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. 16 [X]
AND/OR
REGISTRATION STATEMENT UNDER [X]
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 20
(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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[x] on April 1, 1999 pursuant to paragraph (a) of Rule (485 or 486)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
- --------------------------------------------------------------------------------
JOHN HANCOCK
Tax-Free
Income Funds
[LOGO] Prospectus
April 1, 1999
- --------------------------------------------------------------------------------
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
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
- --------------------------------------------------------------------------------
A fund-by-fund summary California Tax-Free Income Fund 4
of goals, strategies, risks,
performance and expenses. 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 Choosing a share class 14
closing 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
Further information on the Fund details
tax-free income funds. Business structure 21
Financial highlights 22
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
JOHN HANCOCK 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 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.
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
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the FDIC
or any other government agency. Because you could lose money by investing in
these funds, be sure to read all risk disclosure carefully before investing.
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 $30 billion in
assets.
3
<PAGE>
California Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital that is exempt from federal and California personal
income taxes. In pursuing this goal, the fund normally invests at least 80% of
assets in California municipal debt obligations of any maturity. Although most
of these securities are investment grade when purchased, the fund may invest up
to 20% of assets in junk bonds rated BB/Ba and their unrated equivalents.
In managing its portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The management team
also favors bonds with limitations on whether they can be called, or redeemed,
by the issuer before maturity. This enables the management team to minimize the
effect of declining interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in April 1998
Joined adviser in 1986
Began career in 1986
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in April 1995
Joined adviser in 1989
Began career in 1984
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in April 1995
Joined adviser in 1988
Began career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The following table was represented as a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
6.69% 11.70% 9.06% 13.60% -9.29% 21.91% 4.48% 10.13% 6.65%
Best quarter: up 9.23%, first quarter 1995
Worst quarter: down 6.58%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 1.85% 0.85% -- 6.48%
5 years 5.32% 5.18% -- 6.61%
Life of fund 7.48% 6.91% -- 7.93%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
(1) Began operations on April 1, 1999.
4
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in California issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those regarding taxes) and the possibility of credit problems, such as the 1994
bankruptcy of Orange County.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o Junk bonds could make the fund more sensitive to market or economic
shifts.
o In a down market, certain securities could become harder to value or to
sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.55% 0.55% 0.55%
Distribution and service (12b-1) fees 0.15% 0.90% 0.90%
Other expenses 0.11% 0.11% 0.11%
Total fund operating expenses 0.81% 1.56% 1.56%
Expense reimbursement (at least until 1/1/00) 0.06% 0.06% 0.06%
Actual operating expenses 0.75% 1.50% 1.50%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $523 $691 $ 874 $1,401
Class B - with redemption $653 $808 $1,087 $1,725
- without redemption $153 $508 $ 887 $1,725
Class C - with redemption $253 $508 $ 887 $1,952
- without redemption $153 $508 $ 887 $1,952
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ------------------------
Ticker TACAX
CUSIP 41014R108
Newspaper CATFA
SEC number 811-5979
Class B
- ------------------------
Ticker TSCAX
CUSIP 41014R207
Newspaper CATFB
SEC number 811-5979
Class C
- ------------------------
Ticker --
CUSIP --
Newspaper --
SEC number 811-5979
5
<PAGE>
High Yield Tax-Free Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income that is largely exempt
from federal income tax consistent with preservation of capital. In pursuing
this goal, the fund normally invests at least 80% of assets in tax-exempt
municipal debt obligations of any maturity with credit ratings from A to BB/Ba
and their unrated equivalents. The fund may also invest up to 5% of assets in
bonds rated as low as CC/Ca and their unrated equivalents. Bonds that are in or
below the BB/Ba category are considered junk bonds.
In managing its portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The management team
also favors bonds with limitations on whether they can be called, or redeemed,
by the issuer before maturity. This enables the management team to minimize the
effect of declining interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in April 1998
Joined adviser in 1986
Began career in 1986
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in April 1995
Joined adviser in 1988
Began career in 1982
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in April 1995
Joined adviser in 1989
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The following table was represented as a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
7.50% 3.80% 12.30% 8.35% 11.58% -5.70% 18.89% 0.60% 8.81% 4.69%
Best quarter: up 7.62%, first quarter 1995
Worst quarter: down 4.18%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 0.73% -0.30% -- 6.48%
5 years -- 4.82% -- 6.61%
10 years -- 6.98% -- 8.22%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
(1) Began operations on April 1, 1999.
6
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Because their issuers are often in relatively weak financial health, junk bonds
could make the fund more sensitive to market or economic shifts, and to the risk
of default of a particular bond. In general, investors should expect
fluctuations in share price, yield and total return that are above average for
bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o If the fund invests heavily in securities from a given state or region,
its performance could be disproportionately affected by political or
demographic factors in that state or region.
o In a down market, certain securities could become harder to value or to
sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.58% 0.58% 0.58%
Distribution and service (12b-1) fees 0.25% 1.00% 1.60%
Other expenses 0.17% 0.17% 0.17%
Total fund operating expenses 1.00% 1.75% 1.75%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $547 $754 $ 978 $1,620
Class B - with redemption $678 $851 $1,149 $1,864
- without redemption $178 $551 $ 949 $1,864
Class C - with redemption $278 $551 $ 949 $2,062
- without redemption $178 $551 $ 949 $2,062
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ------------------------
Ticker JHTFX
CUSIP 41013Y302
Newspaper --
SEC number 811-5968
Class B
- ------------------------
Ticker TSHTX
CUSIP 41013Y401
Newspaper HYTFB
SEC number 811-5968
Class C
- ------------------------
Ticker --
CUSIP --
Newspaper --
SEC number 811-5968
7
<PAGE>
Massachusetts Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income, consistent with
preservation of capital, that is exempt from federal and Massachusetts personal
income taxes.
In pursuing its goal, the fund normally invests at least 80% of assets in
Massachusetts municipal debt obligations of any maturity. Most of these
securities have credit ratings of A or higher when purchased, but the fund may
invest up to 33.3% of assets in securities rated BBB/Baa or BB/Ba and their
unrated equivalents. Bonds that are in or below the BB/Ba category are
considered junk bonds.
In managing its portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The management team
also favors bonds with limitations on whether they can be called, or redeemed,
by the issuer before maturity. This enables the management team to minimize the
effect of declining interest rates on the fund's income. The fund is
non-diversified and may invest more than 5% of assets in securities of a single
issuer.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in April 1998
Joined adviser in 1986
Began career in 1986
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in April 1995
Joined adviser in 1989
Began career in 1984
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in April 1995
Joined adviser in 1988
Began career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The following table was represented as a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
8.64% 4.39% 13.56% 9.50% 12.71% -5.51% 16.36% 4.27% 9.34% 7.06%
Best quarter: up 6.68%, first quarter 1995
Worst quarter: down 6.07%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 2.27% 1.31% -- 6.48%
5 years 5.09% -- -- 6.61%
10 years 7.37% -- -- 8.22%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
(1) Began operations on April 1, 1999.
8
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in Massachusetts issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those affecting taxes) and the possibility of credit problems.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o If the fund invests heavily in a single issuer, its performance could
suffer significantly from adverse events affecting that issuer.
o Junk bonds could make the fund more sensitive to market or economic
shifts.
o In a down market, certain securities could become harder to value or to
sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.30% 0.30% 0.30%
Total fund operating expenses 1.10% 1.80% 1.80%
Expense reimbursement (at least until 1/1/00) 0.40% 0.40% 0.40%
Actual operating expenses 0.70% 1.40% 1.40%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $518 $746 $ 992 $1,696
Class B - with redemption $643 $828 $1,138 $1,898
- without redemption $143 $528 $ 938 $1,898
Class C - with redemption $243 $528 $ 938 $2,083
- without redemption $143 $528 $ 938 $2,083
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ------------------------
Ticker JHMAX
CUSIP 410229207
Newspaper MATFA
SEC number 811-5079
Class B
- ------------------------
Ticker JHMBX
CUSIP 410229405
Newspaper --
SEC number 811-5079
Class C
- ------------------------
Ticker --
CUSIP --
Newspaper --
SEC number 811-5079
9
<PAGE>
New York Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital, that is exempt from federal, New York State and New
York City personal income taxes.
In pursuing its goal, the fund normally invests at least 80% of assets in New
York municipal debt obligations of any maturity. Most of these securities have
credit ratings of A or higher when purchased, but the fund may invest up to
33.3% of assets in bonds rated BBB/Baa or BB/Ba and their unrated equivalents.
Bonds that are in or below the BB/Ba category are considered junk bonds.
In managing its portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The management team
also favors bonds with limitations on whether they can be called, or redeemed,
by the issuer before maturity. This enables the management team to minimize the
effect of declining interest rates on the fund's income. The fund is
non-diversified and may invest more than 5% of assets in securities of a single
issuer.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in April 1998
Joined adviser in 1986
Began career in 1986
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in April 1995
Joined adviser in 1988
Began career in 1982
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in April 1995
Joined adviser in 1989
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-to-year and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The following table was represented as a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
9.06% 4.77% 13.63% 9.45% 13.78% -6.48% 17.09% 3.65% 9.50% 6.28%
Best quarter: up 6.64%, first quarter 1995
Worst quarter: down 5.54%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 1.49% 0.54% -- 6.48%
5 years 4.76% -- -- 6.61%
10 years 7.39% -- -- 8.22%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
(1) Began operations on April 1, 1999.
10
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in New York issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those affecting taxes) and the legacy of past credit problems of New York City
and other issuers.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o Junk bonds could make the fund more sensitive to market or economic
shifts.
o If the fund invests heavily in a single issuer, its performance could
suffer significantly from adverse events affecting that issuer.
o In a down market, certain securities could become harder to value or to
sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.30% 0.30% 0.30%
Total fund operating expenses 1.10% 1.80% 1.80%
Expense reimbursement (at least until 1/1/00) 0.40% 0.40% 0.40%
Actual operating expenses 0.70% 1.40% 1.40%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $518 $746 $ 992 $1,696
Class B - with redemption $643 $828 $1,138 $1,898
- without redemption $143 $528 $ 938 $1,898
Class C - with redemption $243 $528 $ 938 $2,083
- without redemption $143 $528 $ 938 $2,083
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ------------------------
Ticker JHNYX
CUSIP 410229306
Newspaper NYTFA
SEC number 811-5079
Class B
- ------------------------
Ticker JNTRX
CUSIP 410229504
Newspaper --
SEC number 811-5079
Class C
- ------------------------
Ticker --
CUSIP --
Newspaper --
SEC number 811-5079
11
<PAGE>
Tax-Free Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks as high a level of interest income exempt from federal
income tax as is consistent with preservation of capital. In pursuing this goal,
the fund normally invests at least 80% of assets in tax-exempt municipal debt
obligations of any maturity. Most of these bonds are investment grade when
purchased, but the fund may also invest up to 35% of assets in junk bonds rated
BB/Ba or B and their unrated equivalents.
In managing its portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The fund may invest up
to 25% of assets in private activity bonds.
The management team also favors bonds with limitations on whether they can be
called, or redeemed, by the issuer before maturity. This enables the management
team to minimize the effect of declining interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in April 1998
Joined adviser in 1986
Began career in 1986
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in April 1995
Joined adviser in 1989
Began career in 1984
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in April 1995
Joined adviser in 1988
Began career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-to-year and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The following table was represented as a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998
14.97% 10.95% 15.15% -9.26% 20.22% 4.15% 9.81% 5.50%
Best quarter: up 8.82%, first quarter 1995
Worst quarter: down 7.06%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 0.80% -0.28% -- 6.48%
5 years 4.67% 4.53% -- 6.61%
Life of fund 7.74% 6.90% -- 8.22%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
(1) Began operations on April 1, 1999.
