REGISTRATION NO. 33-32246
REGISTRATION NO. 811-5968
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 13 [X]
AND/OR
REGISTRATION STATEMENT UNDER [X]
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 17
(check appropriate boxes)
-------------------------
JOHN HANCOCK TAX-FREE BOND TRUST
(Exact Name of Registrant as Specified in Charter)
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(617) 375-1700
--------------
Susan S. Newton
Vice President and Secretary
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
(Name and Address of Agent for Service)
---------------------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on January 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (DATE) pursuant to paragraph (a) of Rule (485 or 486)
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT HAS
REGISTERED AN INDEFINITE NUMBER OF SECURITIES UNDER THE SECURITIES ACT OF 1933.
THE REGISTRANT FILED THE NOTICE REQUIRED BY RULE 24F-2 FOR ITS MOST RECENT
FISCAL YEAR ON OR ABOUT November 5, 1997.
<PAGE>
<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
1 Front Cover Page *
2 Overview; Investor Expenses; *
3 Financial Highlights *
4 Overview; Goal and Strategy; Portfolio *
Securities; Risk Factors; Business
Structure; More About Risk
5 Overview; Business Structure; *
Manager/Subadviser; Investor Expenses
6 Choosing a Share Class; Buying Shares; *
Selling Shares; Transaction Policies;
Dividends and Account Policies;
Additional Investor Services
7 Choosing a Share Class; How Sales Charges *
are Calculated; Sales Charge Deductions
and Waivers; Opening an Account; Buying
Shares; Transaction Policies; Additional
Investor Services
8 Selling Shares; Transaction Policies; *
Dividends and Account Policies
9 Not Applicable *
10 * Front Cover Page
11 * Table of Contents
12 * Organization of the Fund
13 * Investment Objectives and Policies;
Certain Investment Practices;
Investment Restrictions
14 * Those Responsible for Management
15 * Those Responsible for Management
16 * Investment Advisory; Subadvisory
and Other Services; Distribution
Contract; Transfer Agent Services;
Custody of Portfolio; Independent
Auditors
17 * Brokerage Allocation
18 * Description of Fund's Shares
19 * Net Asset Value; Additional
Services and Programs
20 * Tax Status
21 * Distribution Contract
22 * Calculation of Performance
23 * Financial Statements
</TABLE>
<PAGE>
JOHN HANCOCK
Tax-Free
Income Funds
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
Prospectus
January 1, 1998
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goal(s)
High Yield Tax-Free Fund may invest up to 85% in junk bonds; read risk
information carefully.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
California Tax-Free Income Fund
High Yield Tax-Free Fund
Massachusetts Tax-Free
Income Fund
New York Tax-Free Income Fund
Tax-Free Bond Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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A fund-by-fund look at goals, California Tax-Free Income Fund 4
strategies, risks, expenses
and financial history. High Yield Tax-Free Fund 6
Massachusetts Tax-Free Income Fund 8
New York Tax-Free Income Fund 10
Tax-Free Bond Fund 12
Policies and instructions for Your account
opening, maintaining and closing Choosing a share class 14
an account in any How sales charges are calculated 14
tax-free income fund. Sales charge reductions and waivers 15
Opening an account 15
Buying shares 16
Selling shares 17
Transaction policies 19
Dividends and account policies 19
Additional investor services 20
Details that apply to the Fund details
tax-free income funds as a group. Business structure 21
Sales compensation 22
More about risk 24
For more information back cover
<PAGE>
Overview
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GOAL OF THE TAX-FREE INCOME FUNDS
John Hancock tax-free income funds seek to offer income that is exempt from
federal and, in some cases, state and local income tax. Each fund has its own
strategy and its own risk/reward profile. Each fund invests at least 80% of
assets in municipal securities exempt from federal (and in some funds, state)
income tax as well as the federal alternative minimum tax. However, a portion of
a tax-free fund's income may be subject to these taxes. Because you could lose
money by investing in these funds, be sure to read all risk disclosure carefully
before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are in higher income brackets
o want regular monthly income
o are interested in lowering their income tax burden
o pay California, Massachusetts or New York income tax (state-specific funds)
Tax-free income funds may NOT be appropriate if you:
o are not subject to a high level of state or federal income tax
o are seeking an investment for a tax-deferred retirement account
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock tax-free income funds are managed by John Hancock Advisers,
Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $22 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clipart] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clipart] 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.
[Clipart] Risk factors The major risk factors associated with the fund.
[Clipart] Portfolio management The individual or group designated by the
investment adviser to handle the fund's day-to-day management.
[Clipart] Expenses The overall costs borne by an investor in the fund, including
sales charges and annual expenses.
[Clipart] Financial highlights A table showing the fund's financial performance
for up to ten years, by share class. A bar chart showing total return allows you
to compare the fund's historical risk level to those of other funds.
<PAGE>
California Tax-Free Income Fund
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
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GOAL AND STRATEGY
[Clipart] The fund seeks income that is exempt from federal and California
personal income taxes. The fund seeks to provide the maximum current income that
is consistent with preservation of capital. To pursue this goal, the fund
invests primarily in municipal securities exempt from these taxes.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of assets in California municipal securities, particularly bonds.
These are primarily investment grade, although up to 20% of assets may be
invested in junk bonds rated BB/Ba and their unrated equivalents. No more than
25% of assets may be invested in unrated securities.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, and may engage in other investment
practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Although the fund is diversified, it concentrates in securities of California
issuers and its performance is largely dependent on factors that may
disproportionately affect these issuers. Factors may include:
o local economic or policy changes
o tax base erosion
o state constitutional limits on tax increases
o changes in the ratings assigned to the state's municipal issuers
o the possibility of credit problems, such as the 1994 bankruptcy of Orange
County
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Dianne Sales, CFA, leader of the fund's portfolio management team
since April 1995, is a second vice president of the adviser. Ms. Sales joined
John Hancock Funds in 1989 and has been in the investment business since 1984.
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INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
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Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.48% 0.48%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses 0.12% 0.12%
Total fund operating expenses (after limitation)(3) 0.75% 1.50%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $52 $68 $85 $134
Class B shares
Assuming redemption
at end of period $65 $77 $102 $159
Assuming no redemption $15 $47 $82 $159
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 0.82% for Class A and 1.57% 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>
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FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 6.13 12.26 9.15 13.60 (9.31) 21.88 0.61(5) 9.71
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class A - period ended: 12/90 12/91 12/92 12/93
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.91 $10.32 $10.41
Net investment income 0.74 0.69 0.66(3) 0.62
Net realized and unrealized gain (loss)
on investments (0.16) 0.47 0.25 0.76
Total from investment operations 0.58 1.16 0.91 1.38
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62)
Distributions from net realized gain
on investments sold -- (0.05) (0.15) (0.32)
Total distributions (0.67) (0.75) (0.82) (0.94)
Net asset value, end of period $9.91 $10.32 $10.41 $10.85
Total investment return at net asset
value(4) (%) 6.13 12.26 9.15 13.60
Total adjusted investment return at net
asset value(4,6) (%) 5.29 11.86 8.90 13.42
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 80,200 163,693 217,014 279,692
Ratio of expenses to average net assets (%) 0.00 0.40 0.58 0.69
Ratio of adjusted expenses to average
net assets(9) (%) 0.84 0.80 0.83 0.87
Ratio of net investment income (loss)
to average net assets (%) 7.11 6.75 6.36 5.69
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) 6.27 6.35 6.11 5.51
Portfolio turnover rate (%) 62 45 34 51
Fee reduction per share ($) 0.09 0.04 0.03(3) 0.02
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(1) 12/95 8/96(2) 8/97
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.69 $10.36
Net investment income 0.58 0.57(3) 0.39(3) 0.57(3)
Net realized and unrealized gain (loss)
on investments (1.57) 1.41 (0.33) 0.41
Total from investment operations (0.99) 1.98 0.06 0.98
Less distributions:
Dividends from net investment income (0.58) (0.57) (0.39) (0.57)
Distributions from net realized gain
on investments sold -- -- -- --
Total distributions (0.58) (0.57) (0.39) (0.57)
Net asset value, end of period $9.28 $10.69 $10.36 $10.77
Total investment return at net asset
value(4) (%) (9.31) 21.88 0.61(5) 9.71
Total adjusted investment return at net
asset value(4,6) (%) (9.45) 21.73 0.55(5) 9.64
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 241,583 309,305 291,072 291,167
Ratio of expenses to average net assets (%) 0.75 0.75 0.76(7,8) 0.75
Ratio of adjusted expenses to average
net assets(9) (%) 0.89 0.90 0.84(7) 0.82
Ratio of net investment income (loss)
to average net assets (%) 5.85 5.76 5.57(7) 5.42
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) 5.71 5.61 5.48(7) 5.35
Portfolio turnover rate (%) 62 37(10) 30 15
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/92 12/93 12/94(1) 12/95 8/96(2) 8/97
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.32 $10.41 $10.85 $9.28 $10.68 $10.36
Net investment income 0.58(3) 0.54 0.51 0.50(3) 0.33(3) 0.49(3)
Net realized and unrealized gain (loss) on investments 0.25 0.76 (1.57) 1.40 (0.31) (0.41)
Total from investment operations 0.83 1.30 (1.06) 1.90 (0.02) 0.90
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50) (0.34) (0.49)
Distributions from net realized gain on investments sold (0.15) (0.32) -- -- -- --
Total distributions (0.74) (0.86) (0.51) (0.50) (0.34) (0.49)
Net asset value, end of period $10.41 $10.85 $9.28 $10.68 $10.36 $10.77
Total investment return at net asset value(4) (%) 8.35 12.76 (9.99) 20.87 0.20(5) 8.88
Total adjusted investment return at net asset value(4, 6) (%) 8.10 12.58 (10.13) 20.72 0.14(5) 8.81
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 26,595 65,437 77,365 84,673 83,253 89,493
Ratio of expenses to average net assets (%) 1.35 1.44 1.50 1.50 1.52(7,8) 1.50
Ratio of adjusted expenses to average net assets(9) (%) 1.60 1.62 1.64 1.65 1.59(7) 1.57
Ratio of net investment income (loss) to average net assets (%) 5.43 4.82 5.10 4.97 4.81(7) 4.66
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 5.18 4.64 4.96 4.82 4.72(7) 4.59
Portfolio turnover rate (%) 34 51 62 37(10) 30 15
Fee reduction per share ($) 0.03(3) 0.02 0.01 0.01(3) 0.01(3) 0.01(3)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) For the period ended August 31, 1996, the Ratio of Expenses to Average Net
Assets for the Fund excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would
be 0.75% for Class A and 1.50% for Class B.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover excludes merger activity.
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
High Yield Tax-Free Fund
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
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GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income that is largely exempt
from federal income tax and is consistent with preservation of capital. To
pursue this goal, the fund invests primarily in a diversified portfolio of
tax-exempt municipal debt securities.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of assets in municipal bonds rated A, BBB/Baa or BB/Ba and their
unrated equivalents. Up to 5% of assets may be invested in bonds rated B,
CCC/Caa or CC/Ca. Bonds rated BB/Ba or lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, including various derivative
securities primarily used in the fund's capital preservation
strategies, and may engage in other investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Investors should expect greater fluctuations in share price, yield and total
return compared to less aggressive tax-free income funds. These fluctuations,
whether positive or negative, may be sharp and unanticipated.
Issuers of BBB/Baa rated bonds and junk bonds are typically in weaker financial
health than issuers of high quality bonds, and their ability to pay interest and
principal is less certain. These issuers are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. Junk bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception of adverse news. Before you invest,
please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Frank A. Lucibella, CFA, leader of the fund's portfolio management
team since April 1995, is a second vice president of the adviser. Mr. Lucibella
joined John Hancock Funds in 1988 and has been in the investment business since
1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.58% 0.58%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.23% 0.23%
Total fund operating expenses 1.06% 1.81%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $55 $77 $101 $169
Class B shares
Assuming redemption
at end of period $68 $87 $118 $193
Assuming no redemption $18 $57 $98 $193
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD TAX-FREE FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) (5.13)(6) 15.88 7.54 4.60 10.07 7.89 13.69 (4.44) 13.99 1.36(6) 7.51
(scale varies from fund to fund) eight
months
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 8/96(3) 8/97
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.85 $8.82 $9.47 $9.16
Net investment income 0.48(4) 0.57 0.49(4) 0.56(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.30) 0.18
Total from investment operations (0.46) 1.27 0.19 0.74
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50) (0.56)
Distributions in excess of net investment income (0.09) (0.04) -- --
Total distributions (0.57) (0.62) (0.50) (0.56)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34
Total investment return at net asset value(5) (%) 4.96(6) 14.85 1.96(6) 8.29
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,401 14,225 23,663 32,199
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.10(7) 1.06
Ratio of net investment income (loss) to average net assets (%) 6.08(7) 6.36 6.39(7) 6.00
Portfolio turnover rate (%) 62 64 38 51
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/87(8) 10/88 10/89 10/90 10/91
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.49 $8.62 $9.25 $9.29 $9.07
Net investment income 0.37 0.62 0.55 0.55 0.54
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts (0.87) 0.70 0.13 (0.14) 0.34
Total from investment operations (0.50) 1.32 0.68 0.41 0.88
Less distributions:
Dividends from net investment income (0.37) (0.66) (0.51) (0.55) (0.54)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized gain on investments sold -- (0.03) -- -- --
Distributions from capital paid-in -- -- (0.13) (0.08) (0.10)
Total distributions (0.37) (0.69) (0.64) (0.63) (0.64)
Net asset value, end of period $8.62 $9.25 $9.29 $9.07 $9.31
Total investment return at net asset value(5) (%) (5.13)(6) 15.88 7.54 4.60 10.07
Total adjusted investment return at net asset value(5,9) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,026 24,278 29,841 35,820 51,467
Ratio of expenses to average net assets (%) 0.61(6) 2.05 2.32 2.20 2.36
Ratio of adjusted expenses to average net assets(10) (%) 0.82(6) -- -- -- --
Ratio of net investment income to
average net assets (%) 4.05(6) 6.66 5.79 5.96 5.61
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) 3.84(6) -- -- -- --
Portfolio turnover rate (%) 42 82 29 41 83
Fee reduction per share ($) 0.02 -- -- -- --
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/92 10/93 10/94 10/95(2) 8/96(3) 8/97
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.31 $9.39 $9.98 $8.82 $9.47 $9.16
Net investment income 0.55 0.53 0.48 0.51 0.44(4) 0.49(4)
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts 0.17 0.72 (0.90) 0.69 (0.31) 0.18
Total from investment operations 0.72 1.25 (0.42) 1.20 0.13 0.67
Less distributions:
Dividends from net investment income (0.55) (0.56) (0.48) (0.51) (0.44) (0.49)
Distributions in excess of net investment income -- -- (0.07) (0.04) -- --
Distributions from net realized gain on investments sold (0.09) (0.10) (0.19) -- -- --
Distributions from capital paid-in -- -- -- -- -- --
Total distributions (0.64) (0.66) (0.74) (0.55) (0.44) (0.49)
Net asset value, end of period $9.39 $9.98 $8.82 $9.47 $9.16 $9.34
Total investment return at net asset value(5) (%) 7.89 13.69 (4.44) 13.99 1.36(6) 7.51
Total adjusted investment return at net asset value(5,9) (%) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 65,933 113,442 151,069 155,234 147,669 139,385
Ratio of expenses to average net assets (%) 2.17 2.06 1.85 1.79 1.81(7) 1.81
Ratio of adjusted expenses to average net assets(10) (%) -- -- -- -- -- --
Ratio of net investment income to
average net assets (%) 5.78 5.23 5.36 5.61 5.65(7) 5.28
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) -- -- -- -- -- --
Portfolio turnover rate (%) 40 100 62 64 38 51
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) Effective August 31, 1996, the fiscal period end changed from October 31
to August 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) For the period 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 the periods shown.
(10) Unreimbursed, without fee reduction.
HIGH YIELD TAX-FREE FUND 7
<PAGE>
Massachusetts Tax-Free Income Fund
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHMAX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks income that is exempt from federal and Massachusetts
personal income taxes. The fund seeks to provide the maximum current income that
is consistent with preservation of capital. To pursue this goal, the fund
invests primarily in municipal securities exempt from these taxes.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of net assets in Massachusetts municipal securities. Up to 33.3% of
assets may be invested in municipal securities rated BBB/Baa or BB/Ba and their
unrated equivalents. The balance of the fund's investments must be rated at
least A or be of equivalent quality. Bonds rated BB/Ba are considered junk
bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable investment-grade short-term securities. For defensive purposes, it may
invest more assets in these securities. The fund also may invest in private
activity bonds and certain higher-risk investments, and may engage in other
investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Because the fund is not diversified and because it concentrates in securities of
Massachusetts issuers, certain factors may disproportionately affect the fund's
investments.
