thereof at such other date or time or dates or times as
the Trustees shall determine. The Trustees may in their discretion determine
that, solely for the purposes of such distributions, Outstanding
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Shares shall exclude Shares for which orders have been placed subsequent to a
specified time on the date the distribution is declared or on the next preceding
day if the distribution is declared as of a day on which Boston banks are not
open for business, all as described in the then effective Prospectus under the
Securities Act of 1933. The Trustees may always retain from the net profits such
amount as they may deem necessary to pay the debts or expenses of the Trust or a
Series or Class thereof or to meet obligations of the Trust or a Series or Class
thereof, or as they may deem desirable to use in the conduct of its affairs or
to retain for future requirements or extensions of the business. The Trustees
may adopt and offer to Shareholders such dividend reinvestment plans, cash
dividend payout plans or related plans as the Trustees shall deem appropriate.
The Trustees may in their discretion determine that an account administration
fee or other similar charge may be deducted directly from the income and other
distributions paid on Shares to a Shareholder's account in each Series or Class.
(b) Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or a Series or Class thereof to avoid or reduce liability for
taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net income
of the Series and Classes thereof of the Trust shall be determined in such
manner as the Trustees shall provide by resolution. Expenses of the Trust or of
a Series or Class thereof, including the advisory or management fee, shall be
accrued each day. Each Class shall bear only expenses relating to its Shares and
an allocable share of Series expenses in accordance with such policies as may be
established by the Trustees from time to time and as are not inconsistent with
the provisions of this Declaration or of any applicable document filed by the
Trust with the Commission or of the Internal Revenue Code of 1986, as amended.
Such net income may be determined by or under the direction of the Trustees as
of the close of regular trading on the New York Stock Exchange on each day on
which such market is open or as of such other time or times as the Trustees
shall determine, and, except as provided herein, all the net income of any
Series or Class, as so determined, may be declared as a dividend on the
Outstanding Shares of such Series or Class. If, for any reason, the net income
of any Series or Class determined at any time is a negative amount, or for any
other reason, the Trustees shall have the power with respect to such Series or
Class (i) to offset each Shareholder's pro rata share of such negative amount
from the accrued dividend account of such Shareholder, or (ii) to reduce the
number of Outstanding Shares of such Series or Class by reducing the number of
Shares in the account of such Shareholder by that number of full and fractional
Shares which represents the amount of such excess negative net income, or (iii)
to cause to be recorded on the books of the Trust an asset account in the amount
of such negative net income, which account may be reduced by the amount,
provided that the same shall thereupon become the property of the Trust with
respect to such Series or Class and shall not be paid to any Shareholder, of
dividends declared thereafter upon the Outstanding Shares of such Series or
Class on the day such negative net income is experienced, until such asset
account is reduced to zero. The Trustees shall have full discretion to determine
whether any cash or property received shall be treated as income or as principal
and whether any item of expense shall be charged to the income or the principal
account, and their determination made in good faith shall be conclusive upon the
Shareholders. In the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much if any of the value thereof shall be treated as income, the balance, if
any, to be treated as principal.
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Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article VII, but subject to Section 5.11
hereof, the Trustees may prescribe, in their absolute discretion, such other
bases and times for determining the per Share net asset value of the Shares of
the Trust or a Series or Class thereof or net income of the Trust or a Series or
Class thereof, or the declaration and payment of dividends and distributions as
they may deem necessary or desirable. Without limiting the generality of the
foregoing, the Trustees may establish several Series or Classes of Shares in
accordance with Section 5.11, and declare dividends thereon in accordance with
Section 5.11(d)(iv).
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A SERIES OR CLASS;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust shall continue without limitation of time
but subject to the provisions of this Article VIII.
Section 8.2. Termination of the Trust or a Series or a Class. The Trust or
any Series or Class thereof may be terminated by (i) the affirmative vote of the
holders of not less than two-thirds of the Outstanding Shares entitled to vote
and present in person or by proxy at any meeting of Shareholders of the Trust or
the appropriate Series or Class thereof, (ii) by an instrument or instruments in
writing without a meeting, consented to by the holders of two-thirds of the
Outstanding Shares of the Trust or a Series or Class thereof; provided, however,
that, if such termination as described in clauses (i) and (ii) is recommended by
the Trustees, the vote or written consent of the holders of a majority of the
Outstanding Shares of the Trust or a Series or Class thereof entitled to vote
shall be sufficient authorization, or (iii) notice to Shareholders by means of
an instrument in writing signed by a majority of the Trustees, stating that a
majority of the Trustees has determined that the continuation of the Trust or a
Series or a Class thereof is not in the best interest of such Series or a Class,
the Trust or their respective shareholders as a result of factors or events
adversely affecting the ability of such Series or a Class or the Trust to
conduct its business and operations in an economically viable manner. Such
factors and events may include (but are not limited to) the inability of a
Series or Class or the Trust to maintain its assets at an appropriate size,
changes in laws or regulations governing the Series or Class or the Trust or
affecting assets of the type in which such Series or Class or the Trust invests
or economic developments or trends having a significant adverse impact on the
business or operations of such Series or Class or the Trust. Upon the
termination of the Trust or the Series or Class,
(i) The Trust, Series or Class shall carry on no business except for
the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust,
Series or Class and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust, Series or Class
shall have been wound up, including the power to fulfill or discharge the
contracts of the Trust, Series or Class, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property or Trust Property allocated or belonging to such
Series or Class to one or more persons at public or private sale for
consideration which may consist in whole or in
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part of cash, securities or other property of any kind, discharge or pay
its liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or Trust Property allocated or belonging to such Series or Class
that requires Shareholder approval in accordance with Section 8.4 hereof
shall receive the approval so required.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property or the remaining property of the
terminated Series or Class, in cash or in kind or partly each, among the
Shareholders of the Trust or the Series or Class according to their
respective rights.
(b) After termination of the Trust, Series or Class and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust and file with the Office of the Secretary
of The Commonwealth of Massachusetts an instrument in writing setting forth the
fact of such termination, and the Trustees shall thereupon be discharged from
all further liabilities and duties with respect to the Trust or the terminated
Series or Class, and the rights and interests of all Shareholders of the Trust
or the terminated Series or Class shall thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be amended by a
vote of the holders of a majority of the Shares outstanding and entitled to vote
or by any instrument in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of a majority of the Shares outstanding
and entitled to vote.
(b) This Declaration may be amended by a vote of a majority of Trustees,
without approval or consent of the Shareholders, except that no amendment can be
made by the Trustees to impair any voting or other rights of shareholders
prescribed by Federal or state law. Without limiting the foregoing, the Trustees
may amend this Declaration without the approval or consent of Shareholders (i)
to change the name of the Trust or any Series, (ii) to add to their duties or
obligations or surrender any rights or powers granted to them herein; (iii) to
cure any ambiguity, to correct or supplement any provision herein which may be
inconsistent with any other provision herein or to make any other provisions
with respect to matters or questions arising under this Declaration which will
not be inconsistent with the provisions of this Declaration; and (iv) to
eliminate or modify any provision of this Declaration which (a) incorporates,
memorializes or sets forth an existing requirement imposed by or under any
Federal or state statute or any rule, regulation or interpretation thereof or
thereunder or (b) any rule, regulation, interpretation or guideline of any
Federal or state agency, now or hereafter in effect, including without
limitation, requirements set forth in the 1940 Act and the rules and regulations
thereunder (and interpretations thereof), to the extent any change in applicable
law liberalizes, eliminates or modifies any such requirements, but the Trustees
shall not be liable for failure to do so.
(c) The Trustees may also amend this Declaration without the approval or
consent of Shareholders if they deem it necessary to conform this Declaration to
the requirements of applicable Federal or state laws or regulations or the
requirements of the regulated investment
25
<PAGE>
company provisions of the Internal Revenue Code of 1986, as amended, or if
requested or required to do so by any Federal agency or by a state Blue Sky
commissioner or similar official, but the Trustees shall not be liable for
failing so to do.
(d) Nothing contained in this Declaration shall permit the amendment of
this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(e) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Trustees or by the
Shareholders as aforesaid or a copy of the Declaration, as amended, and executed
by a majority of the Trustees, shall be conclusive evidence of such amendment
when lodged among the records of the Trust.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or any
Series may merge or consolidate into any other corporation, association, trust
or other organization or may sell, lease or exchange all or substantially all of
the Trust Property or Trust Property allocated or belonging to such Series,
including its good will, upon such terms and conditions and for such
consideration when and as authorized at any meeting of Shareholders called for
the purpose by the affirmative vote of the holders of two-thirds of the Shares
of the Trust or such Series outstanding and entitled to vote and present in
person or by proxy at a meeting of Shareholders, or by an instrument or
instruments in writing without a meeting, consented to by the holders of
two-thirds of the Shares of the Trust or such Series; provided, however, that,
if such merger, consolidation, sale, lease or exchange is recommended by the
Trustees, the vote or written consent of the holders of a majority of the
Outstanding Shares of the Trust or such Series entitled to vote shall be
sufficient authorization; and any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to Massachusetts law.
Section 8.5. Incorporation. The Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws of any
jurisdiction or any other trust, partnership, association or other organization
to take over all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series or to carry on any business in which the
Trust shall directly or indirectly have any interest, and to sell, convey and
transfer all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series to any such corporation, trust,
association or organization in exchange for the shares or securities thereof or
otherwise, and to lend money to, subscribe for the shares or securities of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust or such Series holds or is about to acquire
shares or any other interest. The Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring all or a portion of the Trust Property to such organization or
entities.
26
<PAGE>
ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders of
each Series a written financial report of the transactions of the Trust and
Series thereof, including financial statements which shall at least annually be
certified by independent public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Execution and Filing. This Declaration and any amendment
hereto shall be filed in the office of the Secretary of The Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its execution. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and filed with the Secretary of The Commonwealth of
Massachusetts. A restated Declaration shall, upon execution, be conclusive
evidence of all amendments contained therein and may thereafter be referred to
in lieu of the original Declaration and the various amendments thereto.
Section 10.2. Governing Law. This Declaration is executed by the Trustees
and delivered in The Commonwealth of Massachusetts and with reference to the
laws thereof, and the rights of all parties and the validity and construction of
every provision hereof shall be subject to and construed according to the laws
of said Commonwealth.