12
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Junk bonds may make the fund more sensitive to market or economic shifts. The
fund could lose money if any bonds it owns are downgraded in credit rating or go
into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in other securities with additional risks,
those risks could increase volatility or reduce performance:
o If the fund invests heavily in securities from a given state or region,
its performance could be disproportionately affected by political or
demographic factors in that state or region.
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o In a down market, certain securities could become harder to value or to
sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.53% 0.53% 0.53%
Distribution and service (12b-1) fees 0.15% 0.90% 0.90%
Other expenses 0.19% 0.19% 0.19%
Total fund operating expenses 0.87% 1.62% 1.62%
Expense reimbursement (at least until 1/1/00) 0.02% 0.02% 0.02%
Actual operating expenses 0.85% 1.60% 1.60%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $533 $734 $ 951 $1,576
Class B - with redemption $663 $830 $1,122 $1,821
- without redemption $163 $530 $ 922 $1,821
Class C - with redemption $263 $530 $ 922 $2,020
- without redemption $163 $530 $ 922 $2,020
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ------------------------
Ticker TAMBX
CUSIP 41013Y104
Newspaper TFBdA
SEC number 811-5968
Class B
- ------------------------
Ticker TSMBX
CUSIP 41013Y203
Newspaper TFBdB
SEC number 811-5968
Class C
- ------------------------
Ticker --
CUSIP --
Newspaper --
SEC number 811-5968
13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure. Each class of the funds has adopted
a Rule 12b-1 plan that allows the fund to pay fees for the sale and distribution
of its shares. Your financial representative can help you decide which share
class is best for you.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o Front-end sales charges, as described below.
o Distribution and service (12b-1) fees of 0.15% for California Tax-Free
Income and Tax-Free Bond, 0.25% for High Yield Tax-Free and 0.30% for
Massachusetts Tax-Free Income and New York Tax-Free Income.
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00% (0.90% for California
Tax-Free Income and Tax-Free Bond).
o A deferred sales charge, as described at right.
o Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00%.
o A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, Class B and Class C
shareholders could end up paying more expenses over the long term than if they
had paid a sales charge.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
- --------------------------------------------------------------------------------
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 next column
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
- --------------------------------------------------------------------------------
CDSC on shares
Your investment 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 and Class C Shares are offered at their net asset value per share,
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares you sell within a certain time after you
bought them, as described in the tables below. 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, which-ever
is less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on shares
purchase being sold
1st year 5.00%
2nd year 4.00%
3rd year 3.00%
4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6 years none
- --------------------------------------------------------------------------------
Class C deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1 year none
For purposes of these CDSCs, 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
14 YOUR ACCOUNT
<PAGE>
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.
- --------------------------------------------------------------------------------
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. Retirement plans investing $1 million in
Class B shares may add that value to Class A purchases to calculate
charges.
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, or consult the SAI (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 each 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
o to purchase a John Hancock Declaration annuity
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
Reinstatement privilege If you sell shares of a John Hancock fund, you may
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 selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed 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 certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 eligible
employees (one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI (see the back cover of this prospectus).
- --------------------------------------------------------------------------------
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: $250
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 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
[Clip Art] o Make out a check for the o Make out a check for the
investment amount, payable investment amount payable
to "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 investment slip from an
your financial account statement. If no
representative, or mail them slip is available, include
to Signature Services a note specifying the fund
(address below). 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 below).
By exchange
[Clip Art] 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
[Clip Art] o Deliver your completed o Instruct your bank to wire
application to your the amount of your
financial representative, investment to:
or mail it to Signature First Signature Bank
Services. & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial
representative or Signature Specify the fund name, your
Services. share class, your account
number and the name(s) in
o Instruct your bank to wire which the account is
the amount of your registered. Your bank may
investment to: charge a fee to wire funds.
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
[Clip Art] 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.
----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
----------------------------------------
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
[Clip Art] o Accounts of any type. o Write a letter of
instruction or complete a
o Sales of any amount. 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
[Clip Art] o Most accounts. o For automated service 24
hours a day using your
o Sales of up to $100,000. touch-tone phone, call the
EASI-Line at 1-800-338-8080.
o To place your order, call
your financial representative
or Signature Services between
8 A.M. and 4 P.M. Eastern Time
on most business days.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to sell o To verify that the
any amount (accounts of any telephone redemption
type). privilege is in place on an
account, or to request the
o Requests by phone to sell form to add it to an
up to $100,000 (accounts existing account, call
with telephone redemption Signature Services.
privileges).
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
[Clip Art] o Accounts of any type. o Obtain a current prospectus
for the fund into which you
o Sales of any amount. are exchanging by calling
your financial
representative or Signature
Services.
o Call your financial
representative or Signature
Services to request an
exchange.
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 will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip Art]
- --------------------------------------------------------------------------------
Owners of individual, joint, sole o Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general o On the letter, the signatures and
partner accounts. titles of all persons authorized to
sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or association o Letter of instruction.
accounts.
o Corporate resolution, certified
within the past 12 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 Provide a copy of the trust
document certified within the past
12 months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders with rights o Letter of instruction signed by
of survivorship whose co-tenants are surviving tenant.
deceased.
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,
certified within the past 12
months.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or account instructions.
types not listed above.
----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
----------------------------------------
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable.
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. 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 and Class
C 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
the new fund's rate if that 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.
Capital gains, if any, are distributed annually, typically after the end of a
fund's fiscal year. Most of these funds' dividends are income dividends. Your
dividends begin accruing the day after payment is received by the fund and
continue through the day your shares are actually sold.
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.
YOUR ACCOUNT 19
<PAGE>
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-term capital gains are taxable as ordinary income.
Dividends from a fund's long-term capital gains are taxable at a lower rate.
Whether gains are short-term or long-term depends on the fund's holding period.
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.
Year 2000 compliance The adviser and the funds' service providers are taking
steps to address any year 2000-related computer problems. However, there is some
risk that these problems could disrupt the funds' operations or financial
markets generally.
- --------------------------------------------------------------------------------
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 payments 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 retirement plans,
including traditional, Roth and Education IRAs, SIMPLE plans, SEPs, 401(k) plans
and other pension and profit-sharing plans. Using these plans, you can invest in
any John Hancock fund with a low minimum investment of $250 or, for some group
plans, no minimum investment at all. Because of certain tax implications,
tax-free income funds are not appropriate investments for qualified retirement
plans.
20 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the John Hancock
tax-free income funds. Each fund's board of trustees oversees the fund's
business activities and retains the services of the various firms that carry out
the fund's operations.
The trustees of the Massachusetts Tax-Free Income and New York Tax-Free Income
funds have power to change these funds' respective investment goals without
shareholder approval.
Management fees The management fees paid to the investment adviser by the John
Hancock tax-free income funds last year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
California Tax-Free Income Fund 0.48%
High Yield Tax-Free Fund 0.58%
Massachusetts Tax-Free Income Fund 0.11%
New York Tax-Free Income Fund 0.10%
Tax-Free Bond Fund 0.52%
[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.
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
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.
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
These tables detail the performance of each fund's share classes, including
total return information showing how much an investment in the fund has
increased or decreased each year.
California Tax-Free Income Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94(1) 12/95 8/96(2) 8/97 8/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.41 $10.85 $9.28 $10.69 $10.36 $10.77
Net investment income (loss) 0.62 0.58 0.57(3) 0.39(3) 0.57(3) 0.56(3)
Net realized and unrealized gain (loss) on investments
and financial futures contracts 0.76 (1.57) 1.41 (0.33) 0.41 0.42
Total from investment operations 1.38 (0.99) 1.98 0.06 0.98 0.98
Less distributions:
Dividends from net investment income (0.62) (0.58) (0.57) (0.39) (0.57) (0.56)
Distributions from net realized gain on investments
sold and financial futures contracts (0.32) -- -- -- -- --
Total distributions (0.94) (0.58) (0.57) (0.39) (0.57) (0.56)
Net asset value, end of period $10.85 $9.28 $10.69 $10.36 $10.77 $11.19
Total investment return at net asset value(4) (%) 13.60 (9.31) 21.88 0.61(5) 9.71 9.32
Total adjusted investment return at net asset
value(4,6) (%) 13.42 (9.45) 21.73 0.55(5) 9.64 9.26
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 279,692 241,583 309,305 291,072 291,167 300,483
Ratio of expenses to average net assets (%) 0.69 0.75 0.75 0.76(7,8) 0.75 0.77(8)
Ratio of adjusted expenses to average net assets(9) (%) 0.87 0.89 0.90 0.84(7) 0.82 0.83
Ratio of net investment income (loss) to average net
assets (%) 5.69 5.85 5.76 5.57(7) 5.42 5.05
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 5.51 5.71 5.61 5.48(7) 5.35 4.99
Portfolio turnover rate (%) 51 62 37(10) 30 15 10
Fee reduction per share ($) 0.02 0.01 0.01(3) 0.01(3) 0.01(3) 0.01(3)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93 12/94(1) 12/95 8/96(2) 8/97 8/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.41 $10.85 $9.28 $10.68 $10.36 $10.77
Net investment income (loss) 0.54 0.51 0.50(3) 0.33(3) 0.49(3) 0.47(3)
Net realized and unrealized gain (loss) on investments
and financial futures contracts 0.76 (1.57) 1.40 (0.31) 0.41 0.42
Total from investment operations 1.30 (1.06) 1.90 0.02 0.90 0.89
Less distributions:
Dividends from net investment income (0.54) (0.51) (0.50) (0.34) (0.49) (0.47)
Distributions from net realized gain on investments
sold and financial futures contracts (0.32) -- -- -- -- --
Total distributions (0.86) (0.51) (0.50) (0.34) (0.49) (0.47)
Net asset value, end of period $10.85 $9.28 $10.68 $10.36 $10.77 $11.19
Total investment return at net asset value(4) (%) 12.76 (9.99) 20.87 0.20(5) 8.88 8.50
Total adjusted investment return at net asset
value(4,6) (%) 12.58 (10.13) 20.72 0.14(5) 8.81 8.44
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 65,437 77,365 84,673 83,253 89,493 98,572
Ratio of expenses to average net assets (%) 1.44 1.50 1.50 1.52(7,8) 1.50 1.52(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.62 1.64 1.65 1.59(7) 1.57 1.58
Ratio of net investment income (loss) to average net
assets (%) 4.82 5.10 4.97 4.81(7) 4.66 4.29
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 4.64 4.96 4.82 4.72(7) 4.59 4.23
Portfolio turnover rate (%) 51 62 37(10) 30 15 10
Fee reduction per share ($) 0.02 0.01 0.01(3) 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 end 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 periods ended August 31, 1996 and August 31, 1998, the ratio of
expenses to average net assets for the fund excludes the effect of expense
reductions. If expense reductions had been included, the ratio of expenses
to average net assets would have been 0.75% and 1.50% for Class A and
Class B, respectively.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover rate excludes merger activity.