These factors may include:
o local economic or policy changes
o tax base erosion
o state constitutional limits on tax increases
o changes in the ratings assigned to the state's municipal issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Dianne Sales, CFA, leader of the fund's portfolio management team
since April 1995, is a second vice president of the adviser. Ms. Sales joined
John Hancock Funds in 1989 and has been in the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.11% 0.11%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation and the effect of expense offsets, management fees would be
0.50% for each class and total fund operating expenses would be 1.09% for
Class A and 1.79% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 13.13(3) 9.67 3.49 12.10 12.11 13.29 (0.97) 7.66 4.78 9.85
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/88(1) 8/89 8/90 8/91 8/92
- --------------------------------------------------------------------------------------------------------------------------------
<S> <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
Net investment income 0.65 0.70 0.69 0.73 0.71
Net realized and unrealized gain (loss) on investments 0.63 0.31 (0.31) 0.53 0.60
Total from investment operations 1.28 1.01 0.38 1.26 1.31
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71)
Distributions from net realized gain on investments sold -- -- -- (0.01) --
Total distributions (0.65) (0.70) (0.69) (0.74) (0.71)
Net asset value, end of period $10.63 $10.94 $10.63 $11.15 $11.75
Total investment return at net asset value(2) (%) 13.13(3) 9.67 3.49 12.10 12.11
Total adjusted investment return at net asset value(2,4) (%) 10.38(3) 9.16 2.72 10.66 10.93
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,757 9,138 9,968 15,015 29,113
Ratio of expenses to average net assets (%) 1.00(3) 1.00 1.00 0.60 0.60
Ratio of adjusted expenses to average net assets(6) (%) 3.75(3) 1.51 1.77 2.04 1.78
Ratio of net investment income (loss) to average net assets (%) 6.28(3) 6.35 6.31 6.64 6.18
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 3.53(3) 5.84 5.54 5.20 5.00
Portfolio turnover rate (%) 20 2 2 29 56
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/93 8/94 8/95 8/96 8/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.75 $12.43 $11.56 $11.76 $11.66
Net investment income 0.67 0.63 0.65 0.65 0.66
Net realized and unrealized gain (loss) on investments 0.82 (0.75) 0.20 (0.10) 0.46
Total from investment operations 1.49 (0.12) 0.85 0.55 1.12
Less distributions:
Dividends from net investment income (0.67) (0.63) (0.65) (0.65) (0.66)
Distributions from net realized gain on investments sold (0.14) (0.12) -- -- --
Total distributions (0.81) (0.75) (0.65) (0.65) (0.66)
Net asset value, end of period $12.43 $11.56 $11.76 $11.66 $12.12
Total investment return at net asset value(2) (%) 13.29 (0.97) 7.66 4.78 9.85
Total adjusted investment return at net asset value(2,4) (%) 12.38 (1.50) 7.21 4.30 9.45
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 50,019 54,122 54,416 55,169 54,253
Ratio of expenses to average net assets (%) 0.67 0.70 0.70 0.75(5) 0.71(5)
Ratio of adjusted expenses to average net assets(6) (%) 1.58 1.23 1.15 1.18 1.11
Ratio of net investment income (loss) to average net assets (%) 5.61 5.28 5.67 5.53 5.59
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.70 4.75 5.22 5.05 5.19
Portfolio turnover rate (%) 79 29 24 36 12
Fee reduction per share ($) 0.11 0.06 0.05 0.06 0.05
</TABLE>
- --------------------------------------------------------------------------------
Class B - period ended: 8/97(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $11.84
Net investment income 0.54
Net realized and unrealized gain (loss) on investments 0.28
Total from investment operations 0.82
Less distributions:
Dividends from net investment income (0.54)
Net asset value, end of period $12.12
Total investment return at net asset value(2) (%) 7.08(7)
Total adjusted investment return at net asset value(2,4) (%) 6.72(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,418
Ratio of expenses to average net assets (%) 1.41(3,5)
Ratio of adjusted expenses to average net assets(6) (%) 1.81(3)
Ratio of net investment income (loss) to average net assets (%) 4.82(3)
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.42(3)
Portfolio turnover rate (%) 12
Fee reduction per share ($) 0.04
(1) Class A shares commenced operations on September 3, 1987. Class B shares
commenced operations on October 3, 1996.
(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) The Ratio of Expenses to Average Net Assets for the fund excludes the
effect of expense offsets. If expense offsets were included, the Ratio of
Expenses to Average Net Assets would be 0.70% and 1.40% for Class A and
Class B, respectively.
(6) Unreimbursed, without fee reduction.
(7) Not annualized.
MASSACHUSETTS TAX-FREE INCOME FUND 9
<PAGE>
New York Tax-Free Income Fund
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHNYX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks income that is exempt from federal income taxes as well
as New York State and New York City personal income taxes. The fund seeks to
provide the maximum current income that is consistent with preservation of
capital. To pursue this goal, the fund invests primarily in municipal securities
exempt from these taxes.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of net assets in New York municipal securities. Up to 33.3% of
assets may be invested in municipal securities rated BBB/Baa or BB/Ba and their
unrated equivalents. The balance of the fund's investments must be rated at
least A or be of equivalent quality. Bonds rated BB/Ba are considered junk
bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable investment-grade short-term securities. For defensive purposes, it may
invest more assets in these securities. The fund also may invest in private
activity bonds and certain higher-risk investments, and may engage in other
investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Because the fund is not diversified and it concentrates in securities of New
York issuers, certain factors may disproportionately affect the fund's
investments.
These factors may include:
o local economic or policy changes
o tax base erosion
o limited flexibility to raise taxes
o changes in the ratings assigned to the state's municipal issuers
o the legacy of past credit problems of New York City and other issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Frank A. Lucibella, CFA, leader of the fund's portfolio management
team since April 1995, is a second vice president of the adviser. He joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.11% 0.11%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation and the effect of expense offsets, management fees would be
0.50% for each class and total fund operating expenses would be 1.09% for
Class A and 1.79% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 NEW YORK TAX-FREE INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 11.40(3) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.21 9.48
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/88(1) 8/89 8/90 8/91 8/92
- ----------------------------------------------------------------------------------------------------------------
<S> <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
Net investment income 0.61 0.68 0.67 0.72 0.72
Net realized and unrealized gain
(loss) on investments 0.48 0.55 (0.25) 0.55 0.63
Total from investment operations 1.09 1.23 0.42 1.27 1.35
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72)
Distributions from net realized gain
on investments sold -- (0.02) (0.02) -- (0.02)
Total distributions (0.61) (0.70) (0.69) (0.72) (0.74)
Net asset value, end of period $10.48 $11.01 $10.74 $11.29 $11.90
Total investment return at net asset
value(2) (%) 11.40(3) 11.87 3.74 12.24 12.17
Total adjusted investment return at net
asset value(2,4) (%) 7.56(3) 11.22 3.05 11.02 11.09
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,306 8,795 13,357 20,878 33,806
Ratio of expenses to average net assets (%) 1.00(3) 1.00 1.00 0.60 0.60
Ratio of adjusted expenses to average
net assets(6) (%) 4.84(3) 1.65 1.69 1.82 1.68
Ratio of net investment income (loss) to
average net assets (%) 6.11(3) 6.30 6.17 6.57 6.22
Ratio of adjusted net investment income
(loss) to average net assets(6) (%) 2.27(3) 5.65 5.48 5.35 5.14
Portfolio turnover rate (%) 16 10 10 12 48
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/93 8/94 8/95 8/96 8/97
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.90 $12.63 $11.73 $11.88 $11.83
Net investment income 0.68 0.64 0.65 0.66 0.67
Net realized and unrealized gain
(loss) on investments 0.87 (0.77) 0.15 (0.05) 0.42
Total from investment operations 1.55 (0.13) 0.80 0.61 1.09
Less distributions:
Dividends from net investment income (0.68) (0.64) (0.65) (0.66) (0.67)
Distributions from net realized gain
on investments sold (0.14) (0.13) -- -- --
Total distributions (0.82) (0.77) (0.65) (0.66) (0.67)
Net asset value, end of period $12.63 $11.73 $11.88 $11.83 $12.25
Total investment return at net asset
value(2) (%) 13.70 (1.05) 7.19 5.21 9.48
Total adjusted investment return at net
asset value(2,4) (%) 12.83 (1.58) 6.74 4.77 9.08
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 52,444 55,690 55,753 56,229 54,086
Ratio of expenses to average net assets (%) 0.67 0.70 0.70 0.73(5) 0.71(5)
Ratio of adjusted expenses to average
net assets(6) (%) 1.54 1.23 1.15 1.14 1.11
Ratio of net investment income (loss) to
average net assets (%) 5.63 5.28 5.67 5.51 5.61
Ratio of adjusted net investment income
(loss) to average net assets(6) (%) 4.76 4.75 5.22 5.07 5.21
Portfolio turnover rate (%) 56 23 70 76 46
Fee reduction per share ($) 0.11 0.06 0.05 0.05 0.05
</TABLE>
- --------------------------------------------------------------------------------
Class B - period ended: 8/97(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $11.99
Net investment income 0.54
Net realized and unrealized gain (loss) on investments 0.26
Total from investment operations 0.80
Less distributions:
Dividends from net investment income (0.54)
Net asset value, end of period $12.25
Total investment return at net asset value(2) (%) 6.82(7)
Total adjusted investment return at net asset value(2,4) (%) 6.46(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2.414
Ratio of expenses to average net assets (%) 1.41(3,5)
Ratio of adjusted expenses to average net assets(6) (%) 1.81(3)
Ratio of net investment income (loss) to average net assets (%) 4.79(3)
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.39(3)
Portfolio turnover rate (%) 46
Fee reduction per share ($) 0.04
(1) Class A shares commenced operations on September 11, 1987. Class B shares
commenced operations on October 3, 1996.
(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) The Ratio of Expenses to Average Net Assets for the fund excludes the
effect of expense offsets. If expense offsets were included, the Ratio of
Expenses to Average Net Assets would be 0.70% and 1/40% for Class A and
Class B, respectively.
(6) Unreimbursed, without fee reduction.
(7) Not annualized.
NEW YORK TAX-FREE INCOME FUND 11
<PAGE>
Tax-Free Bond Fund
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks as high a level of interest income exempt from federal
income tax as is consistent with preservation of capital. To pursue this goal,
the fund invests in a diversified portfolio of municipal securities. Under
normal circumstances, the fund will place at least 80% of assets in municipal
bonds.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal bonds may include investment-grade bonds, notes
and commercial paper of any maturity. Less than 35% of assets may be invested in
municipal bonds rated BB/Ba or B (junk bonds) and their unrated equivalents. The
fund may not invest more than 25% of assets in private activity bonds of issuers
in any one industry. There is no limit on the fund's investments in issuers
located in any one state.
For liquidity and flexibility, the fund may place up to 20% of
assets in taxable investment-grade short-term securities. For defensive
purposes, it may invest more assets in these securities. The fund also may
invest in private activity bonds and certain higher-risk investments, and may
engage in other investment practices.
RISK FACTORS
[Clipart] As with most income investments, the value of your investment will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed income securities (including
municipal securities). Bonds with longer maturities are especially sensitive to
interest rate movements.
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Thomas C. Goggins has been the leader of the fund's portfolio
management team since joining John Hancock Funds in April 1995. A senior vice
president of the adviser, Mr. Goggins has been in the investment business since
1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.47% 0.47%
12b-1 fee(3,4) 0.15% 0.90%
Other expenses 0.23% 0.23%
Total fund operating expenses(4) 0.85% 1.60%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $53 $71 $90 $145
Class B shares
Assuming redemption
at end of period $66 $81 $107 $170
Assuming no redemption $16 $51 $87 $170
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) The adviser has agreed to limit total fund operating expenses to 0.85% for
Class A and 1.60% for Class B. Without this limitation, management fees
would be 0.53% for each class and total fund operating expenses would be
0.91% for Class A and 1.66% for Class B.
12 TAX-FREE BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 6.04(6) 14.78 10.97 15.15 (9.28) 20.20 (0.01)(6) 9.44
(scale varies from fund to fund) eight
months
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/90(1) 12/91 12/92 12/93
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.90 $10.24 $10.47
Net investment income 0.71 0.69 0.67 0.62
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93
Total from investment operations 0.58 1.41 1.09 1.55
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62)
Distributions from net realized gain on investments sold -- (0.39) (0.18) (0.44)
Total distributions (0.68) (1.07) (0.86) (1.06)
Net asset value, end of period $9.90 $10.24 $10.47 $10.96
Total investment return at net asset value(5) (%) 6.04(6) 14.78 10.97 15.15
Total adjusted investment return at net asset value(5,7) (%) 5.19(6) 14.40 10.67 14.98
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 45,437 73,393 99,523 136,521
Ratio of expenses to average net assets (%) 0.40(6) 0.60 0.66 0.78
Ratio of adjusted expenses to average net assets(9) (%) 1.25(6) 0.98 0.96 0.95
Ratio of net investment income (loss) to average net assets (%) 7.09(6) 6.86 6.46 5.57
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 6.24(6) 6.48 6.16 5.40
Portfolio turnover rate (%) 64 123 79 116
Fee reduction per share ($) 0.08 0.04 0.03 0.02
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(2) 12/95 8/96(3) 8/97
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.39 $10.67 $10.27
Net investment income 0.58 0.57(4) 0.40 0.59
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.41) 0.36
Total from investment operations (1.00) 1.85 (0.01) 0.95
Less distributions:
Dividends from net investment income (0.57) (0.57) (0.39) (0.59)
Distributions from net realized gain on investments sold -- -- -- --
Total distributions (0.57) (0.57) (0.39) (0.59)
Net asset value, end of period $9.39 $10.67 $10.27 $10.63
Total investment return at net asset value(5) (%) (9.28) 20.20 (0.01)(6) 9.44
Total adjusted investment return at net asset value(5,7) (%) (9.39) 20.08 (0.09)(6) 9.38
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 114,539 118,797 560,863 590,185
Ratio of expenses to average net assets (%) 0.85 0.85 0.85(8) 0.85
Ratio of adjusted expenses to average net assets(9) (%) 0.96 0.97 0.98(8) 0.91
Ratio of net investment income (loss) to average net assets (%) 5.72 5.67 5.75(8) 5.61
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.61 5.55 5.62(8) 5.55
Portfolio turnover rate (%) 107 113 116(10) 46(10)
Fee reduction per share ($) 0.01 0.01(4) 0.01(4) 0.01
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/92 12/93 12/94(2) 12/95 8/96(3) 8/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.24 $10.47 $10.96 $9.38 $10.67 $10.27
Net investment income 0.59(4) 0.54 0.50 0.50(4) 0.34 0.51
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28 (0.40) 0.36
Total from investment operations 1.01 1.47 (1.08) 1.78 (0.06) 0.87
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49) (0.34) (0.51)
Distributions from net realized gain on investments sold (0.18) (0.44) -- -- -- --
Total distributions (0.78) (0.98) (0.50) (0.49) (0.34) (0.51)
Net asset value, end of period $10.47 $10.96 $9.38 $10.67 $10.27 $10.63
Total investment return at net asset value(5) (%) 10.15 14.30 (10.05) 19.41 (0.51)(6) 8.63
Total adjusted investment return at net
asset value(5,7) (%) 9.85 14.13 (10.16) 19.29 (0.59)(6) 8.57
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,272 56,384 70,243 76,824 81,177 204,621
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60 1.60(8) 1.60
Ratio of adjusted expenses to average net assets(9) (%) 1.73 1.70 1.71 1.72 1.73(8) 1.66
Ratio of net investment income (loss) to average
net assets (%) 5.57 4.66 4.97 4.90 4.91(8) 4.85
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.27 4.49 4.86 4.78 4.78(8) 4.79
Portfolio turnover rate (%) 79 116 107 113 116(10) 46(10)
Fee reduction per share ($) 0.03(4) 0.02 0.01 0.01(4) 0.01(4) 0.01
</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) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover excludes merger activity.
TAX-FREE BOND FUND 13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock tax-free income funds offer two classes of shares, Class A and
Class B. Each class has its own cost structure, allowing you to choose the one
that best meets your requirements. Your financial representative can help you
decide.
- --------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------
o Front-end sales charges, as o No front-end sales charge;
described below. There are all your money goes to work
several ways to reduce for you right away.
these charges, also
described below. o Higher annual expenses than
Class A shares.
o Lower annual expenses than
Class B shares. o A deferred sales charge on
shares you sell within six
years of purchase, as
described below.
o Automatic conversion to Class A
shares after eight years, thus
reducing future annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
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
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC on shares being sold
1st year 5.00%
2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
14 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o 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.
o 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.
o 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 Signature Services to add these options (see
the back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial investments must
total at least $250) and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge as long as Signature Services is
notified before you reinvest. 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 Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o government entities that are prohibited from paying mutual fund sales
charges
o financial institutions or common trust funds investing $1 million or more
for non-discretionary accounts
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee
benefit plan into a John Hancock fund
o members of an approved affinity group financial services program
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 members
(one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
your financial representative or Signature Services, or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion
in John Hancock funds: $500
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature 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 and
your financial representative can initiate any purchase, exchange or sale
of shares.
YOUR ACCOUNT 15
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clipart] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail them to Signature Services slip is available, include
(address on next page). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
them to Signature Services
(address on next page).
By exchange
[Clipart] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clipart] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clipart] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clipart] o Accounts of any type. o Write a letter of instruction
o Sales of any amount. 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.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clipart] o Most accounts. o For automated service 24 hours
o Sales of up to $100,000. a day using your touch-tone
phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clipart] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clipart] o Accounts of any type. o Obtain a current prospectus for
o Sales of any amount. the fund into which you are
exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
- ----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
YOUR ACCOUNT 17
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o 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:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clipart]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o 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 twelve months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instruction.
account types not listed above.
18 YOUR ACCOUNT
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature 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, Signature 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, Signature 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.
The registration for both accounts involved must be identical. 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 also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature 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 business 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:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
YOUR ACCOUNT 19
<PAGE>
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Each fund intends to meet certain federal tax requirements so that distributions
of the tax-exempt interest it earns may be treated as "exempt-interest
dividends." However, any portion of exempt-interest dividends attributable to
interest on private activity bonds may increase certain shareholders'
alternative minimum tax.
Dividends from a fund's short- and long-term capital gains are taxable. Taxable
dividends paid in January may be taxable as if they had been paid the previous
December.
The state tax-free income funds intend to comply with certain state tax
requirements so that their income dividends generally will be exempt from state
and local personal income taxes in the applicable state. Dividends of the other
tax-free income funds are generally not exempt from state and local income
taxes.
The tax information 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, Signature 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:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Signature
Services, Inc." Deliver your check and application to your financial
representative or Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o 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).
o 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.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Signature Services.
Retirement plans John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SIMPLE plans, SEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund (except tax-free income funds) with a low
minimum investment of $250 or, for some group plans, no minimum investment at
all. To find out more, call Signature Services at 1-800-225-5291.
20 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock tax-free income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock tax-free income funds may
include individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[The following information was represented as a flow chart in the printed
material.]
-----------------
Shareholders
-----------------
Distribution and
shareholder services
-------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-------------------------------------------------
-------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Handles shareholder services, including record-
keeping and statements, distribution of dividends
and processing of buy and sell requests.
------------------------------------------------------
Asset management
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust co.
200 Clarendon Street
Boston, MA 02116
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Supervise the funds' activities.
------------------------------------
YOUR ACCOUNT 21
<PAGE>
Accounting compensation The funds compensate the adviser for performing tax and
financial management services. Annual compensation is not expected to exceed
0.02% of each fund's average net assets.
Portfolio trades In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
Investment goals and policies Except for Massachusetts and New York Tax-Free
Income Funds, each fund's investment goal is fundamental and may only be changed
with shareholder approval. Each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. The High Yield Tax-Free Fund's 80% credit policy is also fundamental.