Section 10.3. Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying (a) the number or identity of Trustees or Shareholders,
(b) the due authorization of the execution of any instrument or writing, (c) the
form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact
that the number of Trustees or Shareholders present at any meeting or executing
any written instrument satisfies the requirements of this Declaration, (e) the
form of any By-laws adopted by or the identity of any officers elected by the
Trustees, or (f) the existence of any fact or facts which in any manner relate
to the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their successors.
27
<PAGE>
Section 10.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986 or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of the
1st of July, 1996.
/s/ Edward J. Boudreau, Jr.
--------------------------------
Edward J. Boudreau, Jr.
as Trustee and not individually,
34 Swan Road
Winchester, Massachusetts 01890
/s/ James F. Carlin
--------------------------------
James F. Carlin
as Trustee and not individually,
619 Washington Street
Wellesley, Massachusetts 02181
/s/ William H. Cunningham
--------------------------------
William H. Cunningham
as Trustee and not individually,
1909 Hill Oaks Court
Austin, Texas 78703
/s/ Charles F. Fretz
--------------------------------
Charles F. Fretz
as Trustee and not individually,
Clothier Springs Road
Malvern, Pennsylvania 19355
28
<PAGE>
/s/ Harold R. Hiser, Jr.
--------------------------------
Harold R. Hiser, Jr.
as Trustee and not individually,
123 Highland Avenue
Short Hill, New Jersey 07078
/s/ Anne C. Hodsdon
--------------------------------
Anne C. Hodsdon
as Trustee and not individually,
135 Woodland Road
Hampton, New Hampshire 03842
/s/ Charles L. Ladner
--------------------------------
Charles L. Ladner
as Trustee and not individually,
182 Beaumont Road
Devon, Pennsylvania 19333
/s/ Leo E. Linbeck, Jr.
--------------------------------
Leo E. Linbeck, Jr.
as Trustee and not individually,
3404 Chevy Chase
Houston, Texas 77027
/s/ Patricia P. McCarter
--------------------------------
Patricia P. McCarter
as Trustee and not individually,
1230 Brentford Road
Malvern, Pennsylvania 19355
/s/ Steven R. Purchansky
--------------------------------
Steven R. Pruchansky
as Trustee and not individually,
6920 Daniels Road
Naples, Florida 33999
29
<PAGE>
/s/ Richard S. Scipione
--------------------------------
Richard S. Scipione
as Trustee and not individually,
4 Sentinel Road
Hingham, Massachusetts 02043
/s/ Norman H. Smith
--------------------------------
Norman H. Smith
as Trustee and not individually,
243 Mount Oriole Lane
Linden, Virginia 22642
/s/ John P. Toolan
--------------------------------
John P. Toolan
as Trustee and not individually,
13 Chadwell Place
Morristown, New Jersey 07960
30
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
SUFFOLK COUNTY, MASSACHUSETTS
July 1, 1996
Then personally appeared the above-named persons, Edward J. Boudreau, Jr.,
James F. Carlin, William H. Cunningham, Charles F. Fretz, Harold R. Hiser, Jr.,
Anne C. Hodsdon, Charles L. Ladner, Leo E. Linbeck, Jr., Patricia P. McCarter,
Steven R. Pruchansky, Richard S. Scipione, Norman H. Smith, and John P. Toolan,
who acknowledged the foregoing instrument to be his free act and deed.
Before me,
/s/ Ann Maries White
Notary Public
My commission expires: 10/20/00
31
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
August 21, 1996
Freedom Investment Trust
on behalf of John Hancock Managed Tax-Exempt Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under the Securities
Act of 1993, as amended (the "Act"), on Form N-14, with respect to the shares of
beneficial interest of John Hancock Tax-Free Bond Fund (the "Fund"), a series of
John Hancock Tax-Free Bond Trust, a Massachusetts business trust (the "Trust"),
it is the opinion of the undersigned that these shares when issued will be
legally issued, fully paid and nonassessable.
In connection with this opinion it should be noted that the Trsut is an entity
of the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for obligations of the Fund
and indemnifies any shareholder of the Fund, with such indemnification to be
paid solely out of the assets of the Fund. Therefore, the shareholder's risk is
limited to circumstances in which the assets of the Fund are insufficient to
meet the obligations asserted against such assets.
The undersigned hereby consents to the filing of a copy of this opinion, as an
exhibit to the Trust's registration statement on Form N-14, with the Securities
and Exchange Commission and with the various state securities administrators.
Sincerely,
/s/ Avery P. Maher
Avery P. Maher
Second Vice President and
Assistant Secretary
JOHN HANCOCK ADVISERS, INC.
December 6, 1996
Board of Trustees
John Hancock Tax-Free
Bond Trust, on behalf of
John Hancock Tax-Free Bond Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Board of Trustees
Freedom Investment Trust, on behalf of
John Hancock Managed Tax-Exempt Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Boards of Trustees:
You have requested our opinion regarding the federal income tax
consequences of the acquisition by John Hancock Tax-Free Bond Fund ("Acquiring
Fund"), a series of John Hancock Tax-Free Bond Trust (the "Bond Trust") of all
of the assets of John Hancock Managed Tax-Exempt Fund ("Acquired Fund"), a
series of Freedom Investment Trust (the "Trust"), in exchange solely for (i) the
assumption by Acquiring Fund of all of the liabilities of Acquired Fund and (ii)
the issuance of Class A and Class B voting shares of beneficial interest of
Acquiring Fund (the "Acquiring Fund Shares") to Acquired Fund, followed by the
distribution by Acquired Fund, in liquidation of Acquired Fund, of the Acquiring
Fund Shares to the shareholders of Acquired Fund and the termination of Acquired
Fund (the foregoing together constituting the "reorganization" or the
"transaction").
In rendering this opinion, we have examined and relied upon the facts
stated and representations made in (i) the prospectus for the Class A and Class
B shares of Acquired Fund, dated March 1, 1996, as supplemented August 27, 1996,
(ii) the statement of additional information for the Class A and Class B shares
of Acquired Fund, dated March 1, 1996, (iii) the prospectus for the Class A and
Class B shares of Acquiring Fund, dated September 30, 1996, (iv) the statement
of additional information for the Class A and Class B shares of Acquiring Fund,
dated September 30, 1996, (v) the registration
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 2
statement on Form N-14 of Acquiring Fund relating to the transaction (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"SEC") on August 29, 1996, (vi) the proxy statement and prospectus relating to
the transaction dated October __, 1996 (the "Proxy Statement"), (vii) the
Agreement and Plan of Reorganization, executed as of ______________, 1996,
between Acquiring Fund and Acquired Fund (the "Agreement"), (viii) the
representation letters on behalf of Acquiring Fund and Acquired Fund referred to
below and (ix) such other documents as we deemed appropriate.
In our examination of documents, we have assumed the authenticity of
original documents, the accuracy of copies, the genuineness of signatures, and
the legal capacity of signatories. We have assumed that all parties to the
Agreement have acted and will act in accordance with the terms of the Agreement
and all other documents relating to the transaction and that the transaction
will be consummated pursuant to the terms and conditions set forth in the
Agreement without the waiver or modification of any such terms and conditions.
Furthermore, we have assumed that all representations contained in the
Agreement, as well as those representations contained in the representation
letters referred to below are, on the date hereof, true and complete in all
material respects, and that any representation made in any of the documents
referred to herein "to the best of the knowledge and belief" (or similar
qualification) of any person or party is correct without such qualification. We
have not attempted to verify independently such representations, but in the
course of our representation, nothing has come to our attention that would cause
us to question the accuracy thereof.
The conclusions expressed herein represent our judgment regarding the
proper treatment of certain aspects of the transaction affecting Acquiring Fund,
Acquired Fund and the shareholders of Acquired Fund on the basis of our analysis
of the Internal Revenue Code of 1986, as amended (the "Code"), case law,
Treasury regulations and the rulings and other pronouncements of the Internal
Revenue Service (the "Service") which exist at the time this opinion is
rendered. Such authorities are subject to prospective or retroactive change, and
we do not undertake any responsibility to advise you of any such change. Our
opinion represents our best judgment regarding how a court would decide if
presented with the issues addressed
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 3
herein and is not binding upon the Service or any court. Moreover, our opinion
does not provide any assurance that a position taken in reliance on such opinion
will not be challenged by the Service and does not constitute any representation
or warranty that such position, if so challenged, will not be rejected by a
court.
This opinion addresses only the specific United States federal income tax
consequences of the transaction set forth below, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, or
other tax consequences that may result from the transaction or any other
transaction.
FACTS
We understand the facts relating to the transaction to be as described
hereinafter.
Acquiring Fund is a series of the Bond Trust, a business trust established
under the laws of The Commonwealth of Massachusetts in 1989 and is registered as
an open-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
The investment objective of Acquiring Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of capital. Acquiring Fund seeks to achieve its investment
objective by investing primarily in municipal bonds, notes and commercial paper,
the interest on which is exempt from federal income taxes. Acquiring Fund may
also enter into repurchase agreements and acquire certain taxable money market
securities, as described in its prospectus.
Acquired Fund is a series of the Trust, a business trust established under
the laws of The Commonwealth of Massachusetts in 1984 and is registered as an
open-end investment company under the 1940 Act. Acquired Fund commenced
operations in 1987.
The investment objective of Acquired Fund is to seek as high a level of
current income exempt from federal income tax as is consistent with preservation
of capital, by investing primarily in municipal securities. Acquired Fund seeks
to achieve its investment objective by investing at least 80% of its total
assets in municipal securities with varying maturities, the interest from which
is, in the opinion of bond
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 4
counsel for the issuer, exempt from federal income tax. Acquired Fund may also
enter into repurchase agreements, engaged in certain transactions in options and
financial futures contracts, and acquire certain taxable investments for
liquidity or temporary defensive purposes, as described in its prospectus.
The steps comprising the reorganization, as set forth in the Agreement, are
as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its assets
(consisting, without limitation, of portfolio securities and instruments,
dividend and interest receivables, cash and other assets). In exchange for the
assets transferred to it, Acquiring Fund will (A) assume all of the liabilities
of Acquired Fund (comprising all of its known and unknown liabilities and
referred to hereinafter as the "Acquired Fund Liabilities") and (B) issue
Acquiring Fund Shares to Acquired Fund that have an aggregate net asset value
equal to the value of the assets transferred to Acquiring Fund by Acquired Fund,
less the value of the Acquired Fund Liabilities assumed by Acquiring Fund.