22 FUND DETAILS
<PAGE>
High Yield Tax-Free Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 8/96(3) 8/97 8/98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.85 $8.82 $9.47 $9.16 $9.34
Net investment income (loss) 0.48(4) 0.57 0.49(4) 0.56(4) 0.54(4)
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts (0.94) 0.70 (0.30) 0.18 0.31
Total from investment operations (0.46) 1.27 0.19 0.74 0.85
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50) (0.56) (0.54)
Distributions in excess of net investment income (0.09) (0.04) -- -- --
Total distributions (0.57) (0.62) (0.50) (0.56) (0.54)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65
Total investment return at net asset value(5) (%) 4.96(6) 14.85 1.96(6) 8.29 9.34
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,401 14,225 23,663 32,199 40,725
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.10(7) 1.06 1.00(8)
Ratio of net investment income (loss) to average
net assets (%) 6.08(7) 6.36 6.39(7) 6.00 5.66
Portfolio turnover rate (%) 62 64 38 51 35
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2) 8/96(3) 8/97 8/98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.39 $9.98 $8.82 $9.47 $9.16 $9.34
Net investment income (loss) 0.53 0.48 0.51 0.44(4) 0.49(4) 0.47(4)
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts 0.72 (0.90) 0.69 (0.31) 0.18 0.31
Total from investment operations 1.25 (0.42) 1.20 0.13 0.67 0.78
Less distributions:
Dividends from net investment income (0.56) (0.48) (0.51) (0.44) (0.49) (0.47)
Distributions in excess of net investment income -- (0.07) (0.04) -- -- --
Distributions from net realized gain on
investments sold (0.10) (0.19) -- -- -- --
Total distributions (0.66) (0.74) (0.55) (0.44) (0.49) (0.47)
Net asset value, end of period $9.98 $8.82 $9.47 $9.16 $9.34 $9.65
Total investment return at net asset value(5) (%) 13.69 (4.44) 13.99 1.36(6) 7.51 8.53
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 113,442 151,069 155,234 147,669 139,385 131,497
Ratio of expenses to average net assets (%) 2.06 1.85 1.79 1.81(7) 1.81 1.75(8)
Ratio of net investment income to average
net assets (%) 5.23 5.36 5.61 5.65(7) 5.28 4.92
Portfolio turnover rate (%) 100 62 64 38 51 35
</TABLE>
(1) Class A shares began 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) The ratio of expenses to average net assets for the year ended August 31,
1998 excludes the effect of balance credits. If these expense reductions
had been included, the effect on the ratio of expenses to average net
assets would have been less than 0.01% for Class A and Class B shares.
FUND DETAILS 23
<PAGE>
Massachusetts Tax-Free Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/94 8/95 8/96 8/97 8/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $12.43 $11.56 $11.76 $11.66 $12.12
Net investment income (loss) 0.63 0.65 0.65 0.66 0.66(1)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.75) 0.20 (0.10) 0.46 0.48
Total from investment operations (0.12) 0.85 0.55 1.12 1.14
Less distributions:
Dividends from net investment income (0.63) (0.65) (0.65) (0.66) (0.66)
Distributions from net realized gain on
investments sold (0.12) -- -- -- --
Total distributions (0.75) (0.65) (0.65) (0.66) (0.66)
Net asset value, end of period $11.56 $11.76 $11.66 $12.12 $12.60
Total investment return at net asset value(2) (%) (0.97) 7.66 4.78 9.85 9.66
Total adjusted investment return at net asset
value(2,3) (%) (1.50) 7.21 4.30 9.45 9.27
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 54,122 54,416 55,169 54,253 58,137
Ratio of expenses to average net assets (%) 0.70 0.70 0.75(4) 0.71(4) 0.71(4)
Ratio of adjusted expenses to average net assets(5) (%) 1.23 1.15 1.18 1.11 1.10
Ratio of net investment income (loss) to average
net assets (%) 5.28 5.67 5.53 5.59 5.28
Ratio of adjusted net investment income (loss) to
average net assets(5) (%) 4.75 5.22 5.05 5.19 4.89
Portfolio turnover rate (%) 29 24 36 12 6
Fee reduction per share ($) 0.06 0.05 0.06 0.05 0.05(1)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Class B - period ended: 8/97(6) 8/98
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.84 $12.12
Net investment income (loss) 0.54 0.57(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.28 0.48
Total from investment operations 0.82 1.05
Less distributions:
Dividends from net investment income (0.54) (0.57)
Net asset value, end of period $12.12 $12.60
Total investment return at net asset value(2) (%) 7.08(7) 8.89
Total adjusted investment return at net asset value(2,3) (%) 6.72(7) 8.50
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,418 6,197
Ratio of expenses to average net assets (%) 1.41(4,8) 1.41(4)
Ratio of adjusted expenses to average net assets(5) (%) 1.81(8) 1.80
Ratio of net investment income (loss) to average net assets (%) 4.82(8) 4.58
Ratio of adjusted net investment income (loss) to average net assets(5) (%) 4.42(8) 4.19
Portfolio turnover rate (%) 12 6
Fee reduction per share ($) 0.04 0.05(1)
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(4) For the periods ended on or after August 31, 1996, the ratio of expenses
to average net assets for the fund excludes the effect of expense offsets.
If expense offsets had been included, the ratio of expenses to average net
assets would have been 0.70% and 1.40% for Class A and Class B,
respectively.
(5) Unreimbursed, without fee reduction.
(6) Class B shares began operations on October 3, 1996.
(7) Not annualized.
(8) Annualized.
24 FUND DETAILS
<PAGE>
New York Tax-Free Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/94 8/95 8/96 8/97 8/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $12.63 $11.73 $11.88 $11.83 $12.25
Net investment income (loss) 0.64 0.65 0.66 0.67 0.66(1)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.77) 0.15 (0.05) 0.42 0.37
Total from investment operations (0.13) 0.80 0.61 1.09 1.03
Less distributions:
Dividends from net investment income (0.64) (0.65) (0.66) (0.67) (0.66)
Distributions from net realized gain on
investments sold (0.13) -- -- -- --
Total distributions (0.77) (0.65) (0.66) (0.67) (0.66)
Net asset value, end of period $11.73 $11.88 $11.83 $12.25 $12.62
Total investment return at net asset value(2) (%) (1.05) 7.19 5.21 9.48 8.64
Total adjusted investment return at net asset
value(2,3) (%) (1.58) 6.74 4.77 9.08 8.24
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 55,690 55,753 56,229 54,086 52,373
Ratio of expenses to average net assets (%) 0.70 0.70 0.73(4) 0.71(4) 0.70
Ratio of adjusted expenses to average net assets(5) (%) 1.23 1.15 1.14 1.11 1.10
Ratio of net investment income (loss) to average
net assets (%) 5.28 5.67 5.51 5.61 5.26
Ratio of adjusted net investment income (loss) to
average net assets(5) (%) 4.75 5.22 5.07 5.21 4.86
Portfolio turnover rate (%) 23 70 76 46 46
Fee reduction per share ($) 0.06 0.05 0.05 0.05 0.05(1)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Class B - period ended: 8/97(6) 8/98
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.99 $12.25
Net investment income (loss) 0.54 0.57(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.26 0.37
Total from investment operations 0.80 0.94
Less distributions:
Dividends from net investment income (0.54) (0.57)
Net asset value, end of period $12.25 $12.62
Total investment return at net asset value(2) (%) 6.82(7) 7.88
Total adjusted investment return at net asset value(2,3) (%) 6.46(7) 7.48
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2.414 5,824
Ratio of expenses to average net assets (%) 1.41(4,8) 1.40
Ratio of adjusted expenses to average net assets(5) (%) 1.81(8) 1.80
Ratio of net investment income (loss) to average net assets (%) 4.79(8) 4.56
Ratio of adjusted net investment income (loss) to average net assets(5) (%) 4.39(8) 4.16
Portfolio turnover rate (%) 46 46
Fee reduction per share ($) 0.04 0.05(1)
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(4) For the periods ended on or after August 31, 1996, the ratio of expenses
to average net assets for the fund excludes the effect of expense offsets.
If expense offsets had been included, the ratio of expenses to average net
assets would have been 0.70% and 1.40% for Class A and Class B,
respectively.
(5) Unreimbursed, without fee reduction.
(6) Class B shares began operations on October 3, 1996.
(7) Not annualized.
(8) Annualized.
FUND DETAILS 25
<PAGE>
Tax-Free Bond Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94(1) 12/95 8/96(2) 8/97 8/98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.47 $10.96 $9.39 $10.67 $10.27 $10.63
Net investment income (loss) 0.62 0.58 0.57(3) 0.40 0.59 0.56(3)
Net realized and unrealized gain (loss) on investments 0.93 (1.58) 1.28 (0.41) 0.36 0.38
Total from investment operations 1.55 (1.00) 1.85 (0.01) 0.95 0.94
Less distributions:
Dividends from net investment income (0.62) (0.57) (0.57) (0.39) (0.59) (0.56)
Distributions from net realized gain on
investments sold (0.44) -- -- -- -- --
Total distributions (1.06) (0.57) (0.57) (0.39) (0.59) (0.56)
Net asset value, end of period $10.96 $9.39 $10.67 $10.27 $10.63 $11.01
Total investment return at net asset value(4) (%) 15.15 (9.28) 20.20 (0.01)(5) 9.44 9.08
Total adjusted investment return at net asset
value(4,6) (%) 14.98 (9.39) 20.08 (0.09)(5) 9.38 9.06
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 136,521 114,539 118,797 560,863 590,185 600,905
Ratio of expenses to average net assets (%) 0.78 0.85 0.85 0.85(7) 0.85 0.85
Ratio of adjusted expenses to average net assets(8) (%) 0.95 0.96 0.97 0.98(7) 0.91 0.87
Ratio of net investment income (loss) to average net
assets (%) 5.57 5.72 5.67 5.75(7) 5.61 5.16
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) 5.40 5.61 5.55 5.62(7) 5.55 5.14
Portfolio turnover rate (%) 116 107 113 116(9) 46(9) 24
Fee reduction per share ($) 0.02 0.01 0.01(3) 0.01(3) 0.01 0.01(3)
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93 12/94(1) 12/95 8/96(2) 8/97 8/98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.47 $10.96 $9.38 $10.67 $10.27 $10.63
Net investment income 0.54 0.50 0.50(3) 0.34 0.51 0.48(3)
Net realized and unrealized gain (loss) on investments 0.93 (1.58) 1.28 (0.40) 0.36 0.38
Total from investment operations 1.47 (1.08) 1.78 (0.06) 0.87 0.86
Less distributions:
Dividends from net investment income (0.54) (0.50) (0.49) (0.34) (0.51) (0.48)
Distributions from net realized gain on
investments sold (0.44) -- -- -- -- --
Total distributions (0.98) (0.50) (0.49) (0.34) (0.51) (0.48)
Net asset value, end of period $10.96 $9.38 $10.67 $10.27 $10.63 $11.01
Total investment return at net asset value(4) (%) 14.30 (10.05) 19.41 (0.51)(5) 8.63 8.27
Total adjusted investment return at net asset
value(4,6) (%) 14.13 (10.16) 19.29 (0.59)(5) 8.57 8.25
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 56,384 70,243 76,824 81,177 204,621 184,085
Ratio of expenses to average net assets (%) 1.53 1.60 1.60 1.60(7) 1.60 1.60
Ratio of adjusted expenses to average net assets(8) (%) 1.70 1.71 1.72 1.73(7) 1.66 1.62
Ratio of net investment income (loss) to average net
assets (%) 4.66 4.97 4.90 4.91(7) 4.85 4.41
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) 4.49 4.86 4.78 4.78(7) 4.79 4.39
Portfolio turnover rate (%) 116 107 113 116(9) 46(9) 24
Fee reduction per share ($) 0.02 0.01 0.01(3) 0.01(3) 0.01 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 end 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) Unreimbursed, without fee reduction.
(9) Portfolio turnover rate excludes merger activity.