Diversification Except for the Massachusetts and New York Tax-Free Income Funds,
all of the tax-free income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation authorizing annual fees of this type). The 12b-1 fee rates
vary by fund and by share class, according to Rule 12b-1 plans adopted by the
funds. The sales charges and 12b-1 fees paid by investors are detailed in the
fund-by-fund information. The portions of these expenses that are reallowed to
financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
California Tax-Free Income $ 4,675,967 5.45%
High Yield Tax-Free $ 7,504,868 5.22%
Massachusetts Tax-Free Income $ 22,252 2.40%
New York Tax-Free Income $ 9,306 0.39%
Tax-Free Bond $10,547,839 5.86%
(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.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class A investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of
$1 million or more
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 and more above that -- 0.00% 0.25% 0.25%
Waiver investments(2) -- 0.00% 0.25% 0.25%
- --------------------------------------------------------------------------------
Class B investments
- --------------------------------------------------------------------------------
<CAPTION>
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following page are brief descriptions of these
securities and practices, along with the risks associated with them. The funds
follow certain policies that may reduce these risks.
As with any bond fund, there is no guarantee that a John Hancock tax-free income
fund will earn income or show a positive return over any period of time -- days,
months or years.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Common to all debt securities.
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses attributable to government or political
actions of any sort.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
24 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
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/semiannual 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
o Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
California Massachusetts New York
Tax-Free High Yield Tax-Free Tax-Free Tax-Free
Income Tax-Free Income Income Bond
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment practices
Borrowing; reverse repurchase agreements
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks 15 33.3(1) 33.3 33.3 15
Repurchase agreements The purchase of
a security that must later be sold back
to the issuer at the same price plus
interest. Credit risk * * * * *
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 engag ing 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
Non-investment-grade debt securities
Debt securities rated below BBB/Baa are
considered junk bonds. Credit, market, interest
rate, liquidity, valuation, information risks 20 85 33.3 33.3 35
Private activity bonds Municipal debt obligations
that are backed primarily by revenues
from non-governmental entities. Credit, information,
interest rate, political, natural event risks * * * * *
Restricted and illiquid securities Securities not
traded on the open market. May include illiquid
Rule 144A securities. Liquidity, valuation, market
risks 10 10 15 15 10
- -------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Participation interests Securities representing
an interest in another security, often a municipal
lease obligation (MLO). MLOs are not backed by the
full faith and credit of the issuing municipality
Credit, information, interest rate, liquidity,
valuation risks * * * * *
- -------------------------------------------------------------------------------------------------------------------------
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
o Futures and related options. Interest
rate, market, hedged or speculative
leverage, correlation, liquidity,
opportunity risks * * * * *
o Options on securities and indices. Interest
rate, market, hedged or speculative leverage,
correlation, liquidity, credit, opportunity
risks o o o o o
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 * * * * *
Swaps, caps, floors, collars OTC contracts involving
the right or obligation to receive or make payments
based on two different income streams. Correlation,
credit, interest rate, hedged or speculative leverage,
liquidity, valuation risks o o o o o
</TABLE>
(1) Applies to reverse repurchase agreements. Other borrowings are limited to
15% of total assets.
FUND DETAILS 25
<PAGE>
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
Quality rating
(S&P/Moody's)(2) High Yield Tax-Free Fund Tax-Free Bond Fund
Investment-Grade Bonds
----------------------------------------------------------------------------
AAA/Aaa 11.4% 31.2%
----------------------------------------------------------------------------
AA/Aa 1.6% 8.5%
----------------------------------------------------------------------------
A/A 4.0% 16.3%
----------------------------------------------------------------------------
BBB/Baa 27.7% 31.8%
- --------------------------------------------------------------------------------
Junk Bonds
----------------------------------------------------------------------------
BB/Ba 48.2% 11.0%
----------------------------------------------------------------------------
B/B 7.1% 1.2%
----------------------------------------------------------------------------
CCC/Caa 0.0% 0.0%
----------------------------------------------------------------------------
CC/Ca 0.0% 0.0%
----------------------------------------------------------------------------
C/C 0.0% 0.0%
----------------------------------------------------------------------------
% of portfolio in bonds 100.0 100.0
n Rated by Standard & Poor's or Moody's n Rated by the adviser
(1) Data as of fund's last fiscal year end.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
26 FUND DETAILS
<PAGE>
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
tax-free income funds:
ANNUAL/SEMIANNUAL 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/ semiannual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semiannual report or SAI, please
write or call:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock(R)
Financial Services
(C) 1996 John Hancock Funds, Inc.
TEXPN 1/98
<PAGE>
JOHN HANCOCK HIGH YIELD TAX-FREE FUND
Statement of Additional Information
January 1, 1998
This Statement of Additional Information provides information about John Hancock
High Yield Tax-Free Fund (the "Fund"), in addition to the information that is
contained in the combined Tax-Free Income Fund's Prospectus (the "Prospectus").
The Fund is a diversified series of John Hancock Tax-Free Bond Trust (the
"Trust").
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 Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund.......................................................2
Investment Objective and Policies..............................................2
Investment Restrictions................................................ ......15
Those Responsible for Management..............................................17
Investment Advisory and Other Services........................................26
Distribution Contracts .......................................................29
Net Asset Value ..............................................................30
Initial Sales Charge on Class A Shares .......................................31
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 .........................................................47
Transfer Agent Services ......................................................48
Custody of Portfolio .........................................................49
Independent Auditors .........................................................49
Appendix A ..................................................................A-1
Appendix B ..................................................................B-1
Financial Statements.........................................................F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management investment
company organized as a Massachusetts business trust under the laws of The
Commonwealth of Massachusetts. Prior to the date of this Statement of Additional
Information, the Fund was a series of John Hancock Series, Inc.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect, wholly owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's primary investment objective is to obtain a high level of current
income that is largely exempt from federal income taxes and is consistent with
the preservation of capital. The Fund pursues this objective by normally
investing substantially all of its assets in medium and lower quality
obligations, including bonds, notes and commercial paper, issued by or on behalf
of states, territories and possessions of the United States, The District of
Columbia and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from federal income tax ("tax-exempt securities").
The Fund seeks as its secondary objective preservation of capital by purchasing
and selling interest rate futures contracts ("financial futures") and tax-exempt
bond index futures contracts ("index futures"), and by purchasing and writing
put and call options on debt securities, financial futures, tax-exempt bond
indices and index futures to hedge against changes in the general level of
interest rates. There can be no assurance that the Fund will achieve its
investment objectives.
As a fundamental policy, the Fund invests, in normal circumstances, at least 80%
of its total assets in municipal bonds ("Municipal Bonds") rated, at the time of
purchase, "A," "Baa" or "Ba" by Moody's Investor Services, Inc. ("Moody's"); or
"A", "BBB" or "BB" by Standard and Poor's Ratings Group ("S&P") and Fitch
Investment Services ("Fitch"), or, if unrated, that are of comparable quality as
determined by the Adviser. Municipal Bonds rated lower than "Ba" or "BB" may be
bought by the Fund. However, the Fund will limit its investments in such
securities to not more than 5% of its total assets at the time of purchase. The
Fund may invest in Municipal Bonds with ratings as low as "CC" by S&P or "Ca" by
Moody's, but will invest in securities rated lower than ""Ba" or "BB" only
where, in the opinion of the Adviser, the rating does not accurately reflect the
true quality of the credit of the issuer and the quality of such securities is
comparable to that of securities rated at least "Ba" or "BB." The rating
limitations applicable to the Fund's investments apply at the time of
acquisition of a security; any subsequent change in the rating or quality of a
security will not require the Fund to sell the security. A general description
of Moody's, S&P's and Fitch ratings is set forth in Appendix A.
"Tax-exempt securities" are debt obligations generally issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, agencies or instrumentalities the
interest on which, in the opinion of the bond issuer's counsel (not the Fund's
counsel), is excluded from gross income for federal income tax purposes. These
securities consist of Municipal Bonds, municipal notes and municipal commercial
paper as well as variable or floating rate obligations and participation
interests.
In addition to the hedging strategies employed by the Fund in pursuit of its
secondary objective of preservation of capital, the Fund can purchase bonds
rated "BBB" and "BB" or "Baa" and "Ba," where based upon price, yield and the
Adviser's assessment of quality, investment in such bonds is determined to be
consistent with the Fund's secondary objective of preserving capital. To the
2
<PAGE>
extent that the Fund purchases, retains or disposes of such bonds for this
purpose, the Fund may not earn as high a yield as might otherwise be obtainable
from lower quality securities.
While the Fund normally will invest primarily in medium and lower quality
Municipal Bonds as indicated above, it may invest in higher quality tax-exempt
securities, particularly when the difference in returns between rating
classifications is very narrow.
The same credit quality standards would apply to municipal commercial paper,
notes and variable rate demand obligations as apply to the Fund's investments in
municipal bonds. For example, these securities could be unrated securities
comparable in quality to securities rated BB or Ba or could be rated as low as
CC or Ca by S&P or Moody's.
At the end of any quarter of its taxable year, tax-exempt securities must
comprise at least 50% of the Fund's total assets. For liquidity and flexibility
the Fund may place up to 20% of total assets in taxable and tax-free short-term
securities. For defensive purposes, it may invest more assets in these
securities.
Government Securities. The Fund may invest in U.S. Government securities, which
are obligations issued or guaranteed by the U.S. Government and its agencies,
authorities or instrumentalities. Certain U.S. Government securities, including
U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities, issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Custodial Receipts. The Fund may acquire custodial receipts in respect of U.S.
Government securities. Such custodial receipts evidence ownership of future
interest payments, principal payments or both on certain notes or bonds. These
custodial receipts are known by various names, including Treasury Receipts,
Treasury Investors Growth Receipts ("TIGRs"), and Certificates of Accrual on
Treasury Securities ("CATS"). For certain securities law purposes, custodial
receipts are not considered U.S. Government securities.
Bank and Corporate Obligations. The Fund may invest in commercial paper.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Fund consists of direct U.S.
dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which the Fund may invest include certificates of deposit, bankers'
acceptances and fixed time deposits. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
3
<PAGE>
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Municipal Obligations. The Fund may invest in a variety of municipal obligations
which consist of municipal bonds, municipal notes and municipal commercial
paper.
Municipal Bonds. Municipal bonds are issued to obtain funds for various public
purposes including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds (often referred to as "private activity bonds") are issued by
or on behalf of public authorities to obtain funds for many types of local,
privately operated facilities. The payment of the principal and interest on such
bonds is generally dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. Such debt instruments are
considered municipal obligations if the interest paid on them is exempt from
federal income tax.
The payment of principal and interest by issuers of certain obligations
purchased by the Fund may be guaranteed by a letter of credit, note repurchase
agreement, insurance or other credit facility agreement offered by a bank or
other financial institution. Such guarantees and the creditworthiness of
guarantors will be considered by the Adviser in determining whether a municipal
obligation meets the Fund's credit quality requirements. No assurance can be
given that a municipality or guarantor will be able to satisfy the payment of
principal or interest on a municipal obligation.
Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
Federal tax legislation enacted in the 1980s placed substantial new restrictions
on the issuance of the bonds described above and in some cases eliminated the
ability of state or local governments to issue municipal obligations for some of
the above purposes. Such restrictions do not affect the Federal income tax
treatment of municipal obligations in which the Fund may invest which were
issued prior to the effective dates of the provisions imposing such
restrictions. The effect of these restrictions may be to reduce the volume of
newly issued municipal obligations.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
4
<PAGE>
other conditions the power or ability of any one or more issuers to pay when due
the principal of and interest on their municipal obligations may be affected.
Lower Rated High Yield Debt Obligations. As described in "Investment Objective
and Policies," the Fund may invest in high yielding debt securities that are
rated below investment grade (i.e., rated Baa or lower by Moody's or BBB or
lower by S&P and Fitch). Ratings are based largely on the historical financial
condition of the issuer. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition, which may be better or worse than the rating would indicate. The Fund
may invest in comparable quality unrated securities which, in the opinion of the
Adviser, offer comparable yields and risks to those securities which are rated.
Debt securities rated lower than Baa or BBB by Moody's, S&P or Fitch,
respectively and unrated securities of comparable quality (commonly called "junk
bonds") generally have larger price fluctuations and involve increased risks to
the principal and interest than do higher rated securities. Many of these
securities are considered to be speculative investments. In general, these risks
include: (1) substantial market price volatility; (2) changes in credit status,
including weaker overall credit condition of issuers and risks of default; and
(3) industry, market and economic risks, including limited liquidity and
secondary market support.
The market price and liquidity of lower rated fixed income securities generally
respond to short-term corporate and market developments to a greater extent than
the price and liquidity of higher rated securities, because these developments
are perceived to have a more direct relationship to the ability of an issuer of
lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield high risk bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the bonds and to value accurately the Fund's assets. The reduced availability
of reliable, objective data may increase the Fund's reliance on management's
judgment in valuing high yield high risk bonds. In addition, the Fund's
investments in high yield high risk securities may be susceptible to adverse
publicity and investor perceptions, whether or not justified by fundamental
factors.
The yields of municipal bonds depend upon, among other things, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of S&P, Moody's and Fitch represent their respective opinions on the
quality of the municipal bonds they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields and municipal bonds of the same maturity and coupon with
different ratings may have the same yield. See the Appendix for a description of
ratings. Many issuers of securities choose not to have their obligations rated.
Although unrated securities eligible for purchase by the Fund must be determined
to be comparable in quality to securities having certain specified ratings, the
market for unrated securities may not be as broad as for rated securities since
many investors rely on rating organizations for credit appraisal.
Credit and Interest Rate Risks. Investors should note that while ratings by a
rating institution provide a generally useful guide to credit risks, they do
not, nor do they purport to, offer any criteria for evaluating interest rate
risk. Changes in the general level of interest rates cause fluctuations in the
prices of fixed-income securities already outstanding and will therefore result
in fluctuation in net asset value of the shares of the Fund. The extent of the
fluctuation is determined by a complex interaction of a number of factors. The
Adviser will evaluate those factors it considers relevant and will make
portfolio changes when it deems it appropriate in seeking to reduce the risk of
depreciation in the value of the Fund's portfolio. However, in seeking to
5
<PAGE>
achieve the Fund's primary objective, there will be times, such as during
periods of rising interest rates, when depreciation and realization of
comparable losses on securities in the portfolio will be unavoidable. Moreover,
medium and lower-rated securities and unrated securities of comparable quality
tend to be subject to wider fluctuations in yield and market values than higher
rated securities. Such fluctuations after a security is acquired do not affect
the cash income received from that security but are reflected in the net asset
value of the Fund's portfolio. Other risks of lower quality securities include:
(i) subordination to the prior claims of banks and other senior
lenders and
(ii) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates whereby
the Fund may reinvest premature redemption proceeds in lower
yielding portfolio securities.
In determining which securities to purchase or hold in the Fund's portfolio and
in seeking to reduce credit and interest rate risk consistent with the Fund's
investment objective and policies, the Adviser will rely on information from
various sources, including: the rating of the security; research, analysis and
appraisals of brokers and dealers; the views of the Trust's Trustees and others
regarding economic developments and interest rate trends; and the Adviser's own
analysis of factors it deems relevant as it pertains to achieving the Fund's
investment objectives.
Participation Interests The Fund may purchase participation interests which give
the Fund an undivided pro rata interest in a tax-exempt security. For certain
participation interests, the Fund will have the right to demand payment, on a
specified number of days' notice for all or any part of the Fund's participation
interest in the tax-exempt security plus accrued interest. Participation
interests which are determined to be not readily marketable will be considered
illiquid for purposes of the Fund's 10% restriction on investment in illiquid
securities.
The Fund may also invest in certificates of participation ("COPs"), which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. Certain municipal lease
obligations may trade infrequently. Accordingly, COPs will be monitored pursuant
to analysis by the Adviser and reviewed according to procedures adopted by the
Board of Trustees, which considers various factors in determining liquidity
risk. COPs will not be considered illiquid for purposes of the Fund's 10%
limitation on illiquid securities, provided the Adviser determines that there is
a readily available market for such securities. An investment in COPs is subject
to the risk that a municipality may not appropriate sufficient funds to meet
payments on the underlying lease obligation.
Callable Bonds. The Fund may purchase and hold callable Municipal Bonds which
contain a provision in the indenture permitting the issuer to redeem the bonds
prior to their maturity dates at a specified price which typically reflects a
premium over the bonds' original issue price. These bonds generally have
call-protection (a period of time during which the bonds may not be called),
which usually lasts for 7 to 10 years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed.