(ii) Promptly after the transfer of its assets to Acquiring Fund, Acquired
Fund will distribute in liquidation the Acquiring Fund Shares it receives in the
exchange to Acquired Fund shareholders pro rata in exchange for their surrender
of their shares of beneficial interest of Acquired Fund ("Acquired Fund
Shares"). In these exchanges, holders of Acquired Fund Shares designated as
Class A ("Class A Acquired Fund Shares") will receive Acquiring Fund Shares
designated as Class A ("Class A Acquiring Fund Shares"), and holders of Acquired
Fund Shares designated as Class B ("Class B Acquired Fund Shares") will receive
Acquiring Fund Shares designated as Class B ("Class B Acquiring Fund Shares").
(iii) After such exchanges, liquidation and distribution, the existence of
Acquired Fund will be promptly terminated in accordance with Massachusetts law.
The Agreement and the transactions contemplated thereby were approved by
the Board of Trustees of Acquiring Fund at a meeting held on September 10, 1996.
Acquiring Fund shareholders are not required and were not asked to approve the
transaction. The Agreement and the transactions contemplated thereby were
approved by the Board of Trustees of Acquired Fund at a meeting held on
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 5
August 27, 1996, subject to the approval of Acquired Fund shareholders. Acquired
Fund shareholders approved the transaction at a meeting held on November 14,
1996.
Massachusetts law does not provide dissenters' rights for Acquired Fund
shareholders in the transaction. Additionally, it is the position of the
Division of Investment Management of the SEC that appraisal rights, in contexts
such as the reorganization, are inconsistent with Rule 22c-1 under the 1940 Act
and are therefore preempted and invalidated by such rule. Consequently, Acquired
Fund shareholders will not have dissenters' or appraisal rights in the
transaction.
Our opinions set forth below are subject to the following factual
assumptions being true and correct (including statements relating to future
actions and facts represented to be to the best knowledge of management, whether
or not known). Authorized representatives of Acquiring Fund and Acquired Fund
have represented to us by letters of even date herewith that the following
assumptions are true and correct:
(i) Acquiring Fund has no plan or intention to redeem or otherwise
reacquire any of the Acquiring Fund Shares received by shareholders of Acquired
Fund in the transaction except in the ordinary course of its business in
connection with its legal obligation under Section 22(e) of the 1940 Act as a
registered open-end investment company to redeem its own shares.
(ii) After the transaction, Acquiring Fund will continue the historic
business of Acquired Fund and will use all of the assets acquired from Acquired
Fund, which are Acquired Fund's historic business assets, i.e., assets not
acquired as part of or in contemplation of the transaction, in the ordinary
course of a business.
(iii) Acquiring Fund has no plan or intention to sell or otherwise dispose
of any assets of Acquired Fund acquired in the transaction, except for
dispositions made in the ordinary course of its business (i.e., dispositions
resulting from investment decisions made after the reorganization on the basis
of investment considerations independent of the reorganization) or to maintain
its qualification as a regulated investment company under Subchapter M of the
Code.
(iv) The shareholders of Acquiring Fund and the shareholders of Acquired
Fund will bear their respective expenses, if any, in connection with the
transaction.
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 6
(v) Acquiring Fund and Acquired Fund will each bear its own expenses
incurred in connection with the transaction. Any liabilities of Acquired Fund
attributable to such expenses that remain unpaid on the closing date of the
transaction and are assumed by Acquiring Fund in the transaction are
attributable to Acquired Fund's expenses that are solely and directly related to
the transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(vi) There is no indebtedness between Acquiring Fund and Acquired Fund.
(vii) Acquired Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since its inception, and qualifies as such for its
final taxable year ending on the closing date of the transaction.
(viii) Acquiring Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since its inception, and qualifies as such as of
the date of the transaction.
(ix) Neither Acquiring Fund nor Acquired Fund is under the jurisdiction of
a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
(x) Acquiring Fund does not own and since its inception has not owned,
directly or indirectly, any shares of Acquired Fund.
(xi) Acquiring Fund will not pay cash in lieu of fractional shares in
connection with the transaction.
(xii) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares issued to Acquired Fund in exchange for the assets of
Acquired Fund is approximately equal to the fair market value of the assets of
Acquired Fund received by Acquiring Fund, minus the value of the Acquired Fund
Liabilities assumed by Acquiring Fund.
(xiii) Acquired Fund shareholders will not be in control (within the
meaning of Sections 368(a)(2)(H) and 304(c) of the Code, which provide that
control means the
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 7
ownership of shares possessing at least 50% of the total
combined voting power of all classes of shares that are entitled to vote or at
least 50% of the total value of shares of all classes) of Acquiring Fund after
the transaction.
(xiv) The principal business purposes of the transaction are to combine the
assets of Acquiring Fund and Acquired Fund in order to capitalize on economies
of scale in expenses such as the costs of accounting, legal, insurance,
custodial, and administrative services, to eliminate the potential adverse
effects on each fund's asset growth of competing with the other fund, and to
increase diversification.
(xv) As of the date of the transaction, the fair market value of the Class
A Acquiring Fund Shares received by each holder of Class A Acquired Fund Shares
is approximately equal to the fair market value of the Class A Acquired Fund
Shares surrendered by such shareholder, and the fair market value of the Class B
Acquiring Fund Shares received by each holder of Class B Acquired Fund Shares is
approximately equal to the fair market value of the Class B Acquired Fund Shares
surrendered by such shareholder.
(xvi) There is no plan or intention on the part of any shareholder of
Acquired Fund that owns beneficially 5% or more of the Acquired Fund Shares and,
to the best knowledge of management of Acquired Fund, there is no plan or
intention on the part of the remaining shareholders of Acquired Fund to sell,
redeem, exchange or otherwise dispose of a number of the Acquiring Fund Shares
received in the transaction that would reduce the aggregate ownership of the
Acquiring Fund Shares by former Acquired Fund shareholders to a number of shares
having a value, as of the date of the transaction, of less than fifty percent
(50%) of the value of all of the formerly outstanding Acquired Fund Shares as of
the same date. Shares of Acquired Fund and Acquiring Fund held by Acquired Fund
shareholders and sold, redeemed, exchanged or otherwise disposed of prior or
subsequent to the transaction as part of the plan of reorganization are taken
into account for purposes of this representation.
(xvii) Acquired Fund assets transferred to Acquiring Fund comprise at least
ninety percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets held by
Acquired Fund immediately prior to the transaction. For purposes of this
representation, amounts used by Acquired Fund to pay its outstanding
liabilities, including reorganization expenses, and all redemptions and
distributions (except for redemptions in the
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 8
ordinary course of business upon demand of a shareholder that Acquired Fund is
required to make as an open-end investment company pursuant to Section 22(e) of
the 1940 Act and regular, normal dividends, which dividends include any final
distribution of previously undistributed investment company taxable income and
net capital gain for Acquired Fund's final taxable year ending on the closing
date of the transaction) made by Acquired Fund immediately preceding the
transaction are taken into account as assets of Acquired Fund held immediately
prior to the transaction.
(xviii) The Acquired Fund Liabilities assumed by Acquiring Fund plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Acquired Fund in the ordinary course of its business or are expenses of the
transaction.
(xix) The fair market value of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(xx) Acquired Fund does not pay compensation to any shareholder- employee.
OPINION
On the basis of and subject to the foregoing and in reliance upon the
representations described above, we are of the opinion that
(a) The acquisition by Acquiring Fund of all of the assets of Acquired Fund
solely in exchange for the issuance of Acquiring Fund Shares to Acquired Fund
and the assumption of all of the Acquired Fund Liabilities by Acquiring Fund,
followed by the distribution by Acquired Fund, in liquidation of Acquired Fund,
of Acquiring Fund Shares to Acquired Fund shareholders in exchange for their
Acquired Fund Shares and the termination of Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code.
Acquiring Fund and Acquired Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code.
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 9
(b) No gain or loss will be recognized by Acquired Fund upon (i) the
transfer of all of its assets to Acquiring Fund solely in exchange for the
issuance of Acquiring Fund Shares to Acquired Fund and the assumption of all of
the Acquired Fund Liabilities by Acquiring Fund and (ii) the distribution by
Acquired Fund of such Acquiring Fund Shares to the shareholders of Acquired Fund
(Sections 361(a) and 361(c) of the Code).
(c) No gain or loss will be recognized by Acquiring Fund upon the receipt
of the assets of Acquired Fund solely in exchange for the issuance of Acquiring
Fund Shares to Acquired Fund and the assumption of all of the Acquired Fund
Liabilities by Acquiring Fund (Section 1032(a) of the Code).
(d) The basis of the assets of Acquired Fund acquired by Acquiring Fund
will be, in each instance, the same as the basis of such assets in the hands of
Acquired Fund immediately prior to the transfer (Section 362(b) of the Code).
(e) The tax holding period of the assets of Acquired Fund in the hands of
Acquiring Fund will, in each instance, include Acquired Fund's tax holding
period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or loss upon
the exchange of all of their Acquired Fund Shares solely for Acquiring Fund
Shares as part of the transaction (Section 354(a)(l) of the Code).
(g) The basis of the Acquiring Fund Shares received by the Acquired Fund
shareholders in the transaction will be the same as the basis of the Acquired
Fund Shares surrendered in exchange therefor (Section 358(a)(1) of the Code).
(h) The tax holding period of the Acquiring Fund Shares received by
Acquired Fund shareholders will include, for each shareholder, the tax holding
period for the Acquired Fund Shares surrendered in exchange therefor, provided
the Acquired Fund Shares were held as capital assets on the date of the exchange
(Section 1223(1) of the Code).
No opinion is expressed or implied regarding the federal income tax
consequences to Acquiring Fund, Acquired Fund or Acquired Fund shareholders of
any conditions existing at the time of, effects resulting from, or other aspects
of the
<PAGE>
Board of Trustees
John Hancock Tax-Free Bond Trust
Freedom Investment Trust
December 6, 1996
Page 10
transaction except as expressly set forth above, and this opinion may not be
relied upon except with respect to the consequences specifically discussed
herein.