26 FUND DETAILS
<PAGE>
JOHN HANCOCK HIGH YIELD TAX-FREE FUND
Class A, Class B and Class C Shares
Statement of Additional Information
April 1, 1999
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 dated April 1, 1999
(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................................................. 28
Sales Compensation..................................................... 30
Net Asset Value........................................................ 32
Initial Sales Charge on Class A Shares................................. 32
Deferred Sales Charge on Class B and Class C........................... 34
Special Redemptions.................................................... 37
Additional Services and Programs....................................... 38
Description of the Fund's Shares....................................... 39
Tax Status............................................................. 41
Calculation of Performance............................................. 46
Brokerage Allocation................................................... 48
Transfer Agent Services................................................ 50
Custody of Portfolio................................................... 50
Independent Auditors................................................... 50
Appendix A-Description of Investment Risk.............................. A-1
Appendix B-Description of Bond Ratings................................. B-1
Appendix C- Description of Equivalent Yields........................... C-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 September 30, 1996, 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 following information supplements the discussion of the Fund's investment
objective discussed in the Prospectus. Appendix A contains further information
describing investment risks. The investment objective is fundamental and may
only be changed with shareholder approval. There is no assurance that the Fund
will achieve its investment objective.
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.
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, at least "Ba" by Moody's Investor Services, Inc. ("Moody's"); 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 B.
Tax Exempt Bonds. "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.
2
<PAGE>
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
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.
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.
3
<PAGE>
Federal tax legislation enacted in the 1980s placed substantial new restrictions
on the issuance of the bonds described above and in some cases eliminated the
ability of state or local governments to issue municipal obligations for some of
the above purposes. Such restrictions do not affect the Federal income tax
treatment of municipal obligations in which the Fund may invest which were
issued prior to the effective dates of the provisions imposing such
restrictions. The effect of these restrictions may be to reduce the volume of
newly issued municipal obligations.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any one or more issuers to pay when due
the principal of and interest on their municipal obligations may be affected.
Commercial Paper. 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
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.
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.
4
<PAGE>
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.
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.
Ratings as Investment Criteria.
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.
5
<PAGE>
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
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.
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.
6
<PAGE>
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.
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
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 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.
7
<PAGE>
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 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.
8
<PAGE>
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.
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.
9
<PAGE>
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
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 and Other Strategies With Future Contracts. 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.
10
<PAGE>
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.
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.
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 a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
11
<PAGE>
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 or 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. 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.
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.
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.
12
<PAGE>
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.
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.
13
<PAGE>
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
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.
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.
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
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.
16
<PAGE>
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").
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Director and Chief
October 1944 Executive Officer, The Berkeley
Financial Group, Inc. ("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.
18
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee Chairman and Chief Executive
John Hancock Place Officer, John Hancock Life Company;
P.O. Box 111 Director, the Adviser, Trustee, The
Boston, MA 02117 Berkeley Group.
July 1937
James F. Carlin Trustee 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 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.
19
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Ronald R. Dion Trustee President and Chief Executive
250 Boylston Street Officer, R.M. Bradley & Co., Inc.;
Boston, MA 02116 Director, The New England Council
March 1946 and Massachusetts Roundtable;
Trustee, North Shore Medical Center
and a corporator of the Eastern
Bank; Trustee, Emmanuel College.
Harold R. Hiser, Jr. Trustee Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996).
October 1931
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser, The
Boston, MA 02199 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 Senior Vice President and Chief
UGI Corporation Financial Officer, UGI Corporation
P.O. Box 858 (Public Utility Holding Company);
Valley Forge, PA 19482 Vice President and Director for
February 1938 AmeriGas, Inc.; Director,
EnergyNorth, Inc. (until 1992).
- -------------------
* 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.
20
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee 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, Linbeck Construction
Corporation; Director, Duke Energy
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); Director, Greater
Houston Partnership.
Steven R. Pruchansky Trustee (1) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 34104 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 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.
21
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
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, Signator Investors, Inc.,
August 1937 Insurance Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Director, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
Signature Services (until January
1997).
Norman H. Smith Trustee 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.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee 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).
Osbert M. Hood Senior Vice President and Chief Senior Vice President and Chief
101 Huntington Avenue Financial Officer Financial Officer, the Adviser, the
Boston, MA 02199 Berkeley Group and John Hancock
August 1952 Funds, Inc.; Vice President and
Chief Financial Officer, John
Hancock Mutual Life Insurance
Company Retail Sector (until 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.
23
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John A. Morin Vice President Vice President 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).
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.
March 1950
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer
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.
</TABLE>
24
<PAGE>
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, 1998. 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/or its affiliates and receive no
compensation from the Fund for their services.
Aggregate Total Compensation from
Compensation all Funds in John Hancock
Trustees from the Fund(1) Fund Complex to Trustees(2)
-------- ---------------- ---------------------------
James F. Carlin $ 1,242 $ 74,000
William H. Cunningham* 1,242 74,000
Ronald R. Dion 0 4,000
Charles F. Fretz 1,026 57,568
Harold R. Hiser, Jr.* 1,182 74,000
Charles L. Ladner 1,265 77,100
Leo E. Linbeck, Jr. 1,242 74,000
Patricia P. McCarter* 842 43,696
Steven R. Pruchansky* 1,292 77,100
Norman H. Smith* 1,303 79,350
John P. Toolan* 1,265 77,100
-------- --------
Total $11,901 $711,914
(1) Compensation made pursuant to different compensation arrangements then
in effect for the fiscal year ended August 31, 1998.
(2) Total compensation from the Fund and the other John Hancock Complex to
the Independent Trustees is as of December 31, 1998. As of this date
there were sixty-seven funds in the John Hancock Fund Complex with each
of these Independent Trustees serving thirty-two funds.
* As of December 31, 1998, the value of aggregate accrued deferred
compensation from all funds in the John Hancock Fund complex for Mr. Cunningham
was $220,106, for Mr. Hiser was $103,868, for Ms. McCarter was $ 159,075, for
Mr. Pruchansky was $68,102, for Mr. Smith was $70,607 and for Mr. Toolan was
$281,133 under the John Hancock Deferred Compensation Plan for Independent
Trustees. Mr. Fretz and Ms. McCarter resigned effective October 1, 1998.
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 January 5, 1999, the officers and Trustees of the Trust as a group owned
beneficially less than 1% of the outstanding shares of the Fund. As of that
date, the following shareholders owned beneficially 5% or more of the
outstanding shares of the Fund:
25
<PAGE>
Percentage of Total
Outstanding Shares of the
Name and Address of Shareholder Class of Shares Class of the Fund
- ------------------------------- --------------- -----------------
MLPF&S For the
Sole Benefit of Its Customers A 5.51%
Attn: Fund Administration 97DD8
4800 Deerlake Drive East 2nd Floor
Jacksonville FL 32246
MLPF&S For The
Sole Benefit of Its Customers B 8.25%
Attn: Fund Administration 974E3
4800 Deerlake Drive East 2nd Floor
Jacksonville FL 32246
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 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. 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 but not
limited to 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,
maintaining a committed line of credit, 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.
26
<PAGE>
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
--------------- -----------
The first $75 million 0.625%
The next $75 million 0.5625%
Over $150 million 0.50%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of its average daily net
assets. The Adviser retains the right to reimpose a 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, 1995 to August 31, 1996 and for the fiscal years
ended August 31, 1997 and 1998, the advisory fees paid by the Fund to the
Adviser amounted to $833,609, $1,001,880 and $996,696, respectively.
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 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 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 and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement, and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the 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.
27
<PAGE>
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 years ended August 31, 1996, 1997 and 1998,
the Fund paid the Adviser $21,583, $31,800 and $29,472, respectively, for
services under this Agreement.
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 that are continually offered at net asset
value next determined, plus an applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis.
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 years ended August 31, 1997 and 1998 were $161,223, $215,849 and
$225,191, respectively. Of such amounts $17,877, $26,764 and $27,441,
respectively, retained by John Hancock Funds in 1996, 1997 and 1998. The
remainder of the underwriting commissions were reallowed to Selling Brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
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% for Class A shares and 1.00% for Class B
and Class C shares, of the Fund's average 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. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; and (iii) with respect to Class B and Class C 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 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 and Class C Plans 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 and Class C
Plans as a liability of the Fund because the Trustees may terminate Class B
and/or Class C Plans at any time. For the fiscal year ended August 31, 1998, an
aggregate of $6,178,787 of distribution expenses or 4.58% 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. Class C shares of the Fund did not commence operations
until April 1, 1999; therefore, there are no unreimbursed expenses to report.
28
<PAGE>
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 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, Class B and Class C 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
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, 1998, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services. Class C
shares did not commence operations until April 1, 1999; therefore, there are no
expenses to report.
29
<PAGE>
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and
Mailing of Interest,
Prospectuses Compensation Expenses of Carrying or
to New to John Other Finance
Advertising Shareholders Selling Brokers Hancock Funds Charges
----------- ------------ --------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Class A $ 14,961 $ 3,155 $ 39,165 $ 33,404 $0
Class B $104,474 $12,591 $378,796 $232,265 $615,447
</TABLE>
SALES COMPENSATION
As part of their business strategies, each of the John Hancock 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. The sales charges and 12b-1
fees paid by investors are detailed in the prospectus and under "Distribution
Contracts" in this Statement of Additional Information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Whenever you make an investment in the Fund, 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. 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.
30
<PAGE>
<TABLE>
<CAPTION>
Maximum
Sales charge Reallowance First year
paid by investors or commission Service fee Maximum
(% of offering (% of offering (% of net Total compensation (1)
Class A investments price) price) 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%(2)
Next $1 and more above that -- 0.00% 0.25% 0.25%(2)
Maximum
Reallowance First year
or commission Service fee Maximum
(% of offering (% of net Total compensation
Class B investments price) investment) (% of offering price)
------------------- ------ ------ ---------------------
All amounts 3.75% 0.25% 4.00%
Maximum
Reallowance First year
Or commission Service fee Maximum
(% of offering (% of net Total compensation
price) investment) (% of offering price)
------ ------ ---------------------
Class C investments
All amounts 0.75% 0.25% 1.00%
</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) For Group Investment Program sales, the maximum total compensation for
investments of $1 million or more is 1.00% of the offering price (one
year CDSC of 1.00% applies for each sale).
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
31
<PAGE>
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
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, owned by the investor, 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 contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
* 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, daughter-in-law, son-in-law, niece, nephew,
grandparents and same sex domestic partner) of any of the
foregoing; or any fund, pension, profit sharing or other
benefit plan of the individuals described above.
* A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement
with John Hancock Funds providing specifically for the use of
Fund shares in fee-based investment products or services made
available to their clients.
* A former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan
and transfers any or all of his or her plan distributions
directly to the Fund.
32
<PAGE>
* A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
* Retirement plans investing through PruArray Program sponsored
by Prudential Securities.
* Pension plans transferring assets from a John Hancock variable
annuity contract to the Fund pursuant to an exemptive
application approved by the Securities and Exchange
Commission.
* 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.
* Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account. Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transaction involving
other investment companies or personal holding companies.
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 being invested but also
the investor's 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. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
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.
33
<PAGE>
Letter of Intention. Reduced sales charges are also applicable to investments
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 period of thirteen (13) months.
Investors who are using the Fund as a funding medium for a retirement plan,
however, may opt to make the necessary investments called for by the LOI over a
forty-eight (48) month period. These retirement plans include traditional, Roth
and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) SIMPLE IRA,
SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section 457 plans.
Non-qualified and qualified retirement plan investments cannot be combined to
satisfy an LOI of 48 months. Such an investment (including accumulations and
combinations but not including reinvested dividends) 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.
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 escrowed 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 AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, 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 or Class C 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 retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
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<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of both Class B and Class C
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 for Class B or one year CDSC
redemption period for Class C, 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 Class B shares. 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.