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Variable and Floating Rate Obligations. The Fund may invest in variable and
floating rate obligations, including inverse floating rate obligations, on which
the interest rate is adjusted at predesignated periodic intervals or when there
is a change in the market rate of interest on which the interest rate payable on
the obligation is based. Variable and floating rate obligations may include a
demand feature which entitles the purchaser to demand prepayment of the
principal amount prior to stated maturity. Also, the issuer may have a
corresponding right to prepay the principal amount prior to maturity. As with
any other type of debt security, the marketability of variable or floating rate
instruments may vary depending on a number of factors, including the type of
issuer and the terms of the instrument. The Fund may invest in more recently
developed floating rate instruments which are created by dividing a municipal
security's interest rate into two or more different components. Typically, one
component ("floating rate component" or "FRC") pays an interest rate that is
reset periodically through an auction process or by reference to an interest
rate index. A second component ("inverse floating rate component" or "IFRC")
pays an interest rate that varies inversely with changes to market rates of
interest, because the interest paid to the IFRC holders is generally determined
by subtracting a variable or floating rate from a predetermined amount (i.e.,
the difference between the total interest paid by the municipal security and
that paid by the FRC). The extent of increases and decreases in the value of an
IFRC generally will be greater than comparable changes in the value of an equal
principal amount of a fixed-rate municipal security having similar credit
quality, redemption provisions and maturity. To the extent that such instruments
are not readily marketable, as determined by the Adviser pursuant to guidelines
adopted by the Board of Trustees, they will be considered illiquid for purposes
of the Fund's 10% investment restriction on investment in illiquid securities.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps, and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
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offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Indexed Securities. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in a relation to one or more interest rates, financial indices, or
other financial indicators ("reference prices"). An indexed security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on an indexed security is a multiple of the change in the
reference price. Thus, indexed securities may decline in value due to adverse
market charges in interest rates or other reference prices.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. The risk of early prepayments
is the primary risk associated with interest only debt securities ("IOs"), super
floaters and other leveraged floating rate instruments. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities. The primary risks associated with certain other derivative debt
securities are the potential extension of average life and/or depreciation due
to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs") and certain residual or support branches of index
amortizing notes. Index amortizing notes are subject to extension risk resulting
from the issuer's failure to exercise its option to call or redeem the notes
before their stated maturity date. Leveraged inverse IOs present an especially
intense combination of prepayment, extension and interest rate risks.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Repurchase Agreements. The Fund may enter into repurchase agreements for the
purpose of realizing additional (taxable) income. In a repurchase agreement Fund
buys a security for a relatively short period (generally not more than 7 days)
subject to the obligation to sell it back to the issuer at a fixed time and
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price plus accrued interest. The Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and with "primary dealers" in
U.S. Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements. The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period which the Fund seeks to
enforce its rights thereto, possible subnormal levels of income decline in value
of the underlying securities or lack of access to income during this, as well
as, and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank or securities firm with an agreement that the Fund will buy
back the securities at a fixed future date at a fixed price plus an agreed
amount of "interest" which may be reflected in the repurchase price. Reverse
repurchase agreements are considered to be borrowings by the Fund. Reverse
repurchase agreements involve the risk that the market value of securities
purchased by the Fund with proceeds of the transaction may decline below the
repurchase price of the securities sold by the Fund which it is obligated to
repurchase. The Fund will also continue to be subject to the risk of a decline
in the market value of the securities sold under the agreements because it will
reacquire those securities upon effecting their repurchase. The Fund will not
enter into reverse repurchase agreements and other borrowings exceeding in the
aggregate 33 1/3% of the market value of its total assets. To minimize various
risks associated with reverse repurchase agreements, the Fund will establish and
maintain with the Fund's custodian a separate account consisting of highly
liquid, marketable securities in an amount at least equal to the repurchase
prices of these securities (plus accrued interest thereon) under such
agreements. In addition, the Fund will not purchase additional securities while
all borrowings exceed 5% of the value of its total assets. The Fund will enter
into reverse repurchase agreements only with federally insured banks or savings
and loan associations which are approved in advance as being creditworthy by the
Trustees. Under procedures established by the Trustees, the Adviser will monitor
the creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 10% of its net
assets in illiquid investments. If the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) or Rule 144A
securities, that they are liquid, they will not be subject to the 10% limit on
illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
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Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on debt securities in which it may invest or on any
securities index based on debt securities in which it may invest. These options
may be listed on national domestic securities exchanges or foreign securities
exchanges or traded in the over-the-counter market. The Fund may write covered
put and call options and purchase put and call options as a substitute for the
purchase or sale of securities or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by the Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities or currency decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
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and losses on the purchase of put options may be offset by countervailing
changes in the value of the Fund's portfolio securities. Under certain
circumstances, the Fund may not be treated as the tax owner of a security if the
Fund has purchase a put option on the same security. If this occurred, the
interest on the security would be taxable.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class 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, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
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) restrictions may be imposed by an exchange 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; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) 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 on that exchange 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 Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To hedge against changes in
interest rates or securities process or for other non-speculative purposes, the
Fund may purchase and sell futures contracts on debt securities and debt
securities indices, and purchase and write call and put options on these futures
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contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. All futures contracts
entered into by the Fund are traded on U.S. exchanges or boards of trade that
are licensed, regulated or approved by the Commodity Futures Trading Commission
("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging Strategies. Hedging is an attempt to establish with more certainty than
would otherwise be possible the effective price or rate of return on portfolio
securities or securities that the Fund proposes to acquire. When interest rates
are rising or securities prices are falling, the Fund can seek to offset a
decline in the value of its current portfolio securities through the sale of
futures contracts. When interest rates are falling or securities prices are
rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other debt securities or indices, the Fund may also enter into such
futures contracts as part of its hedging strategy. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Adviser will attempt to
estimate the extent of this volatility difference based on historical patterns
and compensate for any differential by having the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities to alter the investment
characteristics of portfolio securities or to gain or increase its exposure to a
particular securities market.
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Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions solely for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
The Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for maintaining its
qualifications as a regulated investment company for federal income tax
purposes.
The Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for maintaining its
qualifications as a regulated investment company for federal income tax
purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish with
the custodian a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
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While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities and securities indices. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to changes
in interest rates or other economic trends and developments, or to take
advantage of yield disparities between various fixed income securities in order
to realize capital gains or improve income. Short term trading may have the
effect of increasing portfolio turnover rate. A high rate of portfolio turnover
(100% or greater) involves correspondingly greater brokerage expenses. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights" in the Prospectus.
14
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The following investment restrictions will not be changed without approval of a
majority of the Fund's outstanding voting securities which, as used in the
Prospectus and this Statement of Additional Information, means approval by the
lesser of (1) the holders of 67% or more of the Fund's shares represented at a
meeting if more than 50% of the Fund's outstanding shares are present in person
or by proxy at that meeting or (2) more than 50% of the Fund's outstanding
shares.
The Fund may not:
(1) Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption
requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at
the time the borrowing was made. While borrowings exceed 5% of
the value of the Fund's total assets, the Fund will not
purchase any additional securities. Interest paid on
borrowings will reduce the Fund's net investment income. The
borrowing restriction set forth above does not prohibit the
use of reverse repurchase agreements, in an amount (including
any borrowings) not to exceed 33-1/3% of net assets.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets, except in an amount up to 10% of the value of its
total assets but only to secure borrowings for temporary or
emergency purposes as may be necessary in connection with
maintaining collateral in connection with writing put or call
options or making initial margin deposits in connection with
the purchase or sale of financial futures or index futures
contracts and related options.
(3) Purchase securities (except obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities) if
the purchase would cause the Fund at the time to have more
than 5% of the value of its total assets invested in the
securities of any one issuer or to own more than 10% of the
outstanding debt securities of any one issuer; provided,
however, that up to 25% of the value of the Fund's asset may
be invested without regard to these restrictions.
(4) Purchase or retain the securities of any issuer, if to the
knowledge of the Fund, any officer or director of the Fund or
its Adviser owns more than 1/2 of 1% of the outstanding
securities of such issuer, and all such officers and directors
own in the aggregate more than 5% of the outstanding
securities of such issuer.
(5) Write, purchase or sell puts, calls or combinations thereof,
except put and call options on debt securities, futures
contracts based on debt securities, indices of debt securities
and futures contracts based on indices of debt securities,
sell securities on margin or make short sales of securities or
maintain a short position, unless at all times when a short
position is open it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and
unless not more than 10% of the Fund's net assets (taken at
current value) is held as collateral for such sales at any one
time.
15
<PAGE>
(6) Underwrite the securities of other issuers, except insofar as
the Fund may be deemed an underwriter under the Securities Act
of 1933 in disposing of a portfolio security.
(7) Purchase the securities of any issuer if as a result more than
10% of the value of the Fund's total assets would be invested
in securities that are subject to legal or contractual
restrictions on resale ("restricted securities") and in
securities for which there are no readily available market
quotations; or enter into a repurchase agreement maturing in
more than seven days, if as a result such repurchase agreement
together with restricted securities and securities for which
there are no readily available market quotations would
constitute more than 10% of the Fund's total assets.
(8) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, except
commodities and commodities contracts which are necessary to
enable the Fund to engage in permitted futures and options
transactions necessary to implement hedging strategies, or oil
and gas interests, but this shall not prevent the Fund from
investing in municipal obligations secured by real estate or
interests in real estate.
(9) Make loans to others, except insofar as the Fund may enter in
repurchase agreements as set forth in the Prospectus or this
SAI. The purchase of an issue of publicly distributed bonds or
other securities, whether or not the purchase was made upon
the original issuance of securities, is not to be considered
the making of a loan.
(10) Invest more than 25% of its assets in the securities of the
"issuers" in any single industry; provided that there shall be
no limitation on the purchase of municipal obligations and
obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities. For purposes of
this limitation and that set forth in investment restriction
(3) above, when the assets and revenues of an agency,
authority, instrumentality or other political subdivision are
separate from those of the government creating the issuing
entity and a security is backed only by the assets and
revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond
is backed only by the assets and revenues of the
nongovernmental user, then such nongovernmental user would be
deemed to be the sole issuer. If, however, in either case, the
creating government or some other entity guarantees a
security, such a guarantee would be considered a separate
security and would be treated as an issue of such government
or other entity.
(11) Invest more than 5% of the value of its total assets in the
securities of issuers having a record, including predecessors,
of fewer than three years of continuous operation, except
obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities, unless the
securities are rated by a nationally recognized rating
service.
(12) Invest for the purpose of exercising control or management of
another company.
(13) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940
Act or the rules and regulations promulgated thereunder. For
the purpose of this restriction, collateral arrangements with
16
<PAGE>
respect to options, futures contracts and options on futures
contracts and collateral arrangements with respect to initial
and variation margins are not deemed to be the issuance of a
senior security.
Other Operating Policies
As a matter of operating policy, the Fund will not purchase a security if, as a
result (i) more than 10% of the Fund's total assets would be invested in the
securities of other investment companies, (ii) the Fund would hold more than 3%
of the total outstanding voting securities of any one investment company, or
(iii) more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not apply to (a)
the investment of cash collateral, received by the Fund in connection with
lending the Fund's portfolio securities, in the securities of open-end
investment companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject to the
above percentage limitations, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees, purchase
securities of other investment companies within the John Hancock Group of Funds
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Trust, who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also officers or directors of the Adviser or officers
or directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupation or employment of the
Trustees and principal officers of the Trust during the past five years:
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 Executive Officer, The Berkeley
Financial Group ("The Berkeley
Group"); Chairman and Director, NM
Capital Management, Inc. ("NM
Capital"), John Hancock Advisers
International Limited ("Advisers
International") and Sovereign Asset
Management Corporation ("SAMCorp");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds");
Chairman, First Signature Bank and
Trust Company; Director, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Advisers International
(Ireland) Limited ("International
Ireland"), John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science;
Director, John Hancock Freedom
Securities Corporation (until
September 1996); Director, John
Hancock Signature Services, Inc.
("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Health Plan Services,
Inc., Massachusetts Health and
Education Tax Exempt Trust, Flagship
Healthcare, Inc., Carlin Insurance
Agency, Inc., West Insurance Agency,
Inc. (until May 1995), Uno
Restaurant Corp.; Chairman,
Massachusetts Board of Higher
Education (since 1995).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS; Vice President of
Amerigas Partners L.P..
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Administration Committee.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
24
<PAGE>
All of the officers listed are officers or employees of the Adviser or the
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
Advisers serves as investment adviser.
As of December 1, 1997, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date,, the following shareholders were the only record holders and
beneficial owners of 5% or more of the shares of the Fund:
<TABLE>
<CAPTION>
Number of shares Percentage of total
Name and Address beneficial interest outstanding shares of
of Shareholder Class of Shares owned the class of the Fund
- -------------- --------------- ------------------- ---------------------
<S> <C> <C> <C>
Hazen B. Hinman and Class A 178,753 5.12%
Isabelle Hinman
c/o Wexford Clearing
Service Corp.
1 New York Plaza
New York, NY 10292
Merrill Lynch Pierce Class B 3,141,180 21.56%
Fenner & Smith Inc.
4800 Deerlake Drive East
Jacksonville, FL
32246-6484
</TABLE>
The following tables provide information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services for the Fund's fiscal year ended August
31, 1997. Messrs. Boudreau and Scipione and Ms. Hodsdon each a non-independent
Trustee, and each of the officers of the Trust are interested persons of the
Adviser, are compensated by the Adviser and its affiliates and receive no
compensation from the Fund for their services.
<TABLE>
<CAPTION>
- --------------------------------------- -------------------------------- ---------------------------
Total Compensation from the
Aggregate Compensation Fund and John Hancock Fund
Independent Trustees from the Fund(1) Complex to Trustees(2)
<S> <C> <C>
- --------------------------------------- -------------------------------- ---------------------------
James F. Carlin $ 1,579 $ 74,000
- --------------------------------------- -------------------------------- --------------------------
William H. Cunningham(t) 1,579 74,000
- --------------------------------------- -------------------------------- -------------------------
Charles F. Fretz 1,579 74,250
- --------------------------------------- -------------------------------- -------------------------
Harold R. Hiser, Jr.(t) 1,487 74,000
- --------------------------------------- -------------------------------- -------------------------
Charles L. Ladner 1,579 74,250
- --------------------------------------- -------------------------------- -------------------------
Leo E. Linbeck, Jr. 1,579 74,250
- --------------------------------------- -------------------------------- -------------------------
Patricia P. McCarter(t) 1,579 74,250
- --------------------------------------- -------------------------------- -------------------------
Steven R. Pruchansky(t) 1,644 77,250
- --------------------------------------- -------------------------------- -------------------------
Norman H. Smith(t) 1,644 77,250
- --------------------------------------- -------------------------------- -------------------------
John P. Toolan(t) 1,579 74,250
- --------------------------------------- -------------------------------- -------------------------
TOTAL $15,828 $747,750
- --------------------------------------- -------------------------------- -------------------------
</TABLE>
25
<PAGE>
(1) Compensation made pursuant to different compensation arrangements then
in effect for the fiscal year ended August 31, 1997.
(2) Total compensation from the Fund and the other John Hancock Complex to
the Independent Trustees is as of December 31, 1997. As of this date
there were sixty-seven funds in the John Hancock Fund Complex, of which
each of the Independent Trustees served 32.
(t) As of December 3, 1997, the value of aggregate accrued deferred
compensation from all funds in the John Hancock Fund complex for Mr.
Cunningham was $227,304, for Mr. Hiser was $106,461, for Ms. McCarter
was $ 157,310, for Mr. Pruchansky was $64,639, for Mr. Smith was
$71,457 and for Mr. Toolan was $282,727 under the John Hancock Deferred
Compensation Plan for Independent Trustees/Directors.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $22 billion in total assets under
management in its capacity as investment adviser to the Fund and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over 1,400,000 shareholders. The Adviser is
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 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 Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
26
<PAGE>
Net Asset Value Annual Rate
- --------------- -----------
The first $75 million 0.625%
The next $75 million 0.5625%
Over $150 million 0.50%
The Adviser may temporarily reduce its advisory fee or make other arrangements
to reduce the Fund's expenses to a specified percentage of average daily net
assets. The Adviser retains the right to re-impose the advisory fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
For the period from November 1, 1994 to December 22, 1994 and for the fiscal
year ended October 31, 1994, the Fund paid Transamerica Fund Management Company
("TFMC"), it former investment adviser, advisory fees in the amount of $161,643
and $886,380, respectively. For the period from December 22, 1994 to October 31,
1995, the Fund paid the Adviser advisory fees in the amount of $830,016. During
the period from December 22, 1994 to April 17, 1995, the Adviser paid
subadvisory fees in the amount of $147,903 to Transamerica Investment Services,
Inc.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of them.
To the extent that transactions on behalf of more than one client of the Adviser
or its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the contract relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from its reckless disregard of the obligations
and duties under the contract.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for as long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Fund's
investment management contract is no longer in effect, the Fund (to the extent
that it lawfully can) will cease to use such name or any other name indicating
that it is advised by or otherwise connected with the Adviser. In addition, the
Adviser or the Life Company may grant the non-exclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity, including
but not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The continuation of the Advisory Agreement was approved by all of the Trustees.
The Advisory Agreement, and the Distribution Agreement discussed below, 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 Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
27
<PAGE>
such parties. Both agreements may be terminated on 60 days written notice by any
party or by a vote of a majority of the outstanding voting securities of the
Fund and will terminate automatically if assigned.
Administrative Services Agreement. The Fund was a party to an administrative
services agreement with TFMC (the "Services Agreement"), pursuant to which TFMC
performed bookkeeping and accounting services and functions, including preparing
and maintaining various accounting books, records and other documents and
keeping such general ledgers and portfolio accounts as are reasonably necessary
for the operation of the Fund. Other administrative services included
communications in response to shareholder inquiries and certain printing
expenses of various financial reports. In addition, such staff and office space,
facilities and equipment was provided as necessary to provide administrative
services to the Fund. The Services Agreement was amended in connection with the
appointment of the Adviser as adviser to the Fund to permit services under the
Agreement to be provided to the Funds by the Adviser and its affiliates. The
Services Agreement was terminated during the fiscal year 1995.
For the fiscal years ended October 31, 1995, the Fund paid to TFMC (and to the
Adviser for the period from December 22, 1994 to January 16, 1995)
administrative services fees of $10,565 and $88,709 respectively.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended August 31, 1996 and 1997,
respectively, the Fund paid the Adviser $21,583 and $31,800 for services.
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.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are continually offered at net asset
value next determined, plus an applicable sales charge, if any. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation in the form of a sales charge imposed, in the case
of Class A shares, at the time of sale or, in the case of Class B shares, on a
deferred basis. John Hancock Funds may pay extra compensation to financial
service firms selling large amounts of fund shares. This compensation would be
calculated as a percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended for the period from November 1, 1995 to August 31, 1996 and
for the year ended August 31, 1997 were $161,223 and $215,849, respectively. Of
such amounts $17,877 and $26,764, respectively, retained by John Hancock Funds
in 1996 and 1997. The remainder of the underwriting commissions were reallowed
to dealers.
28
<PAGE>
The Fund's Trustees 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, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.25% and 1.00%, respectively, of the Fund's
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. In each case, up to 0.25% is for service expenses and the
remaining amount is for distribution expenses. The distribution fees will be
used to reimburse John Hancock Funds for their distribution expenses, including
but not limited to: (i) initial and ongoing sales compensation to Selling
Brokers and others (including affiliates of John Hancock Funds) engaged in the
sale of Fund shares; (ii) marketing, promotional and overhead expenses incurred
in connection with the distribution of Fund shares; and (iii) with respect to
Class B shares only, interest expenses on unreimbursed distribution expenses.