Very truly yours,
Hale and Dorr
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of the Registration Statement on Form N-14 dated August 29,
1996 (the "Registration Statement") of our report dated December 18, 1995,
relating to the financial statements and financial highlights appearing in the
October 31, 1995 Annual Report to Shareholders of John Hancock Managed
Tax-Exempt Fund which appears in such Statement of Additional Information. We
also consent to the reference to us under the heading "Experts" in the Proxy
Statement and Prospectus constituting part of the Registration Statement. We
also consent to the references to us under the headings "The Fund's Financial
Highlights" and "Independent Auditor" in the Prospectus of John Hancock Managed
Tax-Exempt Fund, dated March 1, 1996, as supplemented August 27, 1996, which is
incorporated by reference into the Proxy Statement and Prospectus, and under the
heading "Independent Accountants" in the Statement of Additional Information of
John Hancock Managed Tax-Exempt Fund, dated March 1, 1996, which is included in
the Registration Statement.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 28, 1996
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Combined Prospectus/Proxy Statement in the Registration Statement on Form N-14,
dated August 29, 1996, of John Hancock Tax Free Bond Fund, to the reference to
our firm under the caption "Financial Highlights" in the Tax-Free Income Funds
Prospectus with respect to the John Hancock Tax Free Bond Fund dated September
30, 1996, and to the use of our report dated January 31, 1996 with respect to
the financial statements and financial highlights of the John Hancock Tax Free
Bond Fund, included in this Form N-14.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
August 28, 1996
EXHIBIT 17
Registration No. 33-32246
As filed on July 20, 1990
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. 1 / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
- --------------------------------------------------------------- / X /
Amendment No. 4 / /
TRANSAMERICA TAX-FREE BOND FUND
(Exact Name of Registrant as Specified in Charter)
1000 Louisiana, Houston, Texas 77002
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (713) 751-2400
Thomas R. Powers
1000 Louisiana
Houston, Texas 77002
(Name and Address of Agent for Service)
------------------
Copies to:
Kenneth S. Gerstein, Esq. Robert L. Stillwell, Esq.
Gordon Hurwitz Butowsky Weitzen Baker & Botts
Shalov & Wein 3000 One Shell Plaza
101 Park Avenue Suite 3121
New York, New York 10178 Houston, Texas 77002
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective:
/ X / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of rule 485
----------------------
Registrant previously elected, pursuant to Rule 24f-2 (b) (2) under the
Investment Company Act of 1940, to register an indefinite number of its shares
of beneficial interest, for saale under the Securities Act of 1933 and will file
its Notice for the current fiscal year ending December 31, 1990.
John Hancock Managed Tax-Exempt Fund
Supplement to Prospectus dated March 1, 1996
On August 27, 1996, the Trustees of the John Hancock Managed Tax-Exempt Fund
(the "Fund") voted to recommend that the shareholders approve a tax-free
reorganization of the Fund, as described below.
Under the terms of the reorganization, subject to shareholder approval at a
shareholder meeting scheduled to be held on November 14, 1996, the Fund would
transfer all of its assets and liabilities to John Hancock Tax-Free Bond Fund
("Tax-Free Bond Fund") in a tax-free exchange for shares of equal value of
Tax-Free Bond Fund. Further information regarding the proposed reorganization
will be contained in a proxy statement and prospectus which is scheduled to be
mailed to shareholders during October, 1996.
Effective September 20, 1996, John Hancock Managed Tax-Exempt Fund will be
closed to new accounts (except for participants in existing Qualified Retirement
Plans).
August 27, 1996
700S 8/96
<PAGE>
JOHN HANCOCK MANAGED
TAX-EXEMPT FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MARCH 1, 1996
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 5
Organization and Management of the Fund............................................... 9
Alternative Purchase Arrangements..................................................... 9
The Fund's Expenses................................................................... 11
Dividends and Taxes................................................................... 12
Performance........................................................................... 13
How to Buy Shares..................................................................... 14
Share Price........................................................................... 15
How to Redeem Shares.................................................................. 21
Additional Services and Programs...................................................... 23
</TABLE>
This Prospectus sets forth information about John Hancock Managed Tax-Exempt
Fund (the "Fund"), a diversified series of Freedom Investment Trust (the
"Trust"), that you should know before investing. Please read and retain it for
future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Statement of
Additional Information, dated March 1, 1996, and incorporated by reference into
this Prospectus, free of charge by writing or telephoning: John Hancock Investor
Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
The purpose of the following information is to help you understand the various
fees and expenses you will bear, directly or indirectly, when you purchase Fund
shares. The operating expenses included in the table and hypothetical example
below are based on actual fees and expenses for the Class A and Class B shares
of the Fund for the fiscal year ended October 31, 1995 adjusted to reflect
certain current fees and expenses. Actual fees and expenses may be greater or
less than those indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of offering price)................................ 4.50% None
Maximum sales charge imposed on reinvested dividends......................................................... None None
Maximum deferred sales charge................................................................................ None* 5.00%
Redemption fee+.............................................................................................. None None
Exchange fee................................................................................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fee (net of waiver by Adviser)(a)................................................................. 0.55% 0.55%
12b-1 fee**.................................................................................................. 0.30% 1.00%
Other expenses............................................................................................... 0.16% 0.16%
------- -------
Total Fund operating expenses................................................................................ 1.01% 1.71%
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments in Class A
shares of $1 million or more, but for these investments a contingent
deferred sales charge may be imposed, as described under the caption "Share
Price, " in the event of certain redemption transactions within one year of
purchase.
** The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average daily net assets, and the remaining portion will
be used to cover distribution expenses. See "The Fund's Expenses".
(a) Reflects a voluntary waiver by the Adviser of a portion of its management
fee which would normally be 0.60% of average daily net assets. In the
absence of a waiver by the Adviser, the total expenses would have been
1.06% and 1.76% of the Fund's average daily net assets for Class A and
Class B shares, respectively.
+ Redemption by wire fee (currently $4.00) not included.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses for the indicated period of years on a hypothetical
$1,000 investment
assuming a 5% annual return:
Class A shares........................................................................... $ 55 $76 $ 98 $163
Class B shares
--Assuming complete redemption at end of period.......................................... $ 67 $84 $ 113 $183
--Assuming no redemption................................................................. $ 17 $54 $ 93 $183
</TABLE>
(The example should not be considered as a representation of past or future
expenses or future investment returns. Actual expenses may be greater or less
than shown.)
The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under National Association of Securities Dealers Rules of
Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in this
Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Distribution Contract."
2
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS
The following table of Financial Highlights has been audited by Price
Waterhouse LLP, the Fund's independent accountants, whose unqualified report is
included in the Fund's 1995 Annual Report and is included in the Statement of
Additional Information. Further information about the performance of the Fund is
contained in the Fund's Annual Report to shareholders which may be obtained free
of charge by writing or telephoning John Hancock Investor Services Corporation
("Investor Services"), at the address or telephone number listed on the front
page of this Prospectus.
Selected data for each class of shares outstanding throughout each year
indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------
1995 1994 1993 1992(a)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning
of Period............... $ 10.79 $ 12.13 $ 11.12 $ 11.25
-------- -------- -------- --------
Net Investment Income..... 0.63 0.64 0.70 0.55
Net Realized and
Unrealized Gain (Loss)
on Investments and
Financial Futures
Contracts............... 0.77 (1.25) 1.05 (0.11)
-------- -------- -------- --------
Total from
Investment
Operations...... 1.40 (0.61) 1.75 0.44
-------- -------- -------- --------
Less Distributions:
Dividends from Net
Investment Income..... (0.63) (0.64) (0.70) (0.53)
Distributions from Net
Realized Gain on
Investments Sold and
Financial Futures
Contracts............. (0.09) (0.04) (0.04)
-------- -------- -------- --------
Total
Distributions... (0.63) (0.73) (0.74) (0.57)
-------- -------- -------- --------
Net Asset Value, End of
Period.................. $ 11.56 $ 10.79 $ 12.13 $ 11.12
======== ======== ======== ========
Total Investment Return at
Net Asset Value(c)...... 13.30% (5.22)% 16.10% 4.74%*
Total Adjusted Investment
Return at Net Asset
Value(b)(d)............. 13.28% (5.29)% 15.77% 4.51%*
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's omitted)......... $ 42,384 $ 20,968 $ 14,244 $ 9,589
Ratio of Expenses to
Average Net Assets**.... 1.06% 0.95% 0.70% 0.78%*
Ratio of Adjusted Expenses
to Average Net
Assets(b)............... 1.11% 1.02% 1.03% 1.01%*
Ratio of Net Investment
Income to Average Net
Assets**................ 5.53% 5.52% 5.98% 6.24%*
Ratio of Adjusted Net
Investment Income to
Average Net Assets(b)... 5.48% 5.42% 5.65% 6.01%*
Portfolio Turnover Rate... 104% 59% 23% 23%
**Expense Reimbursement
Per Share............... $ 0.01 $ 0.01 $ 0.04 $ 0.02
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987(e)
-------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning
of Period............... $ 10.79 $ 12.13 $ 11.12 $ 11.12 $ 10.61 $ 10.78 $ 10.73 $ 9.69 $10.00
-------- -------- -------- -------- -------- -------- -------- ------- ------
Net Investment Income..... 0.55 0.56 0.64 0.66 0.68 0.73 0.74 0.74 0.27
Net Realized and
Unrealized Gain (Loss)
on Investments and
Financial Futures
Contracts............... (0.78) (1.25) 1.05 0.04 0.61 (0.14) 0.12 1.04 (0.31)
-------- -------- -------- -------- -------- -------- -------- ------- ------
Total from
Investment
Operations...... 1.33 (0.69) 1.69 0.70 1.29 0.59 0.86 1.78 (0.04)
-------- -------- -------- -------- -------- -------- -------- ------- ------
Less Distributions:
Dividends from Net
Investment Income..... (0.55) (0.56) (0.64) (0.64) (0.72) (0.72) (0.74) (0.74) (0.27)
Distributions from Net
Realized Gain on
Investments Sold and
Financial Futures
Contracts............. -- (0.09) (0.04) (0.06) (0.06) (0.04) (0.07) 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- ------- ------
Total
Distributions... (0.55) (0.65) (0.68) (0.70) (0.78) (0.76) (0.81) (0.74) (0.27)
-------- -------- -------- -------- -------- -------- -------- ------- ------
Net Asset Value, End of
Period.................. $ 11.57 $ 10.79 $ 12.13 $ 11.12 $ 11.12 $ 10.61 $ 10.78 $ 10.73 $ 9.69
======== ======== ======== ======== ======== ======== ======== ======= ======
Total Investment Return at
Net Asset Value(c)...... 12.63% (5.85)% 15.51% 6.39% 12.55% 5.66% 8.25% 18.98% (1.31)%*
Total Adjusted Investment
Return at Net Asset
Value(b)(d)............. 12.61% (5.92)% 15.18% 6.20% 12.24% 5.10% 7.66% 18.00% (2.49)%
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's omitted)......... $178,002 $217,066 $256,342 $226,943 $199,955 $140,803 $106,107 $46,329 $8,220
Ratio of Expenses to
Average Net Assets**.... 1.73% 1.62% 1.23% 1.35% 1.19% 0.95% 0.93% 0.74% 1.40%*
Ratio of Adjusted Expenses
to Average Net
Assets(b)............... 1.78% 1.69% 1.56% 1.54% 1.50% 1.51% 1.52% 1.72% 2.58%*
Ratio of Net Investment
Income to Average Net
Assets**................ 4.92% 4.84% 5.49% 5.74% 6.19% 6.74% 6.81% 6.90% 6.11%*
Ratio of Adjusted Net
Investment Income to
Average Net Assets(b)... 4.87% 4.77% 5.16% 5.55% 5.88% 6.18% 6.22% 5.92% 4.93%*
Portfolio Turnover Rate... 104% 59% 23% 23% 30% 54% 94% 186% 174%
**Expense Reimbursement
Per Share............... $ 0.01 $ 0.01 $ 0.04 $ 0.02 $ 0.04 $ 0.06 $ 0.06 $ 0.10 $ 0.05*
</TABLE>
- ---------------
* On an annualized basis.