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:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $ 600.00
o*Minus Appreciation ($12 - $10) x 100 shares ( 200.00)
o Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) ( 120.00)
-------
oAmount subject to CDSC $ 280.00
*The appreciation is based on all 100 shares in the lot not just the shares
being redeemed.
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 and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C 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 and Class C 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.
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<PAGE>
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust
account unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" in the Prospectus.
* Redemptions where the proceeds are used to purchase a John Hancock
Declaration Variable Annuity.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan or redemptions for fees charged by planners or advisors
for advisory services, 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 or Class C
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.
* Redemptions of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under sections
401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k)
Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue
Code.
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
36
<PAGE>
<TABLE>
<CAPTION>
CDSC Waiver Matrix for Class B and Class C
<S> <C> <C> <C> <C> <C>
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), MPP, Rollover Retirement
PSP)
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Death or Waived Waived Waived Waived Waived
Disability
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account value periodic
annually in payments
periodic
payments.
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments.
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
(Class B only) annuity annuity annuity annuity account
payments (72t) payments (72t) payments (72t) payments (72t) value
or 12% of or 12% of or 12% of or 12% of annually in
account value account value account value account value periodic
annually in annually in annually in annually in payments
periodic periodic periodic periodic
payments. payments. payments. payments.
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Hardships Waived Waived Waived N/A N/A
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Return of Waived Waived Waived Waived N/A
Excess
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
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 security would be valued for the purpose of making such payment
at the same value as used in determining the 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 at the
beginning of such period.
37
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or 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 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 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 and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares 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 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:
38
<PAGE>
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 order 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 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 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 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).
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. The Trustees have also
authorized the issuance of three classes of shares of the Fund, designated as
Class A, Class B and Class C.
39
<PAGE>
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
each class of 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 each class of shares will be borne
exclusively by that class, (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares, and (iii) each class of
shares will bear any class expenses properly allocable to that 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 which class of 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 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 by the Fund, 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
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 starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. 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. For telephone transactions, the transfer agent 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 taken, the transfer agent is not 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.
40
<PAGE>
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
TAX STATUS
The Fund is treated as a separate entity for accounting and tax purposes, has
qualified and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") , and
intends to 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 tax-exempt interest and taxable
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.
41
<PAGE>
If the Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" or a "related person" thereof under Section
147(a) with respect to any 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 or constructive sale of securities or other
investments (including from the disposition of rights to when-issued securities
prior to issuance) or from options and futures contracts. If these distributions
are paid from the Fund's "investment company taxable income," they will be
taxable as ordinary income; and if they are paid from the Fund's "net capital
gain," they will be taxable as long-term capital gain. (Net capital gain is the
excess (if any) of net long-term capital gain over net short-term capital loss,
and investment company taxable income is all taxable income and capital gains or
losses, other than those gains and losses included in computing net capital
gain, after reduction by deductible expenses.) Some distributions may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
42
<PAGE>
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
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.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not in any event distribute net capital
gain realized in any year to the extent that a capital loss is carried forward
from prior years against such gain. To the extent such excess was retained and
not exhausted by the carryforward of prior years' capital losses, it would be
subject to Federal income tax in the hands of the Fund. Upon proper designation
of this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if the Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of this excess
and his pro rata share of these taxes.
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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, 1998, the Fund had capital loss carryforwards of $9,957,299 of which
$2,785,979 expires in 2002, $205,838 expires in 2003, $3,207,633 expires in
2004, $716,668 expires in 2005 and $3,041,181 expires in 2006.
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 seek to ensure that it distributes sufficient
income to preserve its status as a regulated investment company and seek to
avoid 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 rate 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.
44
<PAGE>
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
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 types 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.
45
<PAGE>
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.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1998, the annualized yields on Class A
and Class B shares of the Fund were 4.47% and 3.93% respectively. The average
annual total return of the Class B shares of the Fund for the 1 year, 5 year and
10 year periods ended August 31, 1998 were 3.53%, 5.26% and 7.37% 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, 1998 and since inception on December 31, 1993 were 4.42%
and 5.09%, respectively, and reflect payment of the maximum sales charge.
Class C of the Fund did not commence operations until April 1, 1999; therefore,
there is no average annual total return to report.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge) on the
last day of the period, according to the following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV where applicable).
46
<PAGE>
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, 1998 were 7.40% and 6.51%, respectively. Class C shares did not
commence until April 1, 1999; therefore, there is no tax-equivalent yield to
report.
Total return is computed by finding the average annual compounded rate of return
over the 1 year, 5 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 class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. 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 percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C shares from a
total return calculation produces a higher total return figure.
In the case of a tax-exempt obligation issued without original issue discount
and having a current market discount, the coupon rate of interest is used in
lieu of the yield to maturity. Where, in the case of a tax-exempt obligation
with original issue discount, the discount based on the current market value
exceeds the then-remaining portion of original issue discount (market discount),
the yield to maturity is the imputed rate based on the original issue discount
calculation. Where, in the case of a tax-exempt obligation with original issue
discount, the discount based on the current market value is less than the
then-remaining portion of original issue discount (market premium), the yield to
maturity is based on the market value.
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well the Russell and Wilshire Indices.
47
<PAGE>
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 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 an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, 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." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these 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, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies and practices of
the Adviser in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees.
48
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For the fiscal years ended August 31, 1998 and 1997, the Fund paid $3,990 and $
47,181, respectively, in negotiated brokerage commissions. For the period ended
August 31, 1996, the Fund paid $12,578 in 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 another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Directors that the price is
reasonable in light of the services provided and to policies that the Directors
may adopt from time to time. During the period ended August 31, 1996 and the
fiscal years ended August 31, 1997 and 1998, the Fund did not pay commissions to
compensate brokers for research services such as industry, economic and company
reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker dealer ("Signator" 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, 1996, and the fiscal years ended August 31, 1997 and
1998, the Fund did not execute any portfolio transactions with the
Affiliated Broker.
Signator 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
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 Broker. Because the Adviser,
which is affiliated with the Affiliated Broker, 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 Broker 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.
49
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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 account, $22.50 for each
Class B shareholder account and $21.50 for each Class C shareholder account. The
Fund also pays certain out-of-pocket expenses and 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
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, appearing elsewhere herein, and are included in
reliance on their report given on their authority of such firm as experts in
accounting and auditing.
50
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APPENDIX A
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 the fund's
risk profile in the prospectus.
A fund is 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 the Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objective and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the 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. (e.g., futures and related options; securities and index
options, swaps, caps, floors, collars).
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.(e.g. borrowing; reverse repurchase
agreements, repurchase agreements, financial futures and options; securities and
index options, securities lending, non-investment grade debt securities, private
activity bonds, participation interests and structured securities, swaps, caps,
floors, collars).
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities. (e.g.
non-investment grade debt securities, private activity bonds and participation
interests).
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. (e.g.
financial futures and options; securities and index options, non-investment
grade debt securities, private activity bonds, participation interests,
structured securities and swaps, caps, floors and collars).
A-1
<PAGE>
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
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.
o 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. (e.g. financial futures and options;
securities and index options, non-investment-grade debt securities,
restricted and illiquid securities, participation interests, swaps, caps,
floors, collars , structured securities).
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. (e.g. financial futures and options;
securities and index options, short-term trading, when-issued securities and
forward commitments, non-investment-grade debt securities, restricted and
illiquid securities, structured securities).
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events. (e.g. private activity bonds).
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. (e.g. financial futures and options; securities and index options,
when-issued securities and forward commitments).
Political risk The risk of losses attributable to government or political
actions of any sort. (e.g. private activity bonds).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.(e.g. non-investment-grade debt
securities, Restricted and illiquid securities, participation interests,
structured securities, swaps, caps, floors, collars).
A-2
<PAGE>
APPENDIX B
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
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.
B-1
<PAGE>
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.
B-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.
B-3
<PAGE>
APPENDIX C
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 1999. It gives the approximate yield a taxable
security must earn at various income brackets to produce after-tax yields.
<TABLE>
<CAPTION>
TAX-FREE YIELDS 1999 TAX TABLE
Single Return Joint Return Marginal TAX-EXEMPT YIELD
--------- -------- -------- -------- ---------- ---------- ---------
Income
(Taxable Income) Tax Rate 4% 5% 6% 7% 8% 9% 10%
--------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------- --------- -------- -------- -------- ---------- ---------- ---------
$0-$25,750 $0-$43,050 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
25,751-62,450 43,051-104,050 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
62,451-130,250 104,051-158,550 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
130,251-283,150 158,551-283,150 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $283,151 Over $283,151 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
It is assumed that an investor filing a single return is not a "head of
household," a "married individual filing a separate return," or a "surviving
spouse." The table does not take into account the effects of reductions in the
deductibility of itemized deductions or the phaseout of personal exemptions for
taxpayers with adjusted gross incomes in excess of specified amounts. Further,
the table does not attempt to show any alternative minimum tax consequences,
which will depend on each shareholder's particular tax situation and may vary
according to what portion, 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.
C-1
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1998 Annual
Report to Shareholders for the year ended August 31, 1998; (filed electronically
on October 29, 1998, accession number 0001010521-98-000359) 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, 1998.
Statement of Operations for the year ended August 31, 1998.
Statement of Changes in Net Assets for each of the two years in the
period ended August 31, 1998.
Financial Highlights for the five years in the period ended
August 31, 1998.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1998.
Report of Independent Auditors.
F-1
<PAGE>
JOHN HANCOCK TAX-FREE BOND FUND
Class A, Class B and Class C Shares
Statement of Additional Information
April 1, 1999
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 dated April 1, 1999 (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.............................................. 14
Those Responsible for Management..................................... 16
Investment Advisory and Other Services............................... 25
Distribution Contracts............................................... 27
Sales Compensation................................................... 29
Net Asset Value...................................................... 30
Initial Sales Charge on Class A Shares............................... 31
Deferred Sales Charge on Class B and Class C......................... 33
Special Redemptions.................................................. 37
Additional Services and Programs..................................... 37
Description of the Fund's Shares..................................... 39
Tax Status........................................................... 40
Calculation of Performance........................................... 45
Brokerage Allocation................................................. 47
Transfer Agent Services.............................................. 49
Custody of Portfolio................................................. 49
Independent Auditors................................................. 49
Appendix A-Description of Investment Risk............................ A-1
Appendix B-Description of Bond Ratings............................... B-1
Appendix C-Description of Equivalent Yields.......................... C-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 under the laws of The Commonwealth
of Massachusetts.
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. Appendix A contains further
information describing investment risks. The investment objective is fundamental
and may only be changed with shareholder approval. There is no assurance that
the Fund will achieve its investment objective.
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.
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.
2
<PAGE>
Municipal Obligations. In seeking to achieve its investment objective, the Fund
invests in a variety of Municipal Obligations which consist of Municipal Bonds,
Municipal Notes and Municipal Commercial Paper, the interest on which in the
opinion of the bond issuer's counsel (not the Fund's counsel) is exempt from
federal income tax.
Municipal Bonds. Municipal bonds generally are classified as either general
obligation bonds or revenue bonds. General obligation bonds are backed by the
credit of an issuer having taxing power and are payable from the issuer's
general unrestricted revenues. Their payment may depend on an appropriation of
the issuer's legislative body. Revenue bonds, by contrast, are payable only from
the revenues derived from a particular project, facility or a specific revenue
source. They are not generally payable from the unrestricted revenues of the
issuer.
Municipal bonds are issued to obtain funds for various public purposes including
the construction of a wide range of public facilities such as airports,
highways, bridges, schools, hospitals, housing, mass transportation, streets and
water and sewer works. Other public purposes for which Municipal Bonds may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds for many types of
local, privately operated facilities. Such debt instruments are considered
municipal obligations if the interest paid on them is exempt from federal income
tax. The payment of principal and interest by issuers of certain obligations
purchased by the Fund may be guaranteed by a letter of 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.