The service fees will be used to compensate Selling Brokers and others for
providing personal and account maintenance services to shareholders. In the
event the John Hancock Funds is not fully reimbursed for payments or expenses
they incur under the Class A Plan, these expenses will not be carried beyond
twelve months from the date they were incurred. Unreimbursed expenses under the
Class B Plan will be carried forward together with interest on the balance of
these unreimbursed expenses. The Fund does not treat unreimbursed expenses under
the Class B Plan as a liability of the Fund because the Trustees may terminate
Class B Plan at any time. For the fiscal year ended August 31, 1997, an
aggregate of $ 7,504,868 of distribution expenses or 5.22% of the average net
assets of the Class B shares of the Fund, was not reimbursed or recovered by
John Hancock Funds through the receipt of deferred sales charges or Rule 12b-1
fees in prior periods.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the 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, John Hancock Funds provide the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each plan provides, that
no material amendment to the Plans will, in any event, be effective unless it is
approved by a vote of a majority of the Trustees and the Independent Trustees of
the 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
class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
29
<PAGE>
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Funds.
During the fiscal year ended August 31, 1997, the Funds paid John Hancock Funds
the following amounts of expenses with respect to the Class A and Class B shares
of the Fund:
Expense Items
<TABLE>
<CAPTION>
Printing and
Mailing of Interest,
Prospectuses Compensation Carrying or
to New Expenses of to Selling Other Finance
Advertising Shareholders Distributors Brokers Charges
----------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Class A shares $ 11,698 $ 1,158 $ 26,190 $ 31,166 -----
Class B shares $158,567 $14,599 $752,067 $424,827 $90,829
</TABLE>
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 NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees reserve the right to change or
waive the Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
30
<PAGE>
sales charge applicable to current purchases of Class A shares, the investor is
entitled to accumulate current purchases with the greater of the current value
(at offering price) of the Class A shares of the Fund, or if John Hancock
Signature Services, Inc. ("Signature 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.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department,
authority, or agency of these entities that is prohibited by
applicable investment laws from paying a sales charge or
commission when it purchases shares of any registered
investment management company.*
o A bank, trust company, credit union, savings institution or
other depository institution, its trust departments or common
trust funds if it is purchasing $1 million or more for
non-discretionary customers or accounts.*
o A Trustee or officer of the Trust; a Director or officer of
the Adviser and its affiliates or Selling Brokers; employees
or sales representatives of any of the foregoing; retired
officers employees or Directors of any of the foregoing; a
member of the immediate family (spouse, children,
grandchildren, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension,
profit sharing or other benefit plan of the individuals
described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with
John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products or services made
available to their clients.
o A former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan
and transfers any or all of his or her plan distributions
directly to the Fund.
o A member of an approved affinity group financial services
plan.*
o A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
o Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed defined contribution plans with at least
100 eligible employees at the inception of the Fund account,
may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the
end of the calendar year in which the purchase was made, a
CDSC will be imposed at the following rate:
- ---------------------------------------- ---------------------------
Amount Invested CDSC RATE
- ---------------------------------------- ---------------------------
$1 to $4,999,000 1.00%
- ---------------------------------------- ---------------------------
Next $5 million to $9,999,999 0.50%
- ---------------------------------------- ---------------------------
Amounts of $10 million and over 0.25%
- ---------------------------------------- ---------------------------
31
<PAGE>
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transaction involving
other investment companies or personal holding companies.
* 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.
Combination Privilege In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined to reduce sales
charges if made by (a) an individual, his or her spouse and their children under
the age of 21, purchasing securities for his or their own account, (b) a trustee
or other fiduciary purchasing for a single trust, estate or fiduciary account
and (c) groups which qualify for the Group Investment Program (see below).
Further information about combined purchases, including certain restrictions on
combined group purchases, is available from Signature Services or a Selling
Broker's representative.
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 value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. The reduced sales charges are also applicable to
investments in shares 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 IRA, SEP, SARSEP,
401(k), 403(b) (including TSAs) 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 Signature
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 within the specified period (either 13 or 48 months) the sales charge
applicable will not be higher than that which would have applied (including
accumulations and combinations) had the LOI been for the amount actually
invested.
32
<PAGE>
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the 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 Signature Services to act as his attorney-in-fact
to redeem any escrowed Class A shares and adjust the sales charge, if necessary.
A LOI does not constitute a binding commitment by an investor to purchase, or by
the Fund to sell, any additional Class A shares and may be terminated at any
time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of a sales charge so the Fund will receive the full amount of the
purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a CDSC at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B shares being redeemed. No CDSC will be
imposed on increases in account value above the initial purchase prices,
including all shares derived from reinvestment of dividends or capital gains
distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price. However, you cannot redeem appreciation value only in order to avoid a
CDSC.
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:
33
<PAGE>
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares
(40 shares X $2) - 80
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares of each Fund that are
subject to a 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" in the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Signature
Services. (Please note that this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC).
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See you Merrill Lynch financial
consultant for further information.
For Retirement Accounts (such as IRA, SIMPLE plans, Rollover IRA, TSA, 457,
403(b), 401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other
qualified plans as described in the Internal Revenue Code) unless otherwise
noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
34
<PAGE>
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan and
Profit Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
- -------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distribution value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 Waived Waived Waived Waived for 12% of
1/2 and Life account
70 1/2 Expectancy value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account
payments payments payments value
(72t) or (72t) or (72t) or annually
12% of 12% of 12% of in
account account account periodic
value value value payments
annually annually annually
in in in
periodic periodic periodic
payments. payments. payments.
- --------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- --------------------------------------------------------------------------------
Termination Not Waived Not Waived Not Waived Not Waived N/A
of Plan
- --------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
35
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, he or she will incur a brokerage charge.
Any such security would be valued for the purpose of making such payment at the
same value as used in determining the Fund's net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares solely in cash except to the
extent that the redemption payments to any shareholder during any 90- day period
would exceed the lesser of $250,000 or 1% of the Fund's net asset value of the
Fund at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund permits
exchanges of shares of any class for shares of the same class in any other John
Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund 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
and John Hancock Intermediate Maturity 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.
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.
The 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 Fund may refuse any exchange order. The Fund may changed or cancel its
exchange policies at any time, upon 60 days' notice to its 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".
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, which 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 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
of the Fund at the same time that a Systematic Withdrawal Plan is in effect. The
Fund reserves the right to modify or discontinue the Systematic Withdrawal Plan
36
<PAGE>
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 Signature Services.
Monthly Automatic Accumulation Program (MAAP). This program is explained more
fully in the Prospectus. The program, as it relates to automatic investment
checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any check is not honored by your 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 Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed shares of the Fund 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 in shares of any of the other John Hancock mutual funds, subject to the
minimum investment limit of 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 any 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 will be credited with the
amount of any CDSC charged upon the prior redemption and the new shares acquired
through reinvestment will, for purposes of computing the CDSC payable upon
subsequent redemption, include the holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege 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. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel the reinvestment privilege at any time.
A redemption or exchange of shares of the Fund 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."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B share, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
37
<PAGE>
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, 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 shares of the Fund and one other
series. Additional series may be added in the future. The Declaration of Trust
also authorizes the Trustees to classify and reclassify the shares of the Fund,
or any new series of the Trust, into one or more classes. As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of two classes of shares of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
Class A shares and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to Class A and Class B shares will be
borne exclusively by that class, (ii) Class B shares will pay higher
distribution and service fees than Class A shares, and (iii) each of Class A and
Class B shares will bear any other class expenses properly allocable to such
class of shares, subject to the conditions the Internal Revenue Service imposes
with respect to multiple-class structures. Similarly, the net asset value per
share may vary depending on the class of shares purchased. No interest will be
paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitled their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the 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 requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any Fund shareholder held
personally liable by reason of being or having been a shareholder. The
Declaration of Trust also provides that no series of the Trust shall be liable
for the liability of any other series. Furthermore, no Fund included in this
Fund's prospectus shall be liable for the liabilities of any other John Hancock
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Fund. Liability is therefore limited to circumstances in which the Fund itself
would be unable to meet its obligations, and the possibility of this occurrence
is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept credit card checks. Use of information provided on
the account application may be used by the Fund to verify the accuracy of the
information or for background or financial history purposes. A joint account
will be administered as a joint tenancy with right of survivorship, unless the
joint owners notify Signature Services of a different intent. A shareholder's
account is governed by the laws of The Commonwealth of Massachusetts.
TAX STATUS
The Fund is treated as a separate entity for accounting and tax purposes. The
Fund has qualified and elected to be treated as a "regulated investment company"
under Subchapter M of the Code, and intends to continue to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to federal
income tax on its taxable and tax-exempt income (including net realized capital
gains) which is distributed to shareholders in accordance with the timing
requirements of the Code.
The Fund will be subject to a 4% non-deductible federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to avoid 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
obligation 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
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<PAGE>
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund is not deductible to the extent it is deemed related to the Fund's
exempt-interest dividends. Pursuant to published guidelines, the Internal
Revenue Service may deem indebtedness to have been incurred for the purpose of
purchasing or carrying shares of the Fund even though the borrowed funds may not
be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by the Fund may be
excluded by the Fund's shareholders from their gross income for federal income
tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
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
capital gain. (Net capital gain is the excess (if any) of net long-term capital
gain over net short-term capital loss, and investment company taxable income is
all taxable income and capital gains or losses, other than those gains and
losses included in computing net capital gain, after reduction by deductible
expenses.) As a result of federal tax legislation enacted on August 5, 1997 (the
"Act"), gain recognized after May 6, 1997 from the sale of a capital asset is
taxable to individual (noncorporate) investors at different maximum federal
income tax rates, depending generally upon the tax holding period for the asset,
the federal income tax bracket of the taxpayer, and the dates the asset was
acquired and/ or sold. The Treasury Department has issued guidance under the Act
that will enable the Fund to pass through to its shareholders the benefits of
the capital gains rates enacted in the Act. Shareholder should consult their own
tax advisers on the correct application of these new rules in their particular
circumstances. 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
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though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of the
federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of tax-exempt income or tax preference item income earned by the Fund
during the period of their investment in the Fund.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities that will generate capital gains or to enter into options
or futures transactions. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions on
these shares from such appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced 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 or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
Class A shares of the Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within
ninety (90) days after their purchase to the extent shares of the Fund or
another John Hancock fund are subsequently acquired without payment of a sales
charge pursuant to the reinvestment or exchange privilege. This disregarded
charge will result in an increase in the shareholder's tax basis in the shares
subsequently acquired. Also, any loss realized on a redemption or exchange may
be disallowed to the extent the shares disposed of are replaced with other
shares of the Fund within a period of sixty-one (61) days beginning thirty (30)
days before and ending thirty (30) days after the shares are disposed of, such
as pursuant to automatic dividend reinvestments. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be disallowed to the extent of any exempt-interest dividends paid
with respect to such shares and, to the extent in excess of the disallowed
amount, will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Shareholders should consult their own tax advisers regarding their particular
circumstances to determine whether a disposition of Fund shares is properly
treated as a sale for tax purposes, as is assumed in the foregoing discussion.
Also, future Treasury Department guidance issued to implement the Act may
contain additional rules for determining the tax treatment of sales of Fund
shares held for various periods, including the treatment of losses on the sales
of shares held for six month or less that are recharacterized as long-term
capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not in any event distribute net capital
41
<PAGE>
gain realized in any year to the extent that a capital loss is carried forward
from prior years against such gain. To the extent such excess was retained and
not exhausted by the carryforward of prior years' capital losses, it would be
subject to Federal income tax in the hands of the Fund. Upon proper designation
of this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if the Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of this excess
and his pro rata share of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset net capital gains, if any, during the eight
years following the year of the loss. To the extent subsequent net capital gains
are offset by such losses, they would not result in Federal income tax liability
to the Fund and, as noted above, would not be distributed to shareholders. As of
August 31, 1997, the Fund had capital loss carryforwards of $6,907,488 of which
$2,785,979 expires in 2002, $205,838 expires in 2003, $3,207,633 expires in 2004
and $708,038 expires in 2005.
Dividends and capital gain distributions paid by the Fund will not qualify for
the dividends-received deduction for corporate shareholders.
The Fund may invest a substantial portion of its assets in debt obligations that
are in the lower rating categories or are unrated. Investments in debt
obligations that are at risk of default present special tax issues for the Fund.
Tax rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount, or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. If the Fund invests in these debt obligations it will
address these issues in order to distribute sufficient income to preserve its
status as a regulated investment company and avoid becoming subject to Federal
income or excise tax.
The Fund is required to accrue original issued discount ("OID") on certain debt
securities (including zero coupon or deferred payment obligations) that have OID
prior to the receipt of the corresponding cash payments. The mark to market or
constructive sale rules applicable to certain options and futures contracts or
other transactions may also require the Fund to recognize income or gain within
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or borrow the cash, to satisfy these distribution
requirements.
The Federal income tax rules applicable to certain structured or indexed
securities, interest rates swaps, caps, floors and collars, and possibly other
investments or transactions are unclear in certain respects, and the Fund will
account for these investments or transactions in a manner intended to preserve
its qualification as a regulated investment company and avoid material tax
liability.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles property taxes, the
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value of its assets is attributable to) certain U.S. Government obligations or
municipal obligations of issuers in the state in which a shareholder is subject
to tax, provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. The Fund will not seek
to satisfy any threshold or reporting requirements that may apply in particular
taxing jurisdictions, although the Fund may in its sole discretion provide
relevant information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Additionally, the Fund may be required to recognize gains (subject to tax
distribution requirements) if an option, future, notional principal contract, or
a combination thereof is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio. Also, some of the Fund's losses on
its transactions involving options and futures contracts and/or offsetting or
successor portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund's taxable income or gain. Certain of
such transactions may also cause the Fund to dispose of investments sooner than
would otherwise have occurred. These transactions may thereafter affect the
amount, timing and character of the Fund's distributions to shareholders. The
Fund will take into account the special tax rules (including consideration of
available elections) applicable to options and futures transactions in order to
seek to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as insurance companies and financial institutions. Dividends
(including exempt-interest dividends), capital gain distributions and ownership
of or gains realized on the redemption (including an exchange) of shares of the
Fund may also be subject to state and local taxes. Shareholders should consult
their own tax advisers as to the Federal, state or local tax consequences of
ownership of shares of, and receipt of distributions from, the Fund in their
particular circumstances.
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Non-U.S. investors not engaged in a U.S. trade or business with which their Fund
investment is effectively connected will be subject to U.S. Federal income tax
treatment that is different from that described above. These investors may be
subject to nonresident alien withholding tax at the rate of 30% (or a lower rate
under an applicable tax treaty), on amounts treated as ordinary dividends from
the Fund and, unless an effective IRS Form W-8 or authorized substitute for Form
W-8 is on file, to 31% backup withholding on certain other payments from the
Fund. Non-U.S. investors should consult their tax 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
applicable provisions of federal law incorporated in Massachusetts law, it will
also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1997, the annualized yields on Class A
and Class B shares of the Fund were 5.00% and 4.48%% respectively. The average
annual total return of the Class B shares of the Fund for the 1 year and 5 year
periods ended August 31, 1997 and since inception on August 29, 1986 were 2.51%,
5.70% and 6.99% respectively and reflect payment of the applicable CDSC at the
end of the period.
The average annual total return of Class A shares of the Fund for the 1 year
period ended August 31, 1997 and since inception on December 31, 1993 were 3.42%
and 3.95%, respectively, and reflect payment of the maximum sales charge.
The Fund advertises 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:
a - b
______ 6
Yield = 2 ( [ ( cd ) + 1 ] - 1 )
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV where applicable).
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The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the maximum federal tax rate for the
30-day period ended August 31, 1997 were 8.28% and 7.42%, respectively.
The Fund's total return is computed by finding the average annual compounded
rate of return over the 1 year, 5 00 year and life-of fund periods that would
equate the initial amount invested to the ending redeemable value according
to the following formula:
n________
T = \/ ERV / P -1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of hypothetical $1,000 investment
made at the beginning of the 1 year, 5 year and life-of-fund
periods.
Because each share has its own sales charge and fee structure, the classes have
different performance results. 52 In the case of Class A shares or Class B
shares, this calculation assumes the maximum sales charge is included in the
initial investment or the CDSC applied at the end of the period. This
calculation also assumes that all 52 dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period. The 52
"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. Excluding the Fund's sales
charge from the distribution rate produces a higher rate.
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 52 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 52 sales charge on Class
A shares or the CDSC on Class B shares into account. Excluding the Fund's sales
charge on 52 Class A shares and the CDSC on Class B shares from a total return
calculation produces a higher total return 52 figure.
In the case of a tax-exempt obligation issued without original issue discount
and having a current market 52 discount, the coupon rate of interest is used in
lieu of the yield to maturity. Where, in the case of a 52 tax-exempt obligation
with original issue discount, the discount based on the current market value
exceeds the 52 then-remaining portion of original issue discount (market
discount), the yield to maturity is the imputed rate 52 based on the original
issue discount calculation. Where, in the case of a tax-exempt obligation with
original 52 issue discount, the discount based on the current market value is
less than the then-remaining portion of 52 original issue discount (market
premium), the yield to maturity is based on the market value.
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From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to 52 indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed 52 Income
Fund Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on 52 fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are 52 also used for comparison
purposes, as well the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MORNINGSTAR, and BARRON'S may also be utilized. The Fund's 52
promotional and sales literature may make reference to the Fund's "beta." Beta
is a reflection of the 52 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 52 representations of performance of the Fund for
any period in the future. The performance of the Fund is a 52 function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market 52 conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of 52 beneficial interest; and
changes in operating expenses are all examples of items that can increase or
decrease 52 the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions 52 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. 52 Orders for purchases and sales of securities
are placed in a manner which, in the opinion of the Adviser, will 52 offer the
best price and market for the execution of each such transaction. Purchases from
underwriters of 52 portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers 52 serving as market makers
reflect a "spread." Investments in debt securities are generally traded on a net
basis 52 through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are 52 payable on these transactions.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable 52 prices consistent with best execution,
considering all of the costs of the transaction including brokerage 52
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is 52 executed. Consistent with the foregoing
primary policy, the Rules of Fair Practice of the National Association 52 of
Securities Dealers, Inc. and other policies that the Trustees may determine, the
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the 52 services,
including primarily the availability and value of research information and to a
lesser extent 52 statistical assistance furnished to the Adviser of the Fund,
and their value and expected contribution to the 52 performance of the Fund. It
is not possible to place a dollar value on information and services to be
received 52 from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of 52 research information is not
expected to reduce significantly the expenses of the Adviser. The research 52
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other 52 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 52 will make no commitments to allocate
portfolio transactions upon any prescribed basis. While the Adviser's 52
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officers will be primarily responsible for the allocation of the Fund's
brokerage business, the policies and 52 practices of the Adviser in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees.