(a) Class A shares commenced operations on January 3, 1992.
(b) On an unreimbursed basis.
(c) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(d) An estimated total return calculation which takes into consideration fees
and expenses waived or borne by The Adviser during the period.
(e) From commencement of operations April 22, 1987.
4
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek as high a level of current income
exempt from Federal income tax as is consistent with preservation of capital, by
investing primarily in municipal securities. There are market risks in any
investment and therefore there can be no assurance that the Fund will achieve
its investment objectives.
The Fund will invest at least 80% of its total assets in municipal securities
with varying maturities, the interest from which is, in the opinion of bond
counsel for the issuer, exempt from Federal income tax. Municipal securities are
issued to obtain funds for various public purposes. The two principal
classifications of municipal securities are "general obligation" and "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its full
faith and credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or a specific revenue source, and generally are
not payable from the unlimited revenues of the issuer. Industrial development
bonds issued by or on behalf of public authorities to obtain funds for
privately-operated facilities are in most cases revenue bonds which do not
generally carry the pledge of the full faith and credit of the issuer of such
bonds, but depend for payment on the ability of the industrial user to meet its
obligations.
- -------------------------------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK
AS HIGH A LEVEL OF CURRENT INCOME EXEMPT
FROM FEDERAL INCOME TAX AS IS CONSISTENT
WITH PRESERVATION OF CAPITAL, BY INVESTING
PRIMARILY IN MUNICIPAL SECURITIES.
- -------------------------------------------------------------------------------
At least 65% of the Fund's investments in municipal securities will be of
"investment grade" quality, that is securities rated within the four highest
rating categories of Standard & Poor's Ratings Group (AAA, AA, A, BBB), Moody's
Investors Service, Inc. (Aaa, Aa, A, Baa), or Fitch Investors Service, Inc.
(AAA, AA, A, BBB) (collectively, "investment grade securities"). While it is not
the present intention of the Fund to invest in below investment grade
securities, upon Trustee approval, the Fund may invest less than 35% of its
total assets in municipal securities that are rated BB or B by Standard &
Poor's, Ba or B by Moody's, or BB or B by Fitch. The Fund may purchase unrated
municipal securities that are determined to be of comparable quality to rated
investment grade securities by John Hancock Advisers, Inc. (the "Adviser").
There are no percentage limitations on the Fund's investments in municipal
securities within particular rating classifications of investment grade
securities. Therefore, it may invest its entire portfolio in securities rated as
"medium grade" obligations (i.e., BBB or Baa). Medium grade bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments. A description of the ratings of Standard & Poor's,
Moody's and Fitch is contained in the Statement of Additional Information.
The Fund will not generally invest more than 25% of its total assets in any
industry. Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the assets and
revenues of non-governmental users will be subject to this limitation. It is
possible that the Fund may from time to time invest more than 25% of its assets
in a particular segment of the municipal securities market, such as hospital
revenue obligations, housing agency obligations, or airport revenue obligations.
This would
5
<PAGE>
be the case only if the Adviser determined that the yields available from
obligations in a particular segment of the market justified the additional risks
associated with such concentration. Economic, business, political and other
developments generally affecting the revenues of issuers in such a market
segment (e.g. proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all municipal
securities in such segment. The Fund reserves the right to invest more than 25%
of its assets in industrial development bonds or in issuers located in any
particular state. The Fund may also invest in variable rate and floating rate
municipal obligations which have interest rates that are adjusted at designated
intervals or whenever there are changes in the market rates of interest on which
the interest rates are based. The Fund's distributions of the interest on
certain tax exempt securities which the Fund may purchase may be treated as an
item of tax preference under the federal alternative minimum tax. The Fund's
present policy is to invest no more than 20% of its total assets in taxable
securities including those generating interest that is an item of tax preference
under the alternative minimum tax.
SHORT-TERM INVESTMENTS. Although the Fund's portfolio generally will consist
primarily of municipal bonds, for liquidity purposes and for maintaining a
defensive position, in anticipation of a market decline, all or a portion of the
Fund's assets may be held in cash or invested in short-term municipal securities
(i.e., those with less than one year remaining to maturity). Short-term
municipal securities consist of short-term municipal notes and short-term
municipal loans and obligations, including municipal paper, master demand notes
and variable rate demand notes. Investments in short-term municipal securities
will, at the time of purchase, be rated within the three highest rating
categories of Standard & Poor's, Fitch or Moody's, or if unrated determined to
be of comparable quality by the Adviser. The Fund's investments in short-term
municipal securities will represent less than 25% of its total assets except
when the Fund is in a temporary defensive investment position in anticipation of
a market decline.
The Fund may also invest for liquidity or temporary defensive purposes in
taxable short-term obligations of the U.S. Government, its agencies or
instrumentalities; commercial paper rated in the highest grade by the rating
services (A-1, Prime-1 or F-1+, respectively); certificates of deposit and
bankers' acceptances; and repurchase agreements with respect to any securities
eligible for investment by the Fund, including municipal securities. The Fund
may also borrow an amount equal to up to 10% of its total assets to meet
anticipated redemptions but will not make any additional investments so long as
such borrowings exceed 5% of the value of its total assets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may buy and sell financial
futures contracts and options on futures to hedge against the effects of
fluctuations in securities prices, interest rates, currency exchange rates and
other market conditions and for speculative purposes. The potential loss
incurred by the Fund in writing options on futures is unlimited and may exceed
the amount of the premium received. The Fund's futures contracts and options on
futures will be traded on a U.S. commodity exchange or board of trade. The Fund
will not engage in a futures
6
<PAGE>
or options transaction for speculative purposes, if immediately thereafter, the
sum of initial margin deposits on existing positions and premiums required to
establish speculative positions in futures contracts and options on futures
would exceed 5% of the Fund's net assets. The Fund intends to comply with the
CFTC regulations with respect to its speculative transactions. These regulations
are discussed further in the Statement of Additional Information.
Options Transactions. The Fund may write listed and over-the-counter covered
call options and covered put options on debt and equity securities, securities
indices and foreign currency to earn income from the premiums received. The Fund
may write listed and over-the-counter covered call and put options on up to 100%
of its net assets. In addition, the Fund may purchase listed and over-the-
counter call and put options on securities, securities indices and currency. The
SEC considers over-the-counter options to be illiquid except under prescribed
conditions which are discussed in detail in the Statement of Additional
Information.
The Fund's ability to use futures contracts and options to hedge or increase
total return successfully will depend on the ability of the Adviser to predict
accurately the future direction of securities prices, interest rate changes,
currency exchange rate fluctuations and other market factors. There is no
assurance that a liquid market for futures and options will always exist. In
addition, the Fund could be prevented from opening or realizing the benefits of
closing out a futures or options position because of position limits or limits
on daily price fluctuations imposed by an exchange.
The Fund may invest in variable rate and floating rate obligations, including
inverse floating rate obligations, on which the interest rate is adjusted at
predesignated periodic intervals or when there is a change in the market rate of
interest on which the interest rate payable on the obligation is met is based.
Options, futures contracts and variable and floating rate instruments are
generally considered to be "derivative" instruments because they derive their
value from the performance of an underlying asset, index or other economic
benchmark.
RESTRICTED SECURITIES. The Fund may purchase restricted securities, including
those eligible for resale to "qualified institutional buyers" pursuant to Rule
144A under the Securities Act of 1933 (the "Securities Act"). The Trustees will
monitor the Fund's investments in these securities, focusing on certain factors,
including valuation, liquidity and availability of information. Purchases of
other restricted securities are subject to an investment restriction limiting
all the Fund's illiquid securities to not more than 10% of its net assets.
REPURCHASE AGREEMENTS, FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. The Fund
may enter into repurchase agreements and may purchase securities on a forward
commitment or when-issued basis. In a repurchase agreement, the Fund buys a
security subject to the right and obligation to sell it back to the seller at a
higher price. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party defaults on its
obligation and the Fund is delayed in or prevented from liquidating the
7
<PAGE>
collateral. The Fund will segregate in a separate account cash or liquid, high
grade debt securities equal in value to its forward commitments and when-issued
securities. Purchasing debt securities for future delivery or on a when-issued
basis may increase the Fund's overall investment exposure and involves a risk of
loss if the value of the securities declines before the settlement date. The
Fund's distributions of income from repurchase agreements and any net gains
realized from the disposition of rights to when-issued securities or forward
commitments purchased prior to delivery will be taxable to shareholders.