3
<PAGE>
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 B 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
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.
4
<PAGE>
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.
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.
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.
5
<PAGE>
The Fund may engage in short-term trading consistent with its investment
objective. Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates). In addition, a security may be sold and another security of
comparable quality purchased at approximately the same time to take advantage of
what the Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of 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.
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"
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 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.
6
<PAGE>
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 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.
7
<PAGE>
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.
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.
8
<PAGE>
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
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 and Other Strategies with Future Contracts. 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.
9
<PAGE>
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
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.
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 a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
10
<PAGE>
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 or 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. 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.
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.
Variable or Floating Rate Obligations. Certain of the obligations in which the
Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate) or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is based (floating rate). Variable or floating rate
obligations may include a demand feature which entitles the purchaser to demand
prepayment of the principal amount prior to stated maturity. Also, the issuer
may have a corresponding right to prepay the principal amount prior to maturity.
As with any other type of debt security, the marketability of variable or
floating rate instruments may vary depending upon a number of factors, including
the type of issuer and the terms of the instruments. The Fund may also invest in
more recently developed floating rate instruments which are created by dividing
a municipal security's interest rate into two or more different components.
Typically, one component ("floating rate component" or "FRC") pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index. A second component ("inverse floating rate component" or
"IFRC") pays an interest rate that varies inversely with changes to market rates
of interest, because the interest paid to the IFRC holders is generally
determined by subtracting a variable or floating rate from a predetermined
amount (i.e., the difference between the total interest paid by the municipal
security and that paid by the FRC). The Fund may purchase FRC's without
limitation. Up to 10% of the Fund's total assets may be invested in IFRC's in an
attempt to protect against a reduction in the income earned on the Fund's other
investments due to a decline in interest rates. The extent of increases and
decreases in the value of an IFRC generally will be greater than comparable
changes in the value of an equal principal amount of a fixed-rate municipal
security having similar credit quality, redemption provisions and maturity. To
the extent that such instruments are not readily marketable, as determined by
the Adviser pursuant to guidelines adopted by the Trustees, they will be
considered illiquid for purposes of the Fund's 10% investment restriction on
investment in non-readily marketable securities.
11
<PAGE>
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.
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.
12
<PAGE>
On the date the Fund enters into an agreement to purchase securities on a when-
issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
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
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.
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.
13
<PAGE>
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
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 borrowings was made. While
borrowing exceed 5% of the value of the Fund's total assets, the Fund
will not purchase any additional securities. Interest paid on borrowing
will reduce the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except in an amount up to 10% of the value of its total assets
but only to secure borrowing for temporary or emergency purposes or as
may be necessary in connection with maintaining collateral in
connection with writing put and call options or making initial margin
deposits in connection with the purchase or sale of financial futures,
index futures contracts and related options.
3. With respect to 75% of its total assets, purchase
securities (other than obligations issued or guaranteed by the United
States government, its agencies of instrumentalities and shares of
other investment companies) of any issuer if the purchase would cause
immediately thereafter more than 5% of the value of the Fund's total
assets to be invested in the securities of such issuer or the Fund
would own more than 10% of the outstanding voting securities of such
issuer.
4. Make loans to others, except through the purchase of
obligations in which the Fund is authorized to invest, entering in
repurchase agreements and lending portfolio securities in an amount not
exceeding one third of its total assets.
5. Purchase illiquid securities, including securities subject
to restrictions on disposition under the Securities Act of 1933,
repurchase agreements maturing in more than seven days, and securities
which do not have readily available market quotations, if such purchase
would cause the Fund to have more than 10% of its net assets invested
in such types of securities.
14
<PAGE>
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.
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.
15
<PAGE>
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 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 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 Occupation(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, Director and Chief
October 1944 Executive Officer, The Berkeley
Financial Group, Inc. ("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.
17
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee Chairman and Chief Executive
John Hancock Place Officer, John Hancock Life Company;
P.O. Box 111 Director, the Adviser, Trustee, The
Boston, MA 02117 Berkeley Group.
July 1937
James F. Carlin Trustee 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 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.
18
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Ronald R. Dion Trustee President and Chief Executive
250 Boylston Street Officer, R.M. Bradley & Co., Inc.;
Boston, MA 02116 Director, The New England Council
March 1946 and Massachusetts Roundtable;
Trustee, North Shore Medical Center
and a corporator of the Eastern
Bank; Trustee, Emmanuel College.
Harold R. Hiser, Jr. Trustee Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996).
October 1931
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser, The
Boston, MA 02199 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 Senior Vice President and Chief
UGI Corporation Financial Officer, UGI Corporation
P.O. Box 858 (Public Utility Holding Company);
Valley Forge, PA 19482 Vice President and Director for
February 1938 AmeriGas, Inc.; Director,
EnergyNorth, Inc. (until 1992).
- -------------------
* 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.
19
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee 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, Linbeck Construction
Corporation; Director, Duke Energy
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); Director, Greater
Houston Partnership.
Steven R. Pruchansky Trustee (1) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 34104 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 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.
20
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
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, Signator Investors, Inc.,
August 1937 Insurance Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Director, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
Signature Services (until January
1997).
Norman H. Smith Trustee 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.
21
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee 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).
Osbert M. Hood Senior Vice President and Chief Senior Vice President and Chief
101 Huntington Avenue Financial Officer Financial Officer, the Adviser, the
Boston, MA 02199 Berkeley Group and John Hancock
August 1952 Funds, Inc.; Vice President and
Chief Financial Officer, John
Hancock Mutual Life Insurance
Company Retail Sector (until 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.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John A. Morin Vice President Vice President 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).
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.
March 1950
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer
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.
</TABLE>
23
<PAGE>
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, 1998. Messrs. Boudreau and Scipione and Ms. Hodsdon, each a non-independent
Trustee and each of the officers of the Fund are interested persons of the
Adviser, are compensated by the Adviser and/or its affiliates and receive no
compensation from the Fund for their services.
Aggregate Total Compensation from
Compensation all Funds in John Hancock
Trustees from the Fund(1) Fund Complex to Trustees(2)
-------- ---------------- ---------------------------
James F. Carlin $ 5,766 $ 74,000
William H. Cunningham* 5,766 74,000
Ronald R. Dion 0 4,000
Charles F. Fretz 4,762 57,568
Harold R. Hiser, Jr.* 5,489 74,000
Charles L. Ladner 5,874 77,100
Leo E. Linbeck, Jr. 5,766 74,000
Patricia P. McCarter* 3,913 43,696
Steven R. Pruchansky* 6,000 77,100
Norman H. Smith* 6,052 79,350
John P. Toolan* 5,874 77,100
-------- ---------
Total $55,262 $711,914
(1) Compensation for the period ended August 31, 1998.
(2) The total compensation paid by the John Hancock Funds Complex to
the Independent Trustees as of the calendar year ended December 31,
1998. As of this date there were sixty-seven funds in the John Hancock
Funds Complex with each of these Independent Trustees serving on
thirty-two funds.
* As of December 31, 1998, the value of the aggregate deferred
compensation from all funds in the John Hancock Funds Complex for Mr.
Cunningham was $220,106, for Mr. Hiser was $103,868, for Ms. McCarter
was $159,075, for Mr. Pruchansky was $68,102, for Mr. Smith was $70,607
and for Mr. Toolan was $281,133 under the John Hancock Group of Funds
Deferred Compensation Plan for Independent Trustees. Mr. Fretz and Ms.
McCarter resigned effective October 1, 1998.
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 January 5, 1999 the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders beneficially owned 5% or more of the
outstanding shares of the Fund:
24
<PAGE>
Percentage of Total
Name and Outstanding Shares
Address of Shareholder Class of Shares Of the Class of the Fund
- ---------------------- --------------- ------------------------
MLPF&S For The Sole Benefit of B 22.72 %
Its Customers
Attn: Fund Administration 974E6
4800 Deerlake Drive East 2nd Floor
Jacksonville FL 32246-6484
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 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. 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 but not
limited to 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,
maintaining a committed line of credit, 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:
25
<PAGE>
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%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of its average daily net
assets. The Adviser retains the right to reimpose a 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 fiscal year ended December 31, 1996 and the period ending August 31,
1997, advisory fees payable to the Fund's Adviser amounted to $1,489,530 and
$4,110,920, respectively. For the fiscal year ended August 31, 1998, advisory
fees payable to the Fund's Adviser amounted to $4,201,258 However, a portion of
such fees were not imposed pursuant to the voluntary fee reduction and expense
limitation agreement then in effect. For the fiscal year ended August 31, 1998,
advisory fees payable to the Fund's adviser amounted to $4,054,093. .
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 and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement and the
Distribution Agreement will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the 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.
26
<PAGE>
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 years ended August 31, 1997 and 1998, the Fund paid
the Adviser $143,283 and $139,637, respectively, 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 that are continually offered at net asset
value next determined, plus an applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended for the period from January 1, 1996 to August 31, 1996 and
for the years ended August 31, 1997 and 1998 were $364,353, $642,722 and
$645,689, respectively. Of such amounts $39,275, $65,428 and $79,967,
respectively, retained by John Hancock Funds in 1996, 1997 and 1998. The
remainder of the underwriting commissions were reallowed to Selling Brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
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% for Class A shares and 1.00% for Class B
and Class C shares, of the Fund's average daily net assets attributable to
shares of that class. 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. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. The distribution fees will be used to reimburse John
Hancock Funds for its distribution expenses, including but not limited to: (i)
initial and ongoing sales compensation to Selling Brokers and others (including
affiliates of John Hancock Funds) engaged in the sale of Fund shares; (ii)
marketing, promotional and overhead expenses incurred in connection with the
distribution of Fund shares; and (iii) with respect to Class B and Class C
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 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 and Class C Plans 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 and
Class C Plans as a liability of the Fund, because the Trustees may terminate
Class B and/or Class C Plans at any time. For the fiscal year ended August 31,
1998 an aggregate of $11,378,082 of distribution expenses or 5.84% 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. Class C shares of the Fund did not commence
operations until April 1, 1999; therefore, there are no unreimbursed expenses to
report.
27
<PAGE>
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, Class B and Class C 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
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 fiscal year ended August 31, 1998, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services. Class C
shares did not commence operations until April 1, 1999; therefore, there are no
expenses to report.
28
<PAGE>
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and Interest,
Mailing of Expenses of Carrying or
Prospectus to New Compensation to John Hancock Other Finance
Advertising Shareholders Selling Brokers Funds Charges
----------- ------------ --------------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A $81,876 $7,184 $652,546 $151,719 $0
Class B $95,750 $6,927 $591,623 $173,363 $884,651
</TABLE>
SALES COMPENSATION
As part of their business strategies, each of the John Hancock 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. The sales charges and 12b-1
fees paid by investors are detailed in the prospectus and under the
"Distribution Contracts" in this Statement of Additional Information. The
portions of these expenses that are reallowed to financial services firms are
shown on the next page.
Whenever you make an investment in the Fund, 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. 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.
29
<PAGE>
<TABLE>
<CAPTION>
Maximum
Sales charge Reallowance First year
Paid by investors or commission Service fee Maximum
(% of offering (% of offering (% of net total compensation (1)
Class A investments price) price) 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%(2)
Next $1 and more above that -- 0.00% 0.25% 0.25%(2)
Maximum
Reallowance First year
Or commission Service fee Maximum
(% of offering (% of net Total compensation
Class B investments price) investment) (% of offering price)
- ------------------- ------ ------ ---------------------
All amounts 3.75% 0.25% 4.00%
Maximum
Reallowance First year
Or commission Service fee Maximum
Class C investments (% of offering (% of net Total compensation
price) investment) (% of offering price)
------ ------ ---------------------
All amounts 0.75% 0.25% 1.00%
</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) For Group Investment Program sales, the maximum total compensation for
investments of $1 million or more is 1.00% of the offering price (one
year CDSC of 1.00% for each sale).