For the fiscal year ended August 31, 1997, the Fund paid $ 47,181 in negotiated
brokerage commissions. For the 52 period ended August 31, 1996, the Fund paid
$12,578 in negotiated brokerage commissions and for the year ended 52 October
31, 1995, the Fund paid no negotiated brokerage commissions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which 52 another
broker would have charged for effecting that transaction. This practice is
subject to a good faith 52 determination by the Directors that the price is
reasonable in light of the services provided and to policies 52 that the
Directors may adopt from time to time. For the year ended August 31, 1995, the
Fund did not pay 52 commissions to compensate brokers for research services such
as industry, economic and company reviews and 52 evaluations of securities.
During the period ended August 31, 1996 and the fiscal year August 31, 1997, the
Fund did not pay commissions to compensate brokers for research services such as
industry, economic and company 52 reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, 52 Inc., a broker dealer
("Distributors" or "Affiliated Brokers"). Pursuant to procedures determined by
the 52 Trustees and consistent with the above policy of obtaining best net
results, the Fund may execute portfolio 52 transactions with or through
Affiliated Brokers. During the period ended August 31, the Fund did not execute
any portfolio transactions with Affiliated Brokers.
Distributors 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 Investment Company Act. 52 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 52 securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund 52
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for 52 comparable transactions for its other most
favored, but unaffiliated, customers, except for accounts for which 52 the
Affiliated Broker acts as a clearing broker for another brokerage firm, and any
customers of the Affiliated 52 Broker not comparable to the Fund as determined
by a majority of the Trustees who are not "interested persons" 52 (as defined in
the Investment Company Act) of the Fund, the Adviser or the Affiliated Brokers.
Because the 52 Adviser, which is affiliated with the Affiliated Brokers, has, as
an investment adviser to the Fund, the 52 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 52 commissions at a rate higher than that
determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities and the Fund. 52 When these clients buy or sell the same
securities at substantially the same time, the Adviser may average the 52
transaction as to price and allocate the amount of available investments in a
manner which the Adviser believes 52 to be equitable to each client, including
the Fund. In some instances, this investment procedure may adversely 52 affect
the price paid or received by the Fund or the size of the position obtainable
for it. On the other hand, 52 to the extent permitted by law, the adviser may
aggregate the securities to be sold or purchased for the Fund 52 with those to
be sold or purchased for other clients managed by it in order to obtain best
execution.
47
<PAGE>
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent of the Fund. The Fund pays Signature Services
an annual fee of $20.00 for each Class A shareholder and $22.50 for each Class B
shareholder, plus certain out-of-pocket expenses. These expenses are aggregated
and charged to the Fund and allocated to each class on the basis of their
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, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, the custodian 52
performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has been
selected as the independent auditors of the Fund. The financial statements and
financial highlights of the Fund included in the Prospectus and this Statement
of Additional Information have been audited by Ernst & Young LLP for the periods
indicated in their report thereon appearing elsewhere herein, and are included
in reliance on their report given on their authority of such firm as experts in
accounting and auditing.
48
<PAGE>
APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
Moody's Investors Service, Inc. ("Moody's)
Aaa, Aa, A and Baa - Tax-exempt bonds rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to bonds that are of "high quality by all
standards," but long-term risks appear somewhat larger than Aaa rated bonds. The
Aaa and Aa rated bonds are generally known as "high grade bonds." The foregoing
ratings for tax-exempt bonds are rated conditionally. Bonds for which the
security depends upon the completion of some act or upon the fulfillment of some
condition are rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such conditional
ratings denote the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as upper
medium grade obligations. Principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds rated Baa are considered a medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact, have speculative characteristics as well.
Ba, B, Caa, Ca - 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 the characteristics of desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds which are rated Ca represent
obligations which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
Standard & Poor's Ratings Group ("S&P")
AAA, AA, A and BBB - Bonds rated AAA bear the highest rating assigned to debt
obligations, which indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade," are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the bonds being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. Although a provisional rating addresses credit quality subsequent to
completion of the project, it makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. Bonds rated BBB are regarded as
A-1
<PAGE>
having an adequate capacity to repay principal and pay interest. Whereas they
normally exhibit protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay principal
and pay interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on balanced, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Fitch Investors Service ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on balanced, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
TAX-EXEMPT NOTE RATINGS
Moody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal and interest.
Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
A-2
<PAGE>
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Moody's - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
Other Considerations - The ratings of S&P, Moody's, and Fitch represent their
respective opinions of the quality of the municipal securities they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal securities with the same
maturity, coupon and ratings may have different yields and municipal securities
of the same maturity and coupon with different ratings may have the same yield.
A-3
<PAGE>
APPENDIX B
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 1997. It gives the approximate yield a taxable
security must earn at various income brackets to produce after-tax yields.
TAX-FREE YIELDS 1998 TAX TABLE
<TABLE>
<CAPTION>
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>
$0-$25,350 $0-$42,350 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
25,351-61,400 42,351-102,300 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
61,401-128,100 102,301-155,950 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
128,101-278,450 155,951-278,450 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
over $278,450 over $278,450 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 amonts. 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, it 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.
B-1
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in each Fund's 1997 Annual
Report to Shareholders for the year ended August 31, 1997; (filed electronically
on November 4, 1997, accession number 0001010521-97-000413) and are included in
and incorporated by reference into Part B of the Registration Statement for John
Hancock Tax-Free Bond Trust (file nos. 811-5968 and 33-32246).
John Hancock High Yield Tax-Free Bond Fund
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statement of Change in Net Assets for the period ended August 31, 1997.
Financial Highlights for the eleven years in the period ended August 31, 1997.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1997.
Report of Independent Auditors.
F-1
<PAGE>
JOHN HANCOCK TAX-FREE BOND FUND
Class A and Class B Shares
Statement of Additional Information
January 1, 1998
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 combined tax-free Income Funds' Prospectus (the "Prospectus"). The Fund is a
diversified series of John Hancock tax-free Bond Trust (the "Trust").
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 Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Organization of the Fund ..................................................2
Investment Objective and Policies...........................................2
Investment Restrictions.............................................. .....14
Those Responsible for Management...........................................16
Investment Advisory and Other Services.....................................25
Distribution Contracts.....................................................27
Net Asset Value............................................................29
Initial Sales Charge On Class A Shares.....................................29
Deferred Sales Charge on Class B Shares....................................32
Special Redemptions........................................................35
Additional Services and Programs...........................................36
Description of the Fund's Shares...........................................38
Tax Status.................................................................39
Calculation of Performance.................................................44
Brokerage Allocation.......................................................46
Transfer Agent Services....................................................48
Custody of Portfolio.......................................................48
Independent Auditors.......................................................48
Appendix A - Equivalent Yields............................................A-1
Appendix B - Bond and Commercial Paper Rating.............................B-1
Financial Statements .....................................................F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management 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
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. There is no assurance that
the Fund will achieve its investment objective.
The Fund seeks to achieve its objective by investing primarily in municipal
bonds, notes and commercial paper, the interest on which is exempt from federal
income taxes ("Municipal Obligations" or "Municipal Bonds"). Municipal
Obligations include debt obligations issued by or on behalf of states,
territories or possessions of the United States; the District of Columbia, and
the political subdivisions, agencies or instrumentalities thereof.
Under normal market conditions the Fund invests at least 80% of it's assets in
Municipal Bonds. The Fund's Municipal Bonds include investment grade bonds,
notes and commercial paper. This policy is consistent with the SEC staff's
current position about using the word bond in the Fund's name.
For liquidity and flexibility, the Fund may place up to 20% of total assets in
taxable investment grade short-term securities. For defensive purposes, it may
invest more assets in these securities.
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
2
<PAGE>
tax. The payment of principal and interest by issuers of certain obligations
purchased by the Fund may be guaranteed by a letter of credit, note repurchase
agreement, insurance or other credit facility agreement offered by a bank or
other financial institution. Such guarantees and the creditworthiness of
guarantors will be considered by the Adviser in determining whether a Municipal
Obligation meets the Fund's 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 Standard and Poor's Rating Group ("S&P"), Moody's Investor Services,
Inc. ("Moody's") and Fitch Investment Services ("Fitch") represent their
respective opinions of the quality of the Municipal Bonds they undertake to
rate. It should be emphasized, however, that ratings are general and not
absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields and Municipal Bonds of the
same maturity and coupon with different ratings may have the same yield. See
Appendix A for a description of ratings. Many issuers of securities choose not
to have their obligations rated. Although unrated securities eligible for
purchase by the Fund must be determined to be comparable in quality to
securities having certain specified ratings, the market for unrated securities
may not be as broad as for rated securities since many investors rely on rating
organizations for credit appraisal.
Ratings as Investment 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
3
<PAGE>
commercial paper like the Fund's other municipal investments can be of below
investment grade quality and maybe rated or unrated. The Fund may retain
Municipal Obligations whose ratings are downgraded below permissible ratings
until the Adviser determines that disposing of such Obligations is in the best
interests of the Fund.
Municipal bonds and notes rated BBB or Baa are considered to have some
speculative characteristics and can pose special risks involving the ability of
the issuer to make payment of principal and interest to a greater extent than
higher rated securities. Municipal bonds and notes rated BB, B, Ba or B are
considered speculative and are generally referred to as junk bonds. While
generally providing greater income than investments in higher quality
securities, these instruments involve greater risk of principal and income loss,
including the possibility of default. These instruments may have greater price
volatility, especially during periods of economic uncertainty or change. Bonds
rated B are currently meeting debt service requirements but provide a limited
margin of safety and are vulnerable to default in the event of adverse business,
financial or economic conditions. In addition, the market for these instruments
may be less liquid than the market for higher rated securities. Therefore, the
Adviser's judgment at times plays a greater role in the performance and
valuation of the Fund's investments in these instruments. See Appendix B for
additional discussion of the ratings assigned to Municipal Obligations.
The Adviser will purchase municipal bonds rated BBB, BB or B or Baa, Ba or B
where, based upon price, yield and its assessment of quality, investment in such
bonds is determined to be consistent with the Fund's objective of preservation
of capital. The Adviser will evaluate and monitor the quality of all
investments, including bonds rated BBB, BB or B or Baa, Ba or B, and will
dispose of such bonds necessary to assure that the Fund's overall portfolio is
constituted in manner consistent with the goal of preservation of capital. To
the extent that the Fund's investments in municipal bonds rated BBB, BB or B or
Baa, Ba or B includes obligations believed to be consistent with the goal of
preserving capital, such bonds may not provide yields as high as those of other
obligations having such ratings and the differential in yields between such
bonds and obligations with higher quality ratings may not be as significant as
might otherwise be generally available.
Because there is no restriction on the maturities of the Municipal Obligations
in which the Fund may invest, the Fund's average portfolio maturity 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.
Variable or Floating Rate Obligations. Certain of the obligations in which the
Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate) or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is based (floating rate). Variable or floating rate
obligations may include a demand feature which entitles the purchaser to demand
prepayment of the principal amount prior to stated maturity. Also, the issuer
may have a corresponding right to prepay the principal amount prior to maturity.
As with any other type of debt security, the marketability of variable or
floating rate instruments may vary depending upon a number of factors, including
the type of issuer and the terms of the instruments. The Fund may also invest in
more recently developed floating rate instruments which are created by dividing
a municipal security's interest rate into two or more different components.
Typically, one component ("floating rate component" or "FRC") pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index. A second component ("inverse floating rate component" or
"IFRC") pays an interest rate that varies inversely with changes to market rates
of interest, because the interest paid to the IFRC holders is generally
4
<PAGE>
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 Trustees, they will be
considered illiquid for purposes of the Fund's 10% investment restriction on
investment in non-readily marketable securities.
Participation Interests. The Fund may purchase from financial institutions tax
exempt participation interests in tax exempt securities. A participation
interest gives the Fund an undivided interest in the tax exempt security in the
proportion that the Fund's participation interest bears to the total amount of
the tax exempt security. For certain participation interests, the Fund will have
the right to demand payment, on a specified number of days' notice, for all or
any part of the Fund's participation interest in the tax exempt security plus
accrued interest. Participation interests, which are determined to be not
readily marketable, will be considered as such for purposes of the Fund's 10%
investment restriction on investment in non-readily marketable illiquid
securities. The Fund may also invest in Certificates of Participation (COP's)
which provide participation interests in lease revenues. Each Certificate
represents a proportionate interest in or right to the lease-purchase payment
made under municipal lease obligations or installment sales contracts.
Typically, municipal lease obligations are issued by a state or municipal
financing authority to provide funds for the construction of facilities (e.g.,
schools, dormitories, office buildings or prisons) or the acquisition of
equipment. The facilities are typically used by the state or municipality
pursuant to a lease with a financing authority. Certain municipal lease
obligations may trade infrequently. Participation interests in municipal lease
obligations will not be considered illiquid for purposes of the Fund's 10%
limitation on illiquid securities provided the 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.
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
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interest rates). In addition, a security may be sold and another security of
comparable quality purchased at approximately the same time to take advantage of
what the Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the overall demand
for, or supply of, various types of tax- exempt securities.
In general, purchases and sales may also be made to restructure the portfolio in
terms of average maturity, quality, coupon yield or diversification for any one
or more of the following purposes: (a) to increase income, (b) to improve
portfolio quality, (c) to minimize capital depreciation, (d) to realize gains or
losses, or (e) for such other reasons as the Adviser deems relevant in light of
economic or market conditions.
The Fund is a "diversified" management investment company under the Investment
Company Act of 1940 (the "1940 Act"). This means that with respect to 75% of its
total assets: (1) the Fund may not invest more than 5% of its total assets in
the securities of any one issuer other than U.S. government securities and
securities of other investment companies and (2) the Fund may not own more than
10% of the outstanding voting securities of any one issuer. In applying these
limitations, a guarantee of a security will not be considered a security of the
guarantor, provided that the value of all securities issued or guaranteed by
that guarantor, and owned by the Fund, does not exceed 10% of Fund's total
assets. Since Municipal Obligations ordinarily purchased by the Fund are not
voting securities (notwithstanding the 75% limitation described above), there is
generally no limit on the percentage of a single issuer's obligations which the
Fund may own so long as it does not invest more than 5% of its total assets in
the securities of that issuer. Consequently, the Fund may invest in a greater
percentage of the outstanding securities of a single issuer than would an
investment company which invests in voting securities. In determining the issuer
of a security, each state and each political subdivision, agency, and
instrumentality of each state and each multi-state agency of which such state is
a member is a separate issuer. Where securities are backed only by assets and
revenues of a particular instrumentality, facility or subdivision, such entity
is considered the issuer.
Repurchase Agreements. The Fund may enter into repurchase agreements for
purposes of realizing additional (taxable) income. In a repurchase agreement the
Fund buys a security for a relatively short period (usually not more than 7
days) subject to the obligation to sell it back to the issuer at a fixed time
and price plus accrued interest. The Fund will enter into repurchase agreements
only with member banks of the Federal Reserve System and with "primary dealers"
in U.S. Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
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which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. The Fund will not enter into reverse repurchase
agreements and other borrowings exceeding in the aggregate 15% of the market
value of its total assets. To minimize various risks associated with reverse
repurchase agreements, the Fund will establish and maintain with the Fund's
custodian a separate account consisting of highly liquid, marketable securities
in an amount at least equal to the repurchase prices of these securities (plus
accrued interest thereon) under such agreements. In addition, the Fund will not
purchase additional securities while all borrowings exceed 5% of the value of
its total assets. The Fund will enter into reverse repurchase agreements only
with federally insured banks or savings and loan associations which are approved
in advance as being creditworthy by the Trustees. Under procedures established
by the Trustees, the Adviser will monitor the creditworthiness of the banks
involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 10% of its net
assets in illiquid investments. If the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) or Rule 144A
securities, that they are liquid, they will not be subject to the 10% limit on
illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on debt securities in which it may invest or on any
securities index based on debt securities in which it may invest. These options
may be listed on national domestic securities exchanges or foreign securities
exchanges or traded in the over-the-counter market. The Fund may write covered
put and call options and purchase put and call options as a substitute for the
purchase or sale of securities or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by the Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
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its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities or currency decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the Fund's portfolio securities. Under certain
circumstances, the Fund may not be treated as the tax owner of a security if the
Fund has purchase a put option on the same security. If this occurred, the
interest on the security would be taxable.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class 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, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
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Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
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) restrictions may be imposed by an exchange 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; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) 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 on that exchange 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 Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To hedge against changes in
interest rates or securities prices, the Fund may purchase and sell futures
contracts on debt securities and debt securities indices, and purchase and write
call and put options on these futures contracts. The Fund may also enter into
closing purchase and sale transactions with respect to any of these contracts
and options. All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
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corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging Strategies. Hedging is an attempt to establish with more certainty than
would otherwise be possible the effective price or rate of return on portfolio
securities or securities that the Fund proposes to acquire. When interest rates
are rising or securities prices are falling, the Fund can seek to offset a
decline in the value of its current portfolio securities through the sale of
futures contracts. When interest rates are falling or securities prices are
rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other debt securities or indices, the Fund may also enter into such
futures contracts as part of its hedging strategy. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Adviser will attempt to
estimate the extent of this volatility difference based on historical patterns
and compensate for any differential by having the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
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exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions solely for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
The Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for maintaining its
qualifications as a regulated investment company for federal income tax
purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish with
the custodian a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities and securities indices. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
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of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued and Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when- issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a when-
issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps, and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
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Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Indexed Securities. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in a relation to one or more interest rates, financial indices, or
other financial indicators ("reference prices"). An indexed security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on an indexed security is a multiple of the change in the
reference price. Thus, indexed securities may decline in value due to adverse
market charges in interest rates or other reference prices.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. The risk of early prepayments
is the primary risk associated with interest only debt securities ("IOs"), super
floaters and other leveraged floating rate instruments. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities. The primary risks associated with certain other derivative debt
securities are the potential extension of average life and/or depreciation due
to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs") and certain residual or support branches of index
amortizing notes. Index amortizing notes are subject to extension risk resulting
from the issuer's failure to exercise its option to call or redeem the notes
before their stated maturity date. Leveraged inverse IOs present an especially
intense combination of prepayment, extension and interest rate risks.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
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unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
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.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to changes
in interest rates or other economic trends and developments, or to take
advantage of yield disparities between various fixed income securities in order
to realize capital gains or improve income. Short term trading may have the
effect of increasing portfolio turnover rate. A high rate of portfolio turnover
(100% or greater) involves correspondingly greater brokerage expenses. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions will not be changed without approval of a
majority of the Fund's outstanding voting securities which, as used in the
Prospectus and this Statement of Additional Information, means approval by the
lesser of (1) the holders of 67% or more of the Fund's shares represented at a
meeting if more than 50% of the Fund's outstanding shares are present in person
or by proxy at that meeting or (2) more than 50% of the Fund's outstanding
shares.
The Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of securities,
in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowings was made.
While borrowing exceed 5% of the value of the Fund's total assets, the
Fund will not purchase any additional securities. Interest paid on
borrowing will reduce the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets but
only to secure borrowing for temporary or emergency purposes or as may
be necessary in connection with maintaining collateral in connection
with writing put and call options or making initial margin deposits in
connection with the purchase or sale of financial futures, index
futures contracts and related options.
14
<PAGE>
3. With respect to 75% of its total assets, purchase securities
(other than obligations issued or guaranteed by the United States
government, its agencies of instrumentalities and shares of other
investment companies) of any issuer if the purchase would cause
immediately thereafter more than 5% of the value of the Fund's total
assets to be invested in the securities of such issuer or the Fund
would own more than 10% of the outstanding voting securities of such
issuer.
4. Make loans to others, except through the purchase of obligations
in which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not exceeding
one third of its total assets.
5. Purchase illiquid securities, including securities subject to
restrictions on disposition under the Securities Act of 1933,
repurchase agreements maturing in more than seven days, and securities
which do not have readily available market quotations, if such
purchase would cause the Fund to have more than 10% of its net assets
invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those
officers and Trustees of the Fund or the Adviser who own beneficially
more than 1/2 of 1% of the securities of such issuer, together own
more than 5% of the securities of such issuer.
7. Write, purchase or sell puts, calls or combinations thereof,
except put and call options on debt securities, futures contracts
based on debt securities, indices of debt securities and futures
contracts based on indices of debt securities, sell securities on
margin or make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal
amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short, and unless not more than 10% of the Fund's net
assets (taken at current value) is held as collateral for such sales
at any one time.
8. Underwrite the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
9. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, except commodities and
commodities contracts which are necessary to enable the Fund to engage
in permitted futures and options transactions necessary to implement
hedging strategies, or oil and gas interests. This limitation shall
not prevent the Fund from investing in municipal securities secured by
real estate or interests in real estate or holding real estate
acquired as a result of owning such municipal securities.
10. Invest in common stock or in securities of other investment
companies, except that securities of investment companies may be
acquired as part of a merger, consolidation or acquisition of assets
and units of registered unit investment trusts whose assets consist
substantially of tax-exempt securities may be acquired to the extent
permitted by Section 12 of the Act or applicable rules.
15
<PAGE>
11. Invest more than 25% of its assets in the securities of "issuers"
in any single industry; provided that there shall be no limitation on
the purchase of obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or by any state or
political subdivision thereof. For purposes of this limitation when
the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond is
backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such government
or other entity unless the value of all securities issued or
guaranteed by the government or other entity owned by the Fund does
not exceed 10% of the Fund's total assets.
12. Invest more than 5% of its total assets in securities of any
issuers if the party responsible for payment, together with any
predecessor, has been in operation for less than three years (except
U.S. government and agency obligations and obligations backed by the
faith, credit and taxing power of any person authorized to issue tax
exempt securities).
13. Issue any senior securities, except insofar as the Fund may be
deemed to have issued a senior security by: entering into a repurchase
agreement; purchasing securities on a when-issued or delayed delivery
basis; purchasing or selling any options or financial futures
contract; borrowing money or lending securities in accordance with
applicable investment restrictions.
The Trustees have 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, 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.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of each Fund's assets will not be
considered a violation of the restriction.
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").
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 Executive Officer, The Berkeley
Financial Group ("The Berkeley
Group"); Chairman and Director, NM
Capital Management, Inc. ("NM
Capital"), John Hancock Advisers
International Limited ("Advisers
International") and Sovereign Asset
Management Corporation ("SAMCorp");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds");
Chairman, First Signature Bank and
Trust Company; Director, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Advisers International
(Ireland) Limited ("International
Ireland"), John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science;
Director, John Hancock Freedom
Securities Corporation (until
September 1996); Director, John
Hancock Signature Services, Inc.
("Signature Services") (until
January 1997).
- ---------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B
President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS; Vice President of
Amerigas Partners L.P.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
23
<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.
As of December 1, 1997, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
December 1, 1997, Merrill Lynch Pierce Fenner & Smith Inc., Trade House Account
Team B, 4800 Deerlake Drive East, Jacksonville, FL held 989,807 shares
representing 5.36% 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.
The following tables provide information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services for the Fund's fiscal year ended August
31, 1997. Messrs. Boudreau and Scipione and Ms. Hodsdon each a non-independent
Trustee, and each of the officers of the Trust are interested persons of the
Adviser, are compensated by the Adviser and its affiliates and receive no
compensation from the Fund for their services.
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Compensation all Funds in John Hancock
Trustees from the Fund1 Fund Complex to Trustees2
-------- -------------- -------------------------
<S> <C> <C>
James F. Carlin $ 6,572 $ 74,000
William H. Cunningham(t) 6,572 74,000
Charles F. Fretz 6,572 74,250
Harold R. Hiser, Jr.(t) 6,245 74,000
Charles L. Ladner 6,572 74,250
Leo E. Linbeck, Jr. 6,572 74,250
Patricia P. McCarter(t) 6,572 74,250
Steven R. Pruchansky(t) 6,832 77,250
Norman H. Smith(t) 6,832 77,250
John P. Toolan(t) 6,572 74,250
------- --------
Total $65,913 $747,750
1 Compensation for the period ended August 31, 1997.
2 The total compensation paid by the John Hancock Funds Complex to
the Independent Trustees as of the calendar year ended December
31, 1997. As of this date there were 67 funds in the John Hancock
Funds Complex, of which each of these Independent Trustees serve
32.
</TABLE>
24
<PAGE>
(t) As of December 3, 1997, the value of the aggregate deferred
compensation from all funds in the John Hancock Funds Complex for Mr.
Cunningham was $227,304, for Mr. Hiser was $106,461, for Ms. McCarter
was $157,310, for Mr. Pruchansky was $64,639, for Mr. Smith was $71,457
and for Mr. Toolan was $282,727 under the John Hancock Group of Funds
Deferred Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $22 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,400,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries a high rating from Standard & Poor's and A. M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund 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%
25
<PAGE>
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.
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.
Pursuant to the Advisory Agreement, 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 Advisory
Agreement 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 its obligations and duties under the Advisory
Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Fund's
Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the Adviser.
The continuation of the Advisory Agreement was approved by all of the Trustees.
The Advisory Agreement, and the Distribution Agreement discussed below, 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 Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
such parties. Both agreements may be terminated on 60 days written notice by any
party or by a vote of a majority of the outstanding voting securities of the
Fund and will terminate automatically if assigned.
For the fiscal year ended December 31, 1995 and the period ending August 31,
1996, advisory fees payable to the Fund's Adviser amounted to $1,048,120 and
$1,489,530 respectively. For the fiscal year ended August 31, 1997, advisory
fees payable to the Fund's Adviser amounts to $4,110,920. However, a portion of
such fees were not imposed pursuant to the voluntary fee reduction and expense
limitation agreement then in effect.
Administrative Services Agreement. The Fund was a party to an administrative
services agreement with Transamerica Fund Management Company ("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
26
<PAGE>
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 year ended December 31, 1994, the Fund paid to TFMC (pursuant to
the Services Agreement) $116,742, of which $81,515, was paid to TFMC and
$35,227, were paid for certain data processing and pricing information services.
No fees relating to the Services Agreement were paid or incurred since fiscal
year 1995.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended August 31, 1996, the Fund paid the
Adviser $20,551 for services under this agreement from the effective date of
July 1, 1996. For the fiscal year ended August 31, 1997, the Fund paid the
Adviser $143,283 for services under this agreement.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser and
the Trust 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 Funds and their shareholders come
first.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accept orders for the
purchase of the shares of the Fund 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, John Hancock Funds and Selling
Brokers receive compensation in the form of a sales charge imposed, in the case
of Class A shares, at the time of sale or, in the case of Class B shares, on a
deferred basis. John Hancock Funds may pay extra compensation to financial
services firms selling large amounts of fund shares. This compensation would be
calculated as a percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended for the period from November 1, 1995 to August 31, 1996 and
for the year ended August 31, 1997 were $355,895 and $642,722, respectively. Of
such amounts $39,275 and $65,428, respectively, retained by John Hancock Funds
in 1996 and 1997. The remainder of the underwriting commissions were reallowed
to dealers.
The Fund's Trustees 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, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.25% and 1.00%, respectively, of the Fund's
daily net assets attributable to shares of that class. However, the service fee
27
<PAGE>
will not exceed 0.15% and 0.25% of the Fund's average daily net assets
attributable to Class A and Class B shares, respectively. In each case, up to
0.25% is for service expenses and the remaining amount is for distribution
expenses. John Hancock Funds has agreed to continue to limit the payments of
expenses under the Plans to 0.15% and 0.90% of the average daily net assets of
the Class A and Class B shares, respectively. The distribution fees will be used
to reimburse John Hancock Funds for their distribution expenses, including but
not limited to: (i) initial and ongoing sales compensation to Selling Brokers
and others (including affiliates of John Hancock Funds) engaged in the sale of
Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B shares only, interest expenses on unreimbrused distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event the John
Hancock Funds is not fully reimbursed for payments or expenses they incur under
the Class A Plan, these expenses will not be carried beyond twelve months from
the date they were incurred. Unreimbursed expense under the Class B Plan will be
carried forward together with interest on the balance of these unreimbursed
expenses. The Fund does not treat unreimbrused expenses under the Class B Plan
as a liability of the Fund because the Trustees may terminate Class B Plan at
any time. For the fiscal year ended August 31, 1997 an aggregate of $10,547,839
of distribution expenses or 5.86% of the average net assets of the Class B
shares of the Fund, was not reimbursed or recovered by John Hancock Funds
through the receipt of deferred sales charges or Rule 12b-1 fees in prior
periods.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the 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, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. The Plans provide that they must be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The Plans further provide that they must not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each plan provides, that
no material amendment to the Plans will, in any event, be effective unless it is
approved by a vote of a majority vote of the Trustees and the Independent
Trustees of the 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 class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that the expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
28
<PAGE>
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Funds.
During the period ended August 31, 1997, the Funds paid John Hancock Funds the
following amounts of expenses with respect to the Class A and Class B shares of
the Fund:
Expense Items
<TABLE>
<CAPTION>
Printing and Interest,
Mailing of Carrying or
Prospectus Compensation Other
to New to Selling Expenses of Finance
Advertising Shareholders Brokers Distributor Charges
----------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C>
Class A Shares $ 66,737 $1,907 $ 634,266 $184,277 ----
Class B Shares $133,884 $3,148 $1,044,444 $311,630 $132,197
</TABLE>
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 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.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees 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.
29
<PAGE>
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 accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, or if
Signature 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.
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 or officer of the Trust; a Director or officer of
the Adviser and its affiliates or Selling Brokers; employees
or sales representatives of any of the foregoing; retired
officers, employees or Directors of any of the foregoing; a
member of the immediate family (spouse, children,
grandchildren, 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.
o A broker, dealer, financial planner, consultant or registered
investment adviser that has entered into an agreement with
John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products or services made
available to their clients.
o A former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan
and transfers any or all of his or her plan distributions
directly to the Fund.
o A member of an approved affinity group financial services plan
o A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
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.
30
<PAGE>
However, if the shares are redeemed within 12 months after the
end of the calendar year in which the purchase was made, a
CDSC will be imposed at the following rate:
----------------------------------------------- ----------------
Amount Invested CDSC Rate
----------------------------------------------- ----------------
$1 to $4,999,999 1.00%
----------------------------------------------- ----------------
Next $5 million to $9,999,999 0.50%
----------------------------------------------- ----------------
Amounts of $10 million and over 0.25%
----------------------------------------------- ----------------
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
*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.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
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 value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. The reduced sales charges are also applicable to
investments in shares 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 IRA, SEP, SARSEP,
401(k), 403(b) (including TSAs) 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 Signature
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
31
<PAGE>
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 within the specified period (either 13 or 48 months) the sales charge
applicable will not be higher than that which would have applied (including
accumulations and combinations) had the LOI been for the amount actually
invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the 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 Signature Services to act as his attorney-in-fact
to redeem any escrowed Class A shares and adjust the sales charge, if necessary.
A LOI does not constitute a binding commitment by an investor to purchase, or by
the Fund to sell, any additional Class A shares and may be terminated at any
time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investment in Class B shares are purchased at net asset value per share without
the position of an initial sales charge so the Fund will receive the full amount
of the purchase payment.
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 all shares derived from reinvestment of dividends or capital gains
distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six- year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
32
<PAGE>
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price. However, you cannot redeem appreciation value only in order to avoid a
CDSC.
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.
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 a CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate
your account if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or
acquisition transactions involving other investment companies
or personal holding companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as
described in "Sales Charge Reductions and Waivers" of the
Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal
plan, as long as your annual redemptions do not exceed 12% of
your account value, including reinvested dividends, at the
time you established your periodic withdrawal plan and 12% of
the value of subsequent investments (less redemptions) in that
33
<PAGE>
* account at the time you notify Signature Services. (Please
note, this waiver does not apply to periodic withrdrawl
plan redemptions of Class A shares that are subject to a CDSC)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in
assets or 500 eligible employees at the date the Plan Sponsor
signs the Merrill Lynch Recordkeeping Service Agreement. See
your Merrill Lynch financial consultant for further
information.
For Retirement Accounts (such as IRA, SIMPLE plan, Rollover IRA, TSA,
457, 403(b), 401(k), Money Purchase Pension Plan, Profit-Sharing Plan
and other qualified plans as described in the Internal Revenue Code of
1986, as amended (the "Code") unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plans and
Profit Sharing Plans).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
34
<PAGE>
Please see matrix for reference.
CDSC Waiver Matrix for Class B Funds.
- -------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distribution value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 Waived Waived Waived Waived for 12% of
1/2 and Life account
70 1/2 Expectancy value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account
payments payments payments value
(72t) or (72t) or (72t) or annually
12% of 12% of 12% of in
account account account periodic
value value value payments
annually annually annually
in in in
periodic periodic periodic
payments. payments. payments.
- --------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- --------------------------------------------------------------------------------
Termination Not Waived Not Waived Not Waived Not Waived N/A
of Plan
- --------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
35
<PAGE>
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its 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 Fund's net asset value at the
beginning of such period.
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.
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 Fund 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
and John Hancock Intermediate Maturity 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.
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.
The 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 Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its 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".
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, which 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 Class A and Class B
shares at the same time 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 Signature Services.
36
<PAGE>
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
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 Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, 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 fund, subject to the minimum investment limit of 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 any 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 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.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege 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. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies 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."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
37
<PAGE>
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund 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 shares of the Fund and one other
series. Additional series may be added in the future. The Declaration of Trust
also authorizes the Trustees to classify and reclassify the shares of the Fund,
or any new series of the Trust into one or more classes. As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of two classes of shares of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
Class A shares and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to Class A and Class B shares will be
borne exclusively by that class (ii) Class B shares will pay higher distribution
and service fees than Class A shares and (iii) each of Class A shares and Class
B shares will bear any other class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to multiple-class structure. Similarly, the net asset value per share
may vary depending on whether Class A shares or Class B shares are purchased. No
interest will be paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the class of the Fund available for distribution
to these shareholders. Shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
When issued, shares are fully paid and non-assessable, except as set forth
below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the 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 Fund's outstanding shares and the Trustees shall promptly call
a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Fund. Shareholders
may, under certain circumstances, communicate with other shareholders in
connection with requesting a special meeting of shareholders. However, at any
time that less than a majority of the Trustees holding office were elected by
the shareholders, the Trustees will call a special meeting of shareholders for
the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Fund shall be liable for the liabilities of
38
<PAGE>
any other series. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept credit card checks. Use of information provided on
the account application may be used by the Fund to verify the accuracy of the
information or for background or financial history purposes. A joint account
will be administered as a joint tenancy with right of survivorship, unless the
joint owners notify Signature Services of a different intent. A shareholder's
account is governed by the laws of The Commonwealth of Massachusetts.
TAX STATUS
The Fund is treated as a separate entity for accounting and tax purposes. The
Fund has qualified and elected to be treated as a "regulated investment company"
under Subchapter M of the Code, and intends to continue to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on its taxable and tax-exempt income (including net realized capital
gains, if any) which is distributed to shareholders in accordance with the
timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
The Fund expects to qualify to pay "exempt-interest dividends," as defined in
the Code. To qualify to pay exempt-interest dividends, the Fund must, at the
close of each quarter of its taxable year, have at least 50% of the value of its
total assets invested in municipal securities whose interest is excluded from
gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes. The Fund will not undertake
independent investigations concerning the tax-exempt status of such obligations,
nor does it guarantee or represent that bond counsels' opinions are correct.
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
obligation 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
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to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund is not deductible to the extent it is deemed related to the Fund's
exempt- interest dividends. Pursuant to published guidelines, the Internal
Revenue Service may deem indebtedness to have been incurred for the purpose of
purchasing or carrying shares of the Fund even though the borrowed funds may not
be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by the Fund may be
excluded by the Fund's shareholders from their gross income for federal income
tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
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
capital gain. (Net capital gain is the excess (if any) of net long-term capital
gain over net short-term capital loss, and investment company taxable income is
all taxable income and capital gains or losses, other than those gains and
losses included in computing net capital gain, after reduction by deductible
expenses.) As a result of federal tax legislation enacted on August 5, 1997 (the
"Act"), gain recognized after May 6, 1997 from the sale of a capital asset is
taxable to individual (noncorporate) investors at different maximum federal
income tax rates, depending generally upon the tax holding period for the asset,
the federal income tax bracket of the taxpayer, and the dates the asset was
acquired and/ or sold. The Treasury Department has issued guidance under the Act
that will enable the Fund to pass through to its shareholders the benefits of
the capital gains rates enacted in the Act. Shareholder should consult their own
tax advisers on the correct application of these new rules in their particular
circumstances. 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.