STAND-BY COMMITMENTS. The Fund may acquire stand-by commitments from banks with
respect to municipal securities held by the Fund. Under a stand-by commitment, a
bank that acts as a municipal securities dealer agrees to purchase, at the
Fund's option, specified municipal securities at a specified price. The Fund's
right to exercise stand-by commitments is unconditional and unqualified. The
total amount paid for outstanding stand-by commitments is not expected to exceed
1/2 of 1% of the Fund's total asset value calculated immediately after each
stand-by commitment is acquired. The Fund uses stand-by commitments for
liquidity purposes (i.e., to provide a ready market for its municipal securities
to meet cash needs).
SHORT-TERM TRADING. The Fund may engage in short-term trading, if the Adviser
believes that these transactions will improve the overall return of the Fund's
portfolio and therefore may have higher portfolio turnover than that of other
funds with similar objectives. Portfolio turnover may involve higher transaction
costs and may result in the realization of net capital gains, which are not
tax-exempt when distributed to you.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which are detailed in the Statement of Additional Information, where they are
designated as fundamental or nonfundamental. The investment objective and
fundamental restrictions may not be changed without shareholder approval. All
other investment policies and restrictions are nonfundamental and can be changed
by a vote of the Trustees without shareholder approval. Portfolio turnover rates
of the Fund for recent years are shown in the section "The Fund's Financial
Highlights."
When choosing brokerage firms to carry out the Fund's transactions, the Adviser
gives primary consideration to execution at the most favorable prices, taking
into account the broker's professional ability and quality of service.
Consideration may also be given to the broker's sale of Fund shares. Pursuant to
procedures established by the Trustees, the Adviser may place securities
transactions with brokers affiliated with the Adviser. These brokers include
Tucker Anthony Incorporated, John Hancock Distributors, Inc. and Sutro & Company
Inc., which are indirectly owned by John Hancock Mutual Life Insurance Company
(the "Life Company"), which in turn indirectly owns the Adviser.
- -------------------------------------------------------------------------------
BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
- -------------------------------------------------------------------------------
8
<PAGE>
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified series of Freedom Investment Trust, an open-end
management investment company organized as a Massachusetts business trust in
1984 (the "Trust"). The Trust reserves the right to create and issue a number of
series of shares, or funds or classes thereof, which are separately managed and
have different investment objectives.
The Fund is not required to hold annual shareholder meetings, although special
meetings may be held for such purposes as electing or removing Trustees,
changing fundamental policies or approving a management contract. The Fund,
under certain circumstances, will assist in shareholder communications with
other shareholders.
- -------------------------------------------------------------------------------
THE TRUSTEES ELECT OFFICERS AND RETAIN THE
INVESTMENT ADVISER WHO IS RESPONSIBLE FOR
THE DAY-TO-DAY OPERATIONS OF THE FUND,
SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
- -------------------------------------------------------------------------------
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the Life Company, a financial services company. The Adviser provides the Fund,
and other investment companies in the John Hancock group of funds, with
investment research and portfolio management services. John Hancock Funds, Inc.
("John Hancock Funds") distributes shares for all of the John Hancock funds
directly and through selected broker-dealers ("Selling Brokers"). Freedom
Distributors Corporation, a co-distributor of the Fund, is, along with John
Hancock Funds (together with John Hancock Funds, the "Distributors"), an
indirect subsidiary of the Life Company. Certain Fund officers are also officers
of the Adviser and John Hancock Funds. Pursuant to an order granted by the
Securities and Exchange Commission, 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.
- -------------------------------------------------------------------------------
JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF MORE THAN $16 BILLION.
- -------------------------------------------------------------------------------
Frank A. Lucibella is portfolio manager of the Fund. Mr. Lucibella also manages
the John Hancock High Yield Tax-Free Fund and John Hancock Tax-Exempt Series --
9
<PAGE>
New York Portfolio. He is assisted by a team of analysts in the management of
the Fund. He joined the Adviser in 1988 after six years of investment experience
with Eaton Vance and The Travelers Corporation.
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.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share, plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative--Class
A Shares") or on a contingent deferred basis (See "Contingent Deferred Sales
Charge Alternative--Class B Shares"). If you do not specify on your account
application the class of shares you are purchasing, it will be assumed that you
are investing in Class A shares.
- -------------------------------------------------------------------------------
AN ALTERNATIVE PURCHASE PLAN ALLOWS YOU TO
CHOOSE THE METHOD OF PAYMENT THAT IS BEST
FOR YOU.
- -------------------------------------------------------------------------------
10
<PAGE>
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount you purchase is $1 million or more. If
you purchase $1 million or more of Class A shares, you will not be subject to an
initial sales charge but you will incur a sales charge if you redeem your shares
within one year of purchase. Class A shares are subject to ongoing distribution
and service fees at a combined annual rate of up to 0.30% of the Fund's average
daily net assets attributable to the Class A shares. Certain purchases of Class
A shares qualify for a reduced initial sales charge. See "Share
Price--Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
- -------------------------------------------------------------------------------
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all your
dollars to work from the time you make your investment, but the higher ongoing
distribution fee will cause these shares to have higher expenses than Class A
shares. To the extent that any dividends are paid by the Fund, these higher
expenses will also result in lower dividends than those paid on Class A shares.
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
Class B shares are not available 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.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider whether,
during the anticipated life of your Fund investment, the CDSC and accumulated
fees on Class B shares would be less than the initial sales charge and
accumulated fees on Class A shares purchased at the same time, and to what
extent this
11
<PAGE>
differential would be offset by the Class A shares' lower expenses. To help you
make this determination, the table under the caption "Expense Information" on
the inside cover of this Prospectus shows examples of the charges applicable to
each class of shares. Class A shares will normally be more beneficial if you
qualify for a reduced sales charge. See "Share Price--Qualifying for a Reduced
Sales Charge."
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WILL BE MORE BENEFICIAL FOR YOU.
- -------------------------------------------------------------------------------
Class A shares are subject to lower distribution and service fees and,
accordingly, pay correspondingly higher dividends per share, to the extent any
dividends are paid. However, because initial sales charges are deducted at the
time of purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all of your funds invested initially. However, you will
be subject to higher distribution fees and, for a six-year period, a CDSC.
12
<PAGE>
In the case of Class A shares, distribution expenses that John Hancock Funds
incurs in connection with the sale of the shares will be paid from the proceeds
of the initial sales charge and the ongoing distribution and service fees. In
the case of Class B shares, the expenses will be paid from the proceeds of the
ongoing distribution and service fees as well as from the CDSC incurred upon
redemption within six years of purchase. The purpose and function of the Class B
shares' CDSC and ongoing distribution and service fees are the same as those of
the Class A shares' initial sales charge and ongoing distribution and service
fees.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time, on the same day. They will also be in the same amount,
except for differences resulting from each class bearing only its own
distribution and service fees and shareholder meeting expenses. See "Dividends
and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a monthly fee to
the Adviser, which for the 1995 fiscal year was 0.55% of the Fund's average
daily net assets. The Adviser has voluntarily agreed to limit its management fee
to 0.55% of the Fund's average daily net assets.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.30% of the Class A shares' average daily
net assets and an aggregate annual rate of up to 1.00% of the Class B shares'
average daily net assets. In each case, up to 0.25% is for service expenses and
the remaining amount is for distribution expenses. The distribution fees will be
used to reimburse the Distributors for their distribution expenses, including
but not limited to: (i) initial and ongoing sales compensation to Selling
Brokers and others (including affiliates of the Distributors) 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 distribution expenses.
The service fees are paid to the Distributors to compensate Selling Brokers and
others providing personal and account maintenance services to shareholders.
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
In the event the Distributors are not fully reimbursed for payments they make or
expenses they incur under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. These unreimbursed expenses
under the Class B Plan will be carried forward together with interest on the
balance of these unreimbursed expenses.
For the fiscal year ended October 31, 1995 an aggregate of $6,993,452 of
distribution expenses or 3.51%, of the average net assets of the Class B shares
of the Fund, was not reimbursed or recovered by the Distributors through the
receipt of deferred sales charges or 12b-1 fees in prior periods.
Information on the Fund's total expenses is in the Fund's Financial Highlights
section of this Prospectus.
13
<PAGE>
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares daily and distributes monthly dividends
representing all or substantially all net investment income. The Fund will
distribute net realized long-term and short-term capital gains, if any, at least
annually.
Dividends are reinvested in additional shares of your class unless you elect the
option to receive cash. If you elect the cash option and the U.S. Postal Service
cannot deliver your checks, your election will be converted to the reinvestment
option. Because of the higher expenses associated with Class B shares, any
dividends on these shares will be lower than those on the Class A shares. See
"Share Price."
TAXATION. The Fund intends to meet certain federal tax requirements so that its
distributions of the tax-exempt interest it earns may be treated as
"exempt-interest dividends" which you are entitled to treat as tax-exempt
interest. That portion of exempt-interest dividends, if any, attributable to
interest on certain tax-exempt obligations that are "private activity bonds" may
increase certain shareholders' alternative minimum tax. Any exempt-interest
dividend may increase a corporate shareholder's alternative minimum tax. The
Fund will send you a statement by January 31 showing the tax status of the
dividends you received for the prior year.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to Federal income tax on up to 85 percent of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
advisor if you think this may apply to you.
Dividends from the Fund's net taxable income, if any, including any market
discount included in the Fund's income, and from the Fund's net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long-term capital gains are taxable as long-term capital gain. These
dividends are taxable, whether received in cash or reinvested in additional
shares. Certain dividends may be paid by the Fund in January of a given year but
may be taxable as if you received them the previous December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code."). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income or net realized
capital gains that are distributed to its shareholders within the time period
prescribed by the Code. When you redeem (sell) or exchange shares, you may
realize a taxable gain or loss.
On the account application you must certify that your social security or other
tax-payer identification number is correct and that you are not subject to
backup withholding of Federal income tax. If you do not provide this information
or are otherwise subject to this withholding, the Fund may be required to
withhold 31% of your taxable dividends and the proceeds of redemptions and
exchanges.
14
<PAGE>
In addition to Federal taxes, you may be subject to state and local taxes with
respect to your investments in and distributions from the Fund. Non-U.S.
shareholders and tax-exempt shareholders are subject to a different tax
treatment not described above. In many states, a portion of the Fund's dividends
that represents interest received by the Fund on direct U.S. Government
obligations may be exempt from tax. You should consult your tax adviser for
specific advice.