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
30
<PAGE>
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.
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, owned by
the investor, 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 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, daughter-in-law, son-in-law, niece, nephew and
same sex domestic partner) 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 a signed 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.
31
<PAGE>
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 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 Retirement plans investing through the PruArray Program
sponsored by Prudential Securities.
o Pension plans transferring assets from a John Hancock variable
annuity contract to the Fund pursuant to an exemptive
application approved by the Securities and Exchange
Commission.
o Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
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 being invested but also
the investor's 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. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
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<PAGE>
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. Reduced sales charges are also applicable to investments
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 period of thirteen (13) months.
Investors who are using the Fund as a funding medium for a retirement plan,
however, may opt to make the necessary investments called for by the LOI over a
forty-eight (48) month period. These retirement plans include traditional, Roth
and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) SIMPLE IRA,
SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section 457 plans.
Non-qualified and qualified retirement plan investments cannot be combined to
satisfy an LOI of 48 months. Such an investment (including accumulations and
combinations but not including reinvested dividends) 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.
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 escrowed 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 AND CLASS C SHARES
Investment in Class B and Class C 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. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, 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 or Class C 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.
33
<PAGE>
Class B shares are not available to full-service retirement 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 both Class B and Class C shares 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 for Class B or one year CDSC
redemption for Class C, 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 Class B shares. 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.
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:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the shares
being redeemed.
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 and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
34
<PAGE>
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C 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. (Does not apply to Trust
accounts unless Trust is dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions where the proceeds are used to purchase a John Hancock
Declaration Variable Annuity.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or
advisors for advisory services, 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, this waiver
does not apply to periodic withdrawal plan redemptions of Class A or
Class C 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.
* Redemptions of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under sections
401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k)
Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue
Code.
35
<PAGE>
* 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.
<TABLE>
<CAPTION>
CDSC Waiver Matrix for Class B and Class C
<S> <C> <C> <C> <C> <C>
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), MPP, Rollover Retirement
PSP)
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Death or Waived Waived Waived Waived Waived
Disability
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account value periodic
annually in payments
periodic
payments.
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments.
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
(Class B only) annuity annuity annuity annuity account
payments (72t) payments (72t) payments (72t) payments (72t) value
or 12% of or 12% of or 12% of or 12% of annually in
account value account value account value account value periodic
annually in annually in annually in annually in payments
periodic periodic periodic periodic
payments. payments. payments. payments.
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Hardships Waived Waived Waived N/A N/A
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
Return of Waived Waived Waived Waived N/A
Excess
- ----------------------- ------------------- ----------------- ----------------- ---------------- ----------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
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.
36
<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, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The 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 a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the 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 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 and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase 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.
37
<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 order 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.
38
<PAGE>
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).
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. The Trustees have also
authorized the issuance of three classes of shares of the Fund, designated as
Class A, Class B and Class C.
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 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 each class of shares will be borne
exclusively by that class (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each of class of
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 structures. Similarly, the net asset value per share
may vary depending on which class of 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 by the Fund, 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
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.
39
<PAGE>
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 starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. 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. For telephone transactions, the transfer agent 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 taken, the transfer agent is not responsible for any
loss 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.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
TAX STATUS
The Fund is treated as a separate entity for accounting and tax purposes, has
qualified and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to 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 tax-exempt interest and taxable
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.
40
<PAGE>
If the Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" or a "related person" thereof under Section
147(a) with respect to any 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 or constructive sale of securities or other
investments (including from the disposition of rights to when-issued securities
prior to issuance) or from options and futures contracts. If these distributions
are paid from the Fund's "investment company taxable income," they will be
taxable as ordinary income; and if they are paid from the Fund's "net capital
gain," they will be taxable as long-term capital gain. (Net capital gain is the
excess (if any) of net long-term capital gain over net short-term capital loss,
and investment company taxable income is all taxable income and capital gains or
losses, other than those gains and losses included in computing net capital
gain, after reduction by deductible expenses.) Some distributions may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
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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.
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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 Fund shares is properly
treated as a sale for tax purposes, as is assumed in the foregoing discussion.
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 long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of such excess
and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed as such to
shareholders. The Fund has $12,768,595 of capital loss carryforwards, $7,117,054
expires in 2002 and $5,651,541 expires in 2003 which are available to offset
future net capital gains.
Dividends and capital gain distributions paid by the Fund will not qualify for
the dividends received deduction for corporate shareholders.
The Fund may invest in debt obligations that are in the lower rating categories
or are unrated. Investments in debt obligations that are at risk of default
present special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be taken
for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by the Fund, in the event it invests in such securities, in
order to seek to ensure that it distributes sufficient income to preserve its
status as a regulated investment company and seek to avoid becoming subject to
Federal income or excise tax.
The Fund is required to accrue 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,
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.
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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.
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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
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 types 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.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1998, the annualized yields of the Fund's
Class A and Class B shares were 4.01% and 3.46%, 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 4.18%, 5.00% and 7.91%,
respectively (4.16%, 4.91% and 7.67%, respectively, without taking into account
the expense limitation arrangements).
As of August 31, 1998, 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
3.27%, 4.85% and 7.12%, respectively (3.25%, 4.76% and 6.99%, respectively,
without taking into account the expense limitation arrangements).
Class C shares of the Fund did not commence operations until April 1, 1999;
therefore, there is no average annual total return to report.
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:
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n ________
T = \ / ERV / P - 1
Where:
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1-year and life-of-fund periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. 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 percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's maximum sales charge on Class A
shares or the CDSC on Class B or Class C shares into account. Excluding the
Fund's sales charge on Class A shares and the CDSC on Class B or Class C shares
from a total return calculation produces a higher total return figure.
In the case of a tax-exempt obligation issued without original issue discount
and having a current market discount, the coupon rate of interest is used in
lieu of the yield to maturity. Where, in the case of a tax-exempt obligation
with original issue discount, the discount based on the current market value
exceeds the then-remaining portion of original issue discount (market discount),
the yield to maturity is the imputed rate based on the original issue discount
calculation. Where, in the case of a tax-exempt obligation with original issue
discount, the discount based on the current market value is less than the
then-remaining portion of original issue discount (market premium), the yield to
maturity is based on the market value.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge) on the
last day of the period, according to the following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
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The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B shares at a maximum federal tax rate for the 30-day period ended
August 31, 1998 were 6.64% and 5.73%, respectively. Class C shares did not
commence operations until April 1, 1999; therefore, there is no tax equivalent
yield to report.
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 an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, 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". Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the 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.
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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 Adviser'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 period ended August 31, 1996, the
Fund paid negotiated brokerage commissions in the amount of $335,052. For the
fiscal years ended August 31, 1997 and 1998, the Fund paid negotiated brokerage
commissions in the amount of $820,093 and $266,570, respectively.
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 periods ended August 31, 1996, 1997 and
1998, 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 Signator Investors, Inc., a broker dealer ("Signator" 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 the Affiliated Broker. During the period ended
August 31, 1996, 1997 and 1998, the Fund did not execute any portfolio
transaction with the Affiliated Broker.
Signator 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
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 Broker. Because the Adviser,
which is affiliated with the Affiliated Broker, 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 Broker as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
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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 account, $22.50 for each
Class B shareholder account and $21.50 for each Class C shareholder account. The
Fund also pays certain out-of-pocket expenses and 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, appearing elsewhere herein, and are included
in reliance on their report given on their authority of such firm as experts in
accounting and auditing.
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APPENDIX A
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 the fund's
risk profile in the prospectus.
A fund is 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 the Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objective and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the 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. (e.g., futures and related options; securities and index
options, swaps, caps, floors, collars).
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.(e.g. borrowing; reverse repurchase
agreements, repurchase agreements, financial futures and options; securities and
index options, securities lending, non-investment grade debt securities, private
activity bonds, participation interests and structured securities, swaps, caps,
floors, collars).
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities. (e.g.
non-investment grade debt securities, private activity bonds and participation
interests).
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. (e.g.
financial futures and options; securities and index options, non-investment
grade debt securities, private activity bonds, participation interests,
structured securities and swaps, caps, floors and collars).
A-1
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Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
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.
o 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. (e.g. financial futures and options; securities and index options,
non-investment-grade debt securities, restricted and illiquid securities,
participation interests, swaps, caps, floors, collars , structured securities).
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. (e.g. financial futures and options;
securities and index options, short-term trading, when-issued securities and
forward commitments, non-investment-grade debt securities, restricted and
illiquid securities, structured securities).
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events. (e.g. private activity bonds).
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. (e.g. financial futures and options; securities and index options,
when-issued securities and forward commitments).
A-2
<PAGE>
Political risk The risk of losses attributable to government or political
actions of any sort. (e.g. private activity bonds).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.(e.g. non-investment-grade debt
securities, Restricted and illiquid securities, participation interests,
structured securities, swaps, caps, floors, collars).
A-3
<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>
APPENDIX C
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 1999. It gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields.
<TABLE>
<CAPTION>
TAX-FREE YIELDS 1999 TAX TABLE
Single Return Joint Return Marginal TAX-EXEMPT YIELD
--------- -------- -------- -------- ---------- ---------- ---------
Income
(Taxable Income) Tax Rate 4% 5% 6% 7% 8% 9% 10%
--------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------- --------- -------- -------- -------- ---------- ---------- ---------
$0-$25,750 $0-$43,050 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
25,751-62,450 43,051-104,050 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
62,451-130,250 104,051-158,550 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
130,251-283,150 158,551-283,150 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $283,151 Over $283,151 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.
C-1
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1998 Annual
Report to Shareholders for the year ended August 31, 1998; (filed electronically
on October 29, 1998, accession number 0001010521-98-000359) 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, 1998.
Statement of Operations for the year ended August 31, 1998.
Statement of Changes in Net Assets for each of the two years in the
period ended August 31, 1998.
Financial Highlights for the five years in the period ended
August 31, 1998.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1998.
Report of Independent Auditors.
F-1
<PAGE>
JOHN HANCOCK TAX-FREE BOND TRUST
PART C.
OTHER INFORMATION
Item. 23. Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by or under common control with
Registrant.
Item. 25. Indemnification.
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.
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 ("the
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 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 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
C-1
<PAGE>
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 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 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 26. 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 Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 27. Principal Underwriters.
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series 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
and John Hancock Investment Trust III.
(b) The following table lists, for each director and officer of John Hancock
Funds, the information indicated.
C-2
<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
James V. Bowhers 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 Senior Vice President
101 Huntington Avenue and and
Boston, Massachusetts Chief Financial Officer Chief Financial Officer
David A. King Director None
380 Stuart Street
Boston, Massachusetts
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
C-3
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
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
Renee M. Humphrey Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kathleen M. Graveline Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Peter F. Mawn Senior Vice President None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard O. Hansen Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Benintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
C-4
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
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
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
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
</TABLE>
C-5
<PAGE>
(c) None.
Item 28. 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 29. Management Services
Not applicable.
Item 30. Undertakings
(a) Not Applicable
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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
25th day of January, 1999.
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 J. Stokowski
- ------------------------ Vice President, Treasurer January 25, 1999
James J. Stokowski and Chief Accounting Officer
*
- ------------------------ Trustee
James F. Carlin
*
- ------------------------ Trustee
William H. Cunningham
*
- ------------------------ Trustee
Ronald R. Dion
*
- ------------------------ Trustee
Harold R. Hiser, Jr.