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Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of the
federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of tax-exempt income or tax preference item income earned by the Fund
during the period of their investment in the Fund.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities or enter into options or futures transactions that will
generate capital gains. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions on
these shares from such appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. 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. 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 automatic dividend reinvestments. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of all
exempt-interest dividends paid with respect to such shares and, to the extent in
excess of the disallowed amount, will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
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Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various periods, including the treatment of
losses on the sales of shares held for six months or less that are
recharacterized as long-term capital losses, as described above.
Although the Fund's present intention is to distribute, at least annually, all
net capital gain, if any, the Fund reserves the right to retain and reinvest all
or any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not in any event distribute net capital
gain realized in any year to the extent that a capital loss is carried forward
from prior years against such gain. To the extent such excess was retained and
not exhausted by the carryforward of prior years' capital losses, it would be
subject to Federal income tax in the hands of the Fund. Upon proper designation
of this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if the Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as capital gain in his return for his taxable year in which the last day
of the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or to a refund of, his pro rata share of the taxes paid by the Fund,
and (c) be entitled to increase the adjusted tax basis for his shares in the
Fund by the difference between his pro rata share of such excess and his pro
rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed as such to
shareholders. The Fund has $15,619,534 of capital loss carry forwards,
$10,378,466 expires in 2002, $5,155,633 expires in 2003 and $85,435 expires in
2004 which are available to offset future net capital gains.
Dividends and capital gain distributions paid by the Fund will not qualify for
the dividends received deduction for corporate shareholders.
The Fund may invest in debt obligations that are in the lower rating categories
or are unrated. Investments in debt obligations that are at risk of default
present special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be taken
for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by the Fund, in the event it invests in such securities, in
order to seek to ensure that it distributes sufficient income to preserve its
status as a regulated investment company and seek to avoid becoming subject to
Federal income or excise tax.
The Fund is required to accrue original issue discount ("OID") on certain debt
securities (including zero coupon or deferred payment obligations) that have OID
prior to the receipt of the corresponding cash payments. The mark to market or
constructive sales rules applicable to certain options and futures contracts or
other transactions may also require the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
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including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or borrow the cash, to satisfy these distribution
requirements.
The Federal income tax rules applicable to certain structured or indexed
securities, interest rates swaps, caps, floors and collars, and possibly other
investments or transactions are unclear in certain respects, and the Fund will
account for these investments or transactions in a manner intended to preserve
its qualification as a regulated investment company and avoid material tax
liability.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Additionally, the Fund may be required to recognize gains (subject to tax
distribution requirements) if an option, future, notional principal contract, or
a combination thereof is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio. Also, certain of the Fund's losses
on its transactions involving options or futures contracts and/or offsetting or
successor portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund's taxable income or gain. Some of
these transactions may also cause the Fund to dispose of investments sooner than
would otherwise have occurred. These transactions may therefore affect the
amount, timing and character of the Fund's distributions to shareholders. The
Fund will take into account the special tax rules (including consideration of
available elections) applicable to options and futures transactions in order to
seek to minimize any potential adverse tax consequences.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles property taxes, the
value of its assets is attributable to) certain U.S. Government obligations or
municipal obligations of issuers in the state in which a shareholder is subject
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to tax, provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. The Fund will not seek
to satisfy any threshold or reporting requirements that may apply in particular
taxing jurisdictions, although the Fund may in its sole discretion provide
relevant information to shareholders.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as insurance companies and financial institutions. Dividends
(including exempt-interest dividends), capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of Fund shares
may also be subject to state and local taxes. Shareholders should consult their
own tax advisers as to the Federal, state or local tax consequences of ownership
of shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Fund qualifies as a regulated investment company under the
applicable provisions of federal law incorporated in Massachusetts law, it will
also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1997, the annualized yields of the Fund's
Class A shares and Class B shares were 4.53% and 3.99%, respectively. The
average annual total returns of the Class A shares of the Fund for the one and
five year periods and since inception on January 5, 1990 were 4.52%, 6.04% and
7.77%, respectively (4.46%, 5.91% and 7.35%, respectively, without taking into
account the expense limitation arrangements). As of August 31, 1997, the average
annual returns for the Fund's Class B shares for the one and five year periods
and since inception on December 31, 1991 were 3.63%, 5.91% % and 6.67%,
respectively (3.57%, 5.78% and 6.43%, 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:
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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.
Because each share has its own sales charge and fee structure, the classes have
different performance results. 52 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 52 dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period. The 52
"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. Excluding the 52 Fund's sales
charge from the distribution rate produces a higher rate.
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 52 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 52 maximum sales charge
on Class A shares or the CDSC on Class B shares into account. Excluding the
Fund's sales 52 charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total 52 return figure.
In the case of a tax-exempt obligation issued without original issue discount
and having a current market 52 discount, the coupon rate of interest is used in
lieu of the yield to maturity. Where, in the case of a 52 tax-exempt obligation
with original issue discount, the discount based on the current market value
exceeds the 52 then-remaining portion of original issue discount (market
discount), the yield to maturity is the imputed rate 52 based on the original
issue discount calculation. Where, in the case of a tax-exempt obligation with
original 52 issue discount, the discount based on the current market value is
less than the then-remaining portion of 52 original issue discount (market
premium), the yield to maturity is based on the market value.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income 52 per share determined for a 30-day period by
the maximum offering price per share (which includes the full sales 52 charge)
on the last day of the period, according to the following standard formula:
a-b
___ 6
Yield = 2 ( [ ( cd) + 1 ] ) - 1)
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Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period (NAV
where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B shares at a maximum federal tax rate for the 30-day period ended
August 31, 1997 were 7.50% and 6.61%, respectively.
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
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
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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 National Association of Securities Dealers, Inc.
and other policies that the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Fund's officers will be primarily responsible for
the allocation of the Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the year ended December 31, 1995 and
period ended August 31, 1996, the Fund paid negotiated brokerage commissions in
the amount of $39,558 and $335,052, respectively. For the fiscal year ended
August 31, 1997, the Fund paid negotiated brokerage commissions in the amount of
$820,093.
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 period ended August 31, 1995, 1996 and
1997, 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 John Hancock Distributors, Inc., a broker dealer ("John Hancock
Distributors" or "Affiliated Broker"). Pursuant to procedures determined by the
Trustees and consistent with the above policy of obtaining best net results, the
Fund may execute portfolio transactions with or through Affiliated Brokers.
During the period ended August 31, 1995, 1996, and 1997, the Fund did not
execute any portfolio transaction with Affiliated Brokers.
Distributors 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 Investment Company 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
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<PAGE>
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
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.
Other investment advisory clients advised by the Adviser may also invest in the
same securities and the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transaction as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent of the Fund. The Fund pays Signature Services
an annual fee of $20.00 for each Class A shareholder and $22.50 for each Class B
shareholder, plus certain out-of-pocket expenses. These expenses are aggregated
and charged to the Fund and allocated to each class on the basis of their
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, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has been
selected as the independent auditors of the Fund. The financial statements and
financial highlights of the Fund included in the Prospectus and this Statement
of Additional Information have been audited by Ernst & Young LLP for the periods
indicated in their report thereon appearing elsewhere herein, and are included
in reliance on their report given on their authority of such firm as experts in
accounting and auditing.
48
<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 1997. It gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields.
<TABLE>
<CAPTION>
TAX-FREE YIELDS 1998 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>
$0-$25,350 $0-$42,350 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
$25,351-61,400 $42,351-102,300 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
$61,401-128,100 $102,301-155,950 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
$128,101-278,450 $155,951-278,450 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
over $278,450 over $278,450 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 phase out 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, it 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
Mode'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 Be 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 & Pool'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 & Pool'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.
Mode's ratings for state and municipal notes and other short-term loans
are designated Mode's Investment Grade (MIDGE). 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:
MIDGE 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.
MIDGE 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>
MIDGE 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 & Pool's ratings for state and municipal notes and other
short-term loans are designated Standard & Pool'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 maturates 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
The financial statements listed below are included in each Fund's 1997 Annual
Report to Shareholders for the year ended August 31, 1997; (filed electronically
on November 4, 1997, accession number 0001010521-97-000413) and are included in
and incorporated by reference into Part B of the Registration Statement for John
Hancock Tax-Free Bond Trust (file nos. 811-5968 and 33-32246).
John Hancock Tax-Free Bond Fund
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statement of Change in Net Assets for the period ended August 31, 1997.
Financial Highlights for the eights years in the period ended August 31, 1997.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1997.
Report of Independent Auditors.
F-1
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the John Hancock
Tax-Free Bond and John Hancock High Yield Tax-Free Fund 1997 Annual Reports to
Shareholders for the year ended August 31, 1997 (filed electronically on
November 4, 1997; file nos. 811-5968 and 33-32246 accession number
0001010521-97-000413).
John Hancock Tax Free Bond Fund
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations of the year ended August 31, 1997.
Statement of Changes in Net Asset for each of the two years in the period
ended August 31, 1997.
Notes to Financial Statements.
Financial Highlights for each of the eight years in the period ended
August 31, 1997.
Schedule of Investments as of August 31, 1997.
Report of Independent Auditors.
John Hancock High Yield Tax Free Fund
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations of the year ended August 31, 1997.
Statement of Changes in Net Asset for each of the two years in the period
ended August 31, 1997.
Notes to Financial Statements.
Financial Highlights for each of the eleven years in the period ended
August 31, 1997.
Schedule of Investments as of August 31, 1997.
Report of Independent Auditors.
C-1
<PAGE>
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities
As of December 1, 1997, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Tax-Free Bond Fund
Class A Shares - 30,289
Class B Shares - 7,092
High Yield Tax-Free
Class A Shares - 1,315
Class B Shares - 3,588
Item 27. Indemnification
(a) Indemnification provisions relating to the Registrant's Trustees,
officers, employees and agents is set forth in Article VII of the Registrant's
By Laws included as Exhibit 2 herein.
C-2
<PAGE>
(b) Under Section 12 of the Distribution Agreement, John Hancock Funds,
Inc. ("John Hancock Funds" ) has agreed to indemnify the Registrant and its
Trustees, officers and controlling persons against claims arising out of certain
acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company
"Insurance Company" provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the of the Insurance Company who serves as a Trustee or
officer of the Registrant at the direction or request of the Insurance Company
against litigation expenses and liabilities incurred while acting as such,
except that such indemnification does not cover any expense or liability
incurred or imposed in connection with any matter as to which such person shall
be finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Insurance Company. In addition,
no such person will be indemnified by the Insurance Company in respect of any
liability or expense incurred in connection with any matter settled without
final adjudication unless such settlement shall have been approved as in the
best interests of the Insurance Company either by vote of the Board of Directors
at a meeting composed of directors who have no interest in the outcome of such
vote, or by vote of the policyholders. The Insurance Company may pay expenses
incurred in defending an action or claim in advance of its final disposition,
but only upon receipt of an undertaking by the person indemnified to repay such
payment if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc.("the Adviser") provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
corporation, or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws, the
Distribution Agreement, the By-Laws of John Hancock Funds, the Adviser, or the
Insurance Company or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
C-3
<PAGE>
against policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Investment
Adviser, reference is made to Forms ADV (801-8124) filed under the Investment
Advisers Act of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Cash Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Declaration Trust, John Hancock Series Trust, John Hancock Tax-Free Bond
Trust, John Hancock California Tax-Free Income Fund, John Hancock Capital
Series, John Hancock Special Equities Fund, John Hancock Sovereign Bond Fund,
John Hancock Tax-Exempt Series, John Hancock Strategic Series, John Hancock
World Fund, John Hancock Investment Trust, John Hancock Institutional Series
Trust, John Hancock Investment Trust II, John Hancok Investment Trust III.
(b) The following table lists, for each director and officer of John
Hancock Funds, the information indicated.
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. President, Chief Executive Chairman
101 Huntington Avenue Officer and Director
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Compliance Officer
P.O. Box 111
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman, Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Anne C. Hodson Director and Executive President
101 Huntington Avenue President
Boston, Massachusetts
Osbert M. Hood Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Senior Vice President and Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Albuquerque, New Mexico
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
Keith F. Hartstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Christopher M. Meyer Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Richard O. Hanson Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Benintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
Gary Cronin Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kristine Pancare Vice President None
101 Huntington Avenue
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-6
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Underwriter
- ---------------- ---------------- ----------------
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-7
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Underwriter
- ---------------- ---------------- ----------------
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
Registrant maintains the records required to be maintained by it under
Rules 31a-1 (a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 101 Huntington Avenue, Boston
Massachusetts 02199-7603. Certain records, including records relating to
the Registrant's shareholders and the physical possession of its
securities, may be maintained pursuant to Rule 31a-3 at the main offices of
the Registrant's Transfer Agent and Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus with respect to a series of the Registrant is delivered with a copy
of the latest annual report to shareholders with respect to that series upon
request and without charge.
(d) The Registrant undertakes to comply with Section 16(c) of the
Investment Company Act of 1940, as amended which relates to the assistance to be
rendered to shareholders by the Trustees of the Registrant in calling a meeting
of shareholders for the purpose of voting upon the question of the removal of a
trustee.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Boston, and the Commonwealth of Massachusetts on
the 22nd day of December, 1997.
JOHN HANCOCK TAX-FREE BOND TRUST
By: *
------------------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*
- ------------------------ Chairman and Chief Executive
Edward J. Boudreau, Jr. Officer (Principal Executive Officer)
/s/James B. Little
- ------------------------ Senior Vice President and Chief December 22, 1997
James B. Little Financial Officer (Principal
Financial and Accounting Officer)
*
- ------------------------ Trustee
James F. Carlin
*
- ------------------------ Trustee
William H. Cunningham
*
- ------------------------ Trustee
Charles F. Fretz
*
- ------------------------ Trustee
Harold R. Hiser, Jr.
C-9
<PAGE>
Signature Title Date
--------- ----- ----
*
- ------------------------ Trustee
Anne C. Hodsdon
*
- ------------------------ Trustee
Charles L. Ladner
*
- ------------------------ Trustee
Leo E. Linbeck, Jr.
*
- ------------------------ Trustee
Patricia P. McCarter
*
- ------------------------ Trustee
Steven R. Pruchansky
*
- ------------------------ Trustee
Norman H. Smith
*
- ------------------------ Trustee
Richard S. Scipione
*
- ------------------------ Trustee
John P. Toolan
*By: /s/ Susan S. Newton December 22, 1997
-------------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
June 25, 1996.
</TABLE>
C-10
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
99.B1 Amended and Restated Declaration of Trust dated July 1, 1996.***
99.B2 Amended and Restated By-Laws dated November 19, 1996.***
99.B3 None
99.B4.1 Specimen share certificate for Registrant (Classes A and B).*
99.B5 Investment Advisory Agreement between John Hancock Advisers,
Inc. and the Registrant.*
99.B5.1 Investment Management Contract between High Yield Tax-Free Fund
and John Hancock Advisers, Inc. dated September 30, 1996.***
99.B6 Distribution Agreement between John Hancock Funds, Inc. and the
Registrant.*
99.B6.1 Amendment to Distribution Agreement dated September 30, 1996.***
99.B6.1 Form of Financial Institution Sales and Service Agreement.*
99.B6.2 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services, Inc. and Selected Dealers.*
99.B7 None
99.B8 Master Custodian Agreement with Investors Bank and Trust Company
Bank.*
99.B9 Transfer Agency and Service Agreement with John Hancock Fund
Services, Inc.*
99.B9.1 Amendment to Transfer Agency and Service Fee Agreement dated
September 30, 1996.***
99.B10 Not applicable.
99.B11 Independent Auditor's Consents.+
99.B12 None
99.B13 None
C-11
<PAGE>
99.B15 Class A Distribution Plan between Tax-Free Bond Fund and John
Hancock Funds, Inc. dated June 26, 1996.*
99.B15.1 Class B Distribution Plan between Tax-Free Bond Fund and John
Hancock Funds, Inc.*
99.B15.2 Class A Distribution Plan between High Yield Tax-Free Fund and
John Hancock Funds, Inc. dated September 30, 1996.***
99.B15.3 Class B Distribution Plan between High Yield Tax-Free Fund and
John Hancock Funds, Inc. dated September 30, 1996.***
99.B16 Working papers showing yield calculation for yield and total
return.**
27.1A High Yield Tax-Free - Annual+
27.1B High Yield Tax-Free - Annual+
27.2A Tax-Free Bond Fund - Annual+
27.2B Tax-Free Bond Fund - Annual+
* Previously filed electronically with post-effective amendment number 7
(file nos. 33-32246 and 811-5968) on February 24, 1995, accession number
00009500129-95-000095.
** Previously filed electronically with post-effective amendment number 8
(file nos. 33-32246 and 811-5968) on February 29, 1996, accession number
0000950135-96-001238.
*** Previously filed electronically with post-effective amendment number 12
(file nos. 33-32246 and 811-5968) on December 23, 1996, accession number
0001010521-96-000229.
+ Filed herewith
C-12
Consent of Ernst & Young LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for the John Hancock High Yield Tax-Free Fund and John Hancock
Tax-Free Bond Fund in the John Hancock Tax-Free Income Funds' Prospectus and
"Independent Auditors" in the John Hancock High Yield Tax-Free Fund Statement of
Additional Information and John Hancock Tax-Free Bond Fund Class A and Class B
Shares Statement of Additional Information and to the incorporation by reference
in Post-Effective Amendment No. 13 to Registration Statement (Form N-1A No.
33-32246) of our reports dated October 14, 1997 on the financial statements and
financial highlights of John Hancock High Yield Tax-Free Fund and John Hancock
Tax-Free Bond Fund.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
December 15, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> JOHN HANCOCK HIGH YIELD TAX-FREE FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
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<NAME> JOHN HANCOCK HIGH YIELD TAX-FREE FUND - CLASS B
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<NAME> JOHN HANCOCK TAX-FREE BOND FUND, CLASS A
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<NAME> JOHN HANCOCK TAX-FREE BOND FUND, CLASS B
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