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements. The Fund may
also utilize tax equivalent yields of its Class A and Class B shares computed in
the same manner, with adjustment for assumed Federal income tax rates. For a
comparison of yields on municipal securities and taxable securities, see the
Taxable Equivalent Yield Table in Appendix A.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL
RETURN.
- -------------------------------------------------------------------------------
The Fund's total return shows the overall dollar or percentage change in value
of a hypothetical investment in the Fund, assuming the reinvestment of all
dividends. Cumulative total return shows the Fund's performance over a period of
time. Average annual total return shows the cumulative return of the respective
class of shares of the Fund divided by the number of years included in the
period. Because average annual total return tends to smooth out variations in
the Fund's performance, you should recognize that it is not the same as actual
year-to-year results.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at lower sales charges would result in
higher performance figures. Yield and total return for the Class B shares
reflect the deduction of the applicable CDSC imposed on a redemption of shares
held for the applicable period (except as shown in "The Fund's Financial
Highlights"). All calculations assume that all dividends are reinvested at net
asset value on the reinvestment dates during the periods. Yield and total return
of Class A and Class B shares will be calculated separately and, because each
class is subject to certain different expenses, the yield and total return may
differ with respect to each class for the same period. The relative performance
of the Class A and Class B shares will be affected by a variety of factors,
including the higher operating expenses attributable to the Class B shares,
whether the Fund's investment performance is better in the earlier or later
portions of the period measured and the level of net assets of the classes
during the period. The Fund will include the total return of both classes in any
advertisement or promotional materials including Fund performance data. The
value of the Fund's shares, when redeemed, may be more or less than their
original cost. Both yield and total return are historical calculations and are
not an indication of future performance. See "Factors to Consider in Choosing an
Alternative."
15
<PAGE>
HOW TO BUY SHARES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT.
- -------------------------------------------------------------------------------
<TABLE>
The minimum initial investment is $1,000 ($250 for group investments).
Complete the Account Application attached to this Prospectus. Indicate whether you
are purchasing Class A or Class B shares. If you do not specify which class of
shares you are purchasing, Investor Services will assume that you are investing in
Class A shares.
- ---------------------------------------------------------------------------------
<S> <C> <C>
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation.
2. Deliver the completed application and check to your registered
representative, Selling Broker or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative, Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Managed Tax-Exempt Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative, Selling Broker or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A
AND CLASS B SHARES.
- -------------------------------------------------------------------------------
1. Complete the "Automatic Investing" and "Bank Information"
MONTHLY sections on the Account Privileges Application designating a bank
AUTOMATIC account from which your funds may be drawn.
ACCUMULATION
PROGRAM 2. The amount you elect to invest will be withdrawn automatically
(MAAP) from your
bank or credit union account.
- --------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-by-Phone" and "Bank Information" sections
on the Account Privileges Application designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, your account must be in a bank or credit
union that is a member of the Automated Clearing House system
(ACH).
2. After your authorization form has been processed, you may
purchase additional Class A or Class B shares by calling
Investor Services toll-free at 1-800-225-5291.
3. Give the Investor Services representative the name(s) in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
BY CHECK 1. Either complete the detachable stub included on your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Managed Tax-Exempt Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A
AND CLASS B SHARES.
(CONTINUED)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Other Requirements. All purchases must be made in U.S. dollars. Checks
written on foreign banks will delay purchases until U.S. funds are received,
and a collection charge may be imposed. Shares of the Fund are priced at the
offering price based on the net asset value computed after John Hancock Funds
receives notification of the dollar equivalent from the Fund's custodian
bank. Wire purchases normally take two or more hours to complete and, to be
accepted the same day, must be received by 4:00 p.m., New York time. Your
bank may charge a fee to wire funds. Telephone transactions are recorded to
verify information. Certificates are not issued unless a request is made in
writing to Investor Services.
- --------------------------------------------------------------------------------
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS THAT
YOU SHOULD KEEP TO HELP WITH YOUR PERSONAL
RECORDKEEPING.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share (the "NAV") is the value of one share. The NAV is
calculated by dividing the net assets of each class by the number of outstanding
shares of that class. The NAV of each class can differ. Securities in the Fund's
portfolio are valued on the basis of market quotations, valuations provided by
independent pricing services or, at fair value as determined in good faith
according to procedures approved by the Trustees. Short-term debt investments
maturing within 60 days are valued at amortized cost which the Board of Trustees
has determined to approximate market value. Foreign securities are valued on the
basis of quotations from the primary market in which they are traded, and are
translated from the local currency into U.S. dollars using current exchange
rates. If quotations are not readily available, or the value has been materially
affected by events occurring after the closing of a foreign market, assets are
valued by a method that the Trustees believe accurately reflects fair value. The
NAV is calculated once daily as of the close of regular trading on the New York
Stock Exchange (generally at 4:00 p.m., New York time) on each day that the
Exchange is open.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE, IF
APPLICABLE, WHICH WILL VARY WITH THE
PURCHASE ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your investment before the close of regular trading on the New York
Stock Exchange and transmit it to John Hancock Funds before its close of
business to receive that day's offering price.
17
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge, as follows:
<TABLE>
<CAPTION>
REALLOWANCE TO
COMBINED SELLING BROKER
REALLOWANCE AS
AMOUNT INVESTED SALES CHARGE AS SALES CHARGE AS AND SERVICE FEE A PERCENTAGE OF
(INCLUDING SALES A PERCENTAGE OF A PERCENTAGE OF AS A PERCENTAGE OFFERING
CHARGE) OFFERING PRICE THE AMOUNT INVESTED OF OFFERING PRICE(+) PRICE(*)
- ---------------------- --------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 3.00% 3.09% 2.50% 2.26%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
- ---------------
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. A Selling Broker to whom substantially the entire sales charge is
reallowed may be deemed to be an underwriter under the Securities Act of
1933.
(**) No sales charge is payable at the time of purchase of Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions made within one year of purchase.
(***) John Hancock Funds may pay a commission and first year's service fee (as
described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in the aggregate as
follows: 1% on sales to $4,999,999, 0.50% on the next $5 million and 0.25%
on $10 million and over.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance, in an amount equal to 0.25% of the net
assets invested in the Fund. Thereafter, it pays the service fee
periodically in arrears in an amount up to 0.25% of the Fund's average
annual net assets. Selling Brokers receive the fee as compensation for
providing personal and account maintenance services to shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
of up to 0.05% of the daily net assets of the accounts attributable to these
brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge."
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more Class A shares will be made at net
asset value with no initial sales charge, but if shares are redeemed within 12
months after the end of the calendar month in which the purchase was made (the
CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on the
amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
- -------------------------------------------------------------- ---------
<S> <C>
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
</TABLE>
18
<PAGE>
Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund account, may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate.
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the redeemed Class A shares. Accordingly,
no CDSC will be imposed on increases in account value above the initial purchase
price, including any dividends which have been reinvested in additional Class A
shares.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that redemption is first made from any shares in
your account that are not subject to the CDSC. The CDSC is waived on redemptions
in certain circumstances. See "Waiver of Contingent Deferred Sales Charge"
below.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or combination of John Hancock funds (except money
market funds), you may qualify for a reduced sales charge on your investments in
Class A shares through a LETTER OF INTENTION. You may also be able to use the
ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE to take advantage of the value
of your previous investments in shares of the John Hancock funds in meeting the
breakpoints for a reduced sales charge. For the ACCUMULATION PRIVILEGE and
COMBINATION PRIVILEGE, the applicable sales charge will be based on the total
of:
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A REDUCED SALES CHARGE
ON YOUR INVESTMENT IN CLASS A SHARES.
- -------------------------------------------------------------------------------
1. Your current purchase of Class A shares of the Fund;
2. The net asset value (at the close of business on the previous day) of (a)
all Class A shares of the Fund you hold, and (b) all Class A shares of any
other John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000 and, subsequently, invest $20,000 in Class A shares of the Fund, the
sales charge on this subsequent investment would be 3.75% and not 4.50%. This is
the rate that would otherwise be applicable to investments of less than
$100,000. See "Initial Sales Charge Alternative--Class A Shares."
19
<PAGE>
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee or officer of the 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 of any of the foregoing; or any
Fund, pension, profit sharing or other benefit plan for the individuals
described above.
- -------------------------------------------------------------------------------
CLASS A SHARES MAY BE AVAILABLE WITHOUT A
SALES CHARGE TO CERTAIN INDIVIDUALS AND
ORGANIZATIONS.
- -------------------------------------------------------------------------------
- - Any state, county, city or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
- - A bank, trust company, credit union, savings institution or other depository
institution, its trust departments or common trust funds if it is purchasing
$1 million or more for non-discretionary customers or accounts.*
- - A broker, dealer, financial planner, consultant or registered investment
adviser that has entered into an agreement with John Hancock Funds providing
specifically for the use of Fund shares in fee-based investment products or
services made available to their clients.
- - A former participant in an employee benefit plan with John Hancock funds, when
he or she withdraws from his or her plan and transfers any or all of his or
her plan distributions directly to the Fund.
- - A member of an approved affinity group financial services plan.*
- ---------------
* For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A shares of the Fund may also by purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without an initial sales charge, so
that your entire investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates set forth below. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
shares being redeemed. Accordingly, you will not be assessed a CDSC on increases
in account value above the initial purchase price, including shares derived from
dividend reinvestment.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends, and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charges"
below.
20
<PAGE>
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $600
- - Minus proceeds of 10 shares not subject to CDSC because they were
acquired through dividend reinvestment (10 x $12) -120
- - Minus appreciation on remaining shares, also not subject to CDSC (40 x
$2) -80
-----
- - Amount subject to CDSC $400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
them to defray its expenses related to providing the Fund with distribution
services in connection with the sale of the Class B shares, such as compensating
Selling Brokers for selling these shares. The combination of the CDSC and the
distribution and service fees makes it possible for the Fund to sell Class B
shares without an initial sales charge.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase the Class B shares until the time you redeem them. Solely
for determining this holding period, any payments you make during the month will
be aggregated and deemed to have been made on the last day of the month.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
YEAR IN WHICH CLASS B SHARES AS A PERCENTAGE
REDEEMED FOLLOWING PURCHASE AMOUNT REDEEMED
- ------------------------------------------------------------- -------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
If you purchased Class B shares during 1992 or 1993, the applicable CDSC as a
percentage of the amount redeemed will be: 4% for redemptions during the first
year after purchase, 3.5% for redemptions during the second year, 3% for
redemptions during the third year, 2.5% for redemptions during the fourth year,
2% for redemptions during the fifth year, 1% for redemption during the sixth
year, and no CDSC for redemptions during the seventh year and thereafter. If you
purchased Class B shares before 1992, the applicable CDSC as a percentage of the
amount redeemed will be: 1% for redemptions during the third, fourth and fifth
years after purchase and no CDSC for redemptions during the sixth year and
thereafter.
21
<PAGE>
WAIVER OF CONTINGENT SALES CHARGES. The CDSC will be waived on redemptions of
Class B shares and of Class A shares that are subject to a CDSC, unless
indicated otherwise, in the circumstances defined below:
- - Redemptions of Class B shares made under Systematic Withdrawal Plan (see "How
to Redeem Shares"), as long as your annual redemptions do not exceed 10% of
your account value at the time you established your Systematic Withdrawal Plan
and 10% of the value of subsequent investments (less redemptions) in that
account at the time you notify Investor Services. This waiver does not apply
to Systematic Withdrawal Plan redemptions of Class A shares that are subject
to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON
CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
your life expectancy or the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as describe in "Additional
Services and Programs" of this Prospectus.
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
own fewer than 50 shares.
- - Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- - Redemptions from certain IRA and retirement plans which purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
CONVERSION OF CLASS B SHARES. Your Class B shares and an appropriate portion of
reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur no later than the month following eight years
after the shares were purchased, and will result in lower annual distribution
fees. If you exchanged Class B shares into this Fund from another John Hancock
fund, the
22
<PAGE>
calculation will be based on the time you purchased the shares in the original
fund. The Fund has been advised that the conversion of Class B shares to Class A
shares of the Fund should not be taxable for Federal income tax purposes, and
should not change your tax basis or tax holding period for the converted shares.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services less any applicable CDSC. The Fund
may hold payment until reasonably satisfied that investments recently made by
check or Invest-by-Phone have been collected (which may take up to 10 calendar
days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss, depending usually on the difference between what you paid for them and
what you receive for them, subject to certain tax rules. Under unusual
circumstances, the Fund may suspend redemptions or postpone payment for up to
three business days or longer, as permitted by Federal securities laws.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELEPHONE All Fund shareholders are eligible automatically for the
telephone redemption privilege. Call 1-800-225-5291, from
8:00 A.M. to 4:00 P.M. (New York time), Monday through
Friday, excluding days on which the New York Stock Exchange
is closed. Investor Services employs the following
procedures to confirm that instructions received by
telephone are genuine. Your name, the account number,
taxpayer identification number applicable to the account
and other relevant information may be requested. In
addition, telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address
on the account must not have changed for the last 30 days.
A check will be mailed to the exact name(s) and address
shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions. In
all other cases, neither the Fund nor Investor Services
will be liable for any loss or expense for acting upon
telephone instructions made according to the telephone
transaction procedures mentioned above.
Telephone redemption is not available for IRAs or other
tax-qualified retirement plans or shares of the Fund that
are in certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times you
should consider placing redemption requests in writing or
using EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account and a
fee (currently $4.00) will be deducted. You may also use
electronic funds transfer to your assigned bank account and
the funds are usually collectible after two business days.
Your bank may or may not charge for this service.
Redemptions of less than $1,000 will be sent by check or
electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number, and the additional requirements listed
below that apply to your particular account.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole A letter of instruction signed (with titles
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaranteed
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signature(s)
guaranteed
Trusts A letter of instruction signed by the
Trustee(s) with the signature guaranteed.
(If the Trustee's name is not registered on
your account, also provide a copy of the
trust document, certified within the last 60
days.)
</TABLE>
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
- --------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less,
John Hancock Funds may guarantee the signature. The following institutions
may provide you with a signature guarantee, provided that the institution
meets credit standards established by Investor Services: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or meets certain
net capital requirements; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and
loan association, a cooperative bank, a federal savings bank or association;
or (v) a national securities exchange, a registered securities exchange or a
clearing agency.
- -------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your
stock power or a letter of instruction. Unless you specify to the contrary,
any outstanding Class A shares will be redeemed before Class B shares. You
may not redeem certificated shares by telephone. Due to the proportionately
high cost of maintaining smaller accounts, the Fund reserves the right to
redeem at net asset value all shares in an account which holds fewer than 50
shares (except accounts under retirement plans) and to mail the proceeds to
the shareholder or the transfer agent may impose an annual fee of $10.00. No
account will be involuntarily redeemed or additional fee imposed, if the
value of the account is in excess of the Fund's minimum initial investment.
No CDSC will be imposed on involuntary redemption of shares. Shareholders
will be notified before these redemptions are to be made or this fee is
imposed and will have 30 days to purchase additional shares to bring their
account balance up to the required minimum. Unless the number of shares
acquired by additional purchases and any dividend reinvestments exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
- --------------------------------------------------------------------------------
24
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND FOR
SHARES OF THE SAME CLASS OF ANOTHER JOHN
HANCOCK FUND.
- -------------------------------------------------------------------------------
Exchanges between funds which are not subject to a CDSC are based on their
respective net asset values. No sales charge or transaction charge is imposed.
Class B shares of the Fund that are subject to a CDSC may be exchanged for Class
B shares of another John Hancock fund without incurring the CDSC; however, these
shares will be subject to the CDSC schedule of the shares acquired (except that
exchanges into John Hancock Short-Term Strategic Income Fund, John Hancock
Intermediate Maturity Government Fund and John Hancock Limited-Term Government
Fund will be subject to the initial fund's CDSC). For purposes of computing the
CDSC payable upon redemption of shares acquired in an exchange, the holding
period of the original shares is added to the holding period of the shares
acquired in an exchange. However, if you exchange Class B shares purchased prior
to January 1, 1994 for Class B shares of any other John Hancock fund, you will
continue to be subject to the CDSC schedule in effect on your initial purchase
date.
The Fund reserves the right to require that you keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted a
new exchange. The Fund may also terminate or alter the terms of the exchange
privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
25
<PAGE>
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
IN WRITING
1. In a letter request an exchange and list the following:
- name and class of the Fund whose shares you currently own
- your account number
- the name(s) in which the account is registered
- the name of the fund in which you wish your exchange to be invested
- the number of shares, all shares or the dollar amount you wish to
exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
26
<PAGE>
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares that you reinvest
in a John Hancock fund that is otherwise subject to a sales charge, as long
as you reinvest within 120 days of the redemption date. If you paid a CDSC
upon a redemption, you may reinvest at net asset value in the same class of
shares from which you redeemed within 120 days. Your account will be credited
with the amount of the CDSC previously charged, and the reinvested shares
will continue to be subject to a CDSC. The holding period of the shares
acquired through reinvestment for purposes of computing the CDSC payable upon
a subsequent redemption will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE FUND, YOU MAY
BE ABLE TO REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS FUND OR ANOTHER
JOHN HANCOCK FUND WITHOUT PAYING AN
ADDITIONAL SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of other John Hancock funds, subject to the minimum investment limit of that
fund.
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain the application from your registered representative or by calling
1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
on a selected monthly basis to yourself or any other designated payee.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS
FROM YOUR RETIREMENT ACCOUNT TO COMPLY
WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to an initial sales charge on your purchases of Class A shares or to
a CDSC on your redemptions of Class B shares. In addition, your redemptions
are taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks, or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be withdrawn automatically each month on
your bank, for investment in Fund shares, under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
2. You can also authorize automatic investing through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
27
<PAGE>
3. You can terminate your Monthly Automatic Accumulation Program at any time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments withdrawn from a bank account and we are notified that
the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY
ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
28
<PAGE>
APPENDIX A
EQUIVALENT YIELDS:
TAX EXEMPT VS. TAXABLE YIELD
The table below shows the effect of the tax status of municipal obligations on
the yield received by their holders under the regular federal income tax laws
that apply to 1996. It gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields.
TAX-FREE YIELDS 1996 TAX TABLE
<TABLE>
<CAPTION>
MARGINAL
SINGLE RETURN JOINT RETURN INCOME
- ----------------- ------------ TAX
BRACKET TAX-EXEMPT YIELD
-------- ----------------------------------------------------------------------
(TAXABLE INCOME) 4% 5% 6% 7% 8% 9% 10%
- -------------------------------------- ------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,000 $0-40,100 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
$24,001-58,150 $40,101-96,900 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
$58,151-121,300 $96,901-147,700 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
$121,301-263,750 $147,701-263,750 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $263,750 Over $263,750 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
It is assumed that an investor filing a single return is not a "head of
household," a "married individual filing a separate return," or a "surviving
spouse." The table does not take into account the effects of reductions in the
deductibility of itemized deductions or the phaseout of personal exemptions for
taxpayers with adjusted gross incomes in excess of specified amounts. Further,
the table does not attempt to show any alternative minimum tax consequences,
which will depend on each shareholder's particular tax situation and may vary
according to what portion, if any, of the Fund's exempt-interest dividends is
attributable to interest on certain private activity bonds for any particular
taxable year. No assurance can be given that the Fund will achieve any specific
tax-exempt yield or that all of its income distributions will be tax-exempt.
Distributions attributable to any taxable income or capital gains realized by
the Fund will not be tax-exempt.
The information set forth above is as of the date of this Prospectus.
Subsequent tax law changes could result in prospective or retroactive changes in
the tax brackets, tax rates, and tax-equivalent yields set forth above.
This table is for illustrative purposes only and is not intended to imply or
guarantee any particular yield from the John Hancock Managed Tax-Exempt 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.
29
<PAGE>
JOHN HANCOCK MANAGED
TAX-EXEMPT FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT AUDITOR
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For: Service Information
Telephone Exchange call 1-800-225-5291
Invest-by-Phone
Telephone Redemption
For: TDD call 1-800-554-6713
JOHN HANCOCK
MANAGED
TAX-EXEMPT
FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MARCH 1, 1996
A MUTUAL FUND SEEKING
AS HIGH A LEVEL OF
CURRENT INCOME EXEMPT
FROM FEDERAL INCOME
TAX AS IS CONSISTENT
WITH PRESERVATION OF
CAPITAL BY INVESTING
PRIMARILY IN MUNICIPAL
SECURITIES.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
JHD-0700P 3-96(LOGO) Printed on
Recycled Paper