C-7
<PAGE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*
- ------------------------ Trustee
Anne C. Hodsdon
*
- ------------------------ Trustee
Charles L. Ladner
*
- ------------------------ Trustee
Leo E. Linbeck, Jr.
*
- ------------------------ Trustee
Steven R. Pruchansky
*
- ------------------------ Trustee
Norman H. Smith
*
- ------------------------ Trustee
Richard S. Scipione
*
- ------------------------ Trustee
John P. Toolan
*By: /s/ Susan S. Newton January 25, 1999
-------------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
June 25, 1996 and September 15, 1998.
</TABLE>
C-8
<PAGE>
John Hancock Tax-Free Bond Trust
INDEX TO EXHIBITS
99.(a) Articles of Incorporation. Amended and Restated Declaration of Trust
dated July 1, 1996.**
99.(b) By-Laws. Amended and Restated By-Laws dated November 19, 1996.***
99.(c) Instruments Defining Rights of Security Holders. See Exhibit 99.(a)
and 99.(b).
99.(d) Investment Advisory Contracts. Investment Advisory Agreement between
John Hancock Advisers, Inc. and the Registrant.*
99.(d).1 Investment Management Contract between High Yield Tax-Free Fund and
John Hancock Advisers, Inc. dated September 30, 1996.***
99.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Funds, Inc. and the Registrant.*
99.(e).1 Amendment to Distribution Agreement dated September 30, 1996.***
99.(e).2 Form of Financial Institution Sales and Service Agreement.*****
99.(e).3 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services, Inc. and Selected Dealers.*
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
99.(g) Custodian Agreements. Master Custodian Agreement with Investors
Bank & Trust Company.*
99.(h) Other Material Contracts. Amended and Restated Master Transfer
Agency and Service Agreement between John Hancock Funds and John
Hancock Signature Services, Inc. dated June 1, 1998.****
99.(i) Legal Opinion. Not Applicable.
99.(j) Other Opinions.+
99.(k) Omitted Financial Statements. Not Applicable.
99.(l) Initial Capital Agreements. None.
99.(m) Rule 12b-1 Plan. Class A Distribution Plan between Tax-Free Bond
Fund and John Hancock Funds, Inc. dated June 26. 1996.*
99.(m).1 Class B Distribution Plan between Tax-Free Bond Fund and John Hancock
Funds, Inc.*
99.(m).2 Class A Distribution Plan between High Yield Tax-Free Fund and John
Hancock Funds, Inc. dated September 30, 1996.***
99.(m).3 Class B Distribution Plan between High Yield Tax-Free Fund and John
Hancock Funds, Inc. dated September 30, 1996.***
Financial Data Schedule.
99.(n).1A High Yield Tax-Free Fund
99.(n).1B High Yield Tax-Free Fund
99.(n).2A Tax-Free Bond Fund
99.(n).2B Tax-Free Bond Fund
99.(o) Rule 18f-3 Plan. John Hancock Funds Class A and Class B Multiple
Class Plan Pursuant to Rule 18f-3 dated May 1, 1998.****
99.(o).1 John Hancock Funds Class A, Class B and Class C amended and restated
Multiple Class Plan pursuant to Rule 18f-3 for John Hancock Tax Free
Bond Trust dated April 1, 1999.+
* Previously filed electronically with post-effective amendment no. 7, (file
nos. 33-32246 and 811-5968) on February 24, 1995, accession number
0000950129-95-000095.
** Previously filed electronically with post-effective amendment no. 8 (file
nos. 33-3246 and 811-5968) on February 29, 1996, accession number
000950135-96-001238.
*** Previously filed electronically with post-effective amendment no. 12 (file
nos. 33-32246 and 811-5968) on December 23, 1996, accession number
0001010521-96-000229.
**** Previously filed electronically with post-effective amendment no. 14 (file
nos. 33-32246 and 811-5968) on October 13, 1998, accession number
0001010521-98-000346.
***** Previously filed electronically with post-effective amendment no. 15 (file
nos. 33-32246 and 811-5968) on December 28, 1998, accession number
0001010521-98-000405.
+ Filed herewith.
<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-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 158,175,963
<INVESTMENTS-AT-VALUE> 174,401,562
<RECEIVABLES> 4,181,247
<ASSETS-OTHER> 36,845
<OTHER-ITEMS-ASSETS> 202,470
<TOTAL-ASSETS> 178,822,124
<PAYABLE-FOR-SECURITIES> 6,222,554
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 377,564
<TOTAL-LIABILITIES> 6,600,118
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 167,340,311
<SHARES-COMMON-STOCK> 4,218,165
<SHARES-COMMON-PRIOR> 3,804,801
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9,567
<ACCUMULATED-NET-GAINS> (11,336,051)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,227,313
<NET-ASSETS> 172,222,006
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,411,602
<OTHER-INCOME> 0
<EXPENSES-NET> 2,720,398
<NET-INVESTMENT-INCOME> 8,691,204
<REALIZED-GAINS-CURRENT> (554,208)
<APPREC-INCREASE-CURRENT> 6,172,597
<NET-CHANGE-FROM-OPS> 14,309,593
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,047,191
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,426,741
<NUMBER-OF-SHARES-REDEEMED> 752,160
<SHARES-REINVESTED> 96,914
<NET-CHANGE-IN-ASSETS> 637,532
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (11,858,115)
<OVERDISTRIB-NII-PRIOR> 5,784
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 996,696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,725,475
<AVERAGE-NET-ASSETS> 36,274,091
<PER-SHARE-NAV-BEGIN> 9.34
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.65
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> JOHN HANCOCK HIGH YIELD TAX-FREE FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 158,175,963
<INVESTMENTS-AT-VALUE> 174,401,562
<RECEIVABLES> 4,181,247
<ASSETS-OTHER> 36,845
<OTHER-ITEMS-ASSETS> 202,470
<TOTAL-ASSETS> 178,822,124
<PAYABLE-FOR-SECURITIES> 6,222,554
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 377,564
<TOTAL-LIABILITIES> 6,600,118
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 167,340,311
<SHARES-COMMON-STOCK> 13,620,174
<SHARES-COMMON-PRIOR> 13,946,914
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9,567
<ACCUMULATED-NET-GAINS> (11,336,051)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,227,313
<NET-ASSETS> 172,222,006
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,411,602
<OTHER-INCOME> 0
<EXPENSES-NET> 2,720,398
<NET-INVESTMENT-INCOME> 8,691,204
<REALIZED-GAINS-CURRENT> (554,208)
<APPREC-INCREASE-CURRENT> 6,172,597
<NET-CHANGE-FROM-OPS> 14,309,593
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,610,696
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,165,723
<NUMBER-OF-SHARES-REDEEMED> 3,693,711
<SHARES-REINVESTED> 228,203
<NET-CHANGE-IN-ASSETS> 637,532
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (11,858,115)
<OVERDISTRIB-NII-PRIOR> 5,784
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 996,696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,725,475
<AVERAGE-NET-ASSETS> 134,939,678
<PER-SHARE-NAV-BEGIN> 9.34
<PER-SHARE-NII> 0.47
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.65
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> JOHN HANCOCK TAX-FREE BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 684,096,285
<INVESTMENTS-AT-VALUE> 775,511,961
<RECEIVABLES> 10,918,963
<ASSETS-OTHER> 115,909
<OTHER-ITEMS-ASSETS> 7,199,612
<TOTAL-ASSETS> 793,746,445
<PAYABLE-FOR-SECURITIES> 7,642,022
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,114,010
<TOTAL-LIABILITIES> 8,756,032
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 713,180,412
<SHARES-COMMON-STOCK> 54,576,528
<SHARES-COMMON-PRIOR> 54,883,873
<ACCUMULATED-NII-CURRENT> 1,118,337
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (20,880,193)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 91,571,857
<NET-ASSETS> 784,990,413
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,494,288
<OTHER-INCOME> 0
<EXPENSES-NET> 8,185,961
<NET-INVESTMENT-INCOME> 39,308,327
<REALIZED-GAINS-CURRENT> 3,421,148
<APPREC-INCREASE-CURRENT> 24,618,507
<NET-CHANGE-FROM-OPS> 67,347,982
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 30,751,765
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,452,430
<NUMBER-OF-SHARES-REDEEMED> 12,463,378
<SHARES-REINVESTED> 2,056,575
<NET-CHANGE-IN-ASSETS> 9,815,811
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15,621,398)
<OVERDISTRIB-NII-PRIOR> 208,645
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,201,258
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,333,126
<AVERAGE-NET-ASSETS> 595,550,085
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.38
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.01
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> JOHN HANCOCK TAX-FREE BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 684,096,285
<INVESTMENTS-AT-VALUE> 775,511,961
<RECEIVABLES> 10,918,963
<ASSETS-OTHER> 115,909
<OTHER-ITEMS-ASSETS> 7,199,612
<TOTAL-ASSETS> 793,746,445
<PAYABLE-FOR-SECURITIES> 7,642,022
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,114,010
<TOTAL-LIABILITIES> 8,756,032
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 713,180,412
<SHARES-COMMON-STOCK> 16,719,356
<SHARES-COMMON-PRIOR> 17,946,606
<ACCUMULATED-NII-CURRENT> 1,118,337
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (20,880,193)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 91,571,857
<NET-ASSETS> 784,990,413
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,494,288
<OTHER-INCOME> 0
<EXPENSES-NET> 8,185,961
<NET-INVESTMENT-INCOME> 39,308,327
<REALIZED-GAINS-CURRENT> 3,421,148
<APPREC-INCREASE-CURRENT> 24,618,507
<NET-CHANGE-FROM-OPS> 67,347,982
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,591,825
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,812,250
<NUMBER-OF-SHARES-REDEEMED> 4,765,668
<SHARES-REINVESTED> 419,825
<NET-CHANGE-IN-ASSETS> 9,815,811
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15,621,398)
<OVERDISTRIB-NII-PRIOR> 208,645
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,201,258
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,333,126
<AVERAGE-NET-ASSETS> 194,701,538
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.38
<PER-SHARE-DIVIDEND> (0.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.01
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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 (comprising the John Hancock Tax Free-Bond Trust) in the John
Hancock Tax-Free Income Funds' Prospectus, and "Independent Auditors" in the
John Hancock Tax-Free Bond Fund and John Hancock High Yield Tax-Free Fund
Statements of Additional Information in Post-Effective Amendment Number 16 to
Registration Statement Form N-1A, No. 33-32246) dated April 1, 1999.
We also consent to the incorporation by reference therein of our reports dated
October 9, 1998, with respect to the financial statements and financial
highlights of the John Hancock High Yield Tax-Free Fund and John Hancock
Tax-Free Bond Fund in the Form N-1A.
/s/Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
January 20, 1999
John Hancock Funds
Class A, Class B, and Class C
Amended and Restated Multiple Class Plan Pursuant to Rule 18f-3
Each class of shares of each of the John Hancock Funds listed in Appendix A
attached hereto (each the "Fund") will have the same relative rights and
privileges and be subject to the same sales charges, fees and expenses, except
as set forth below. The Board of Trustees/Directors, as the case may be, may
determine in the future that other allocations of expenses (whether ordinary or
extraordinary) or other services to be provided to a class of shares are
appropriate and amend this Plan accordingly without the approval of shareholders
of any class. Except as set forth in the Fund's prospectus, shares may be
exchanged only for shares of the same class of another fund in the John Hancock
group of funds.
Class A Shares
Class A Shares are sold at net asset value and subject to the initial sales
charge schedule or contingent deferred sales charge and the minimum purchase
requirements set forth in the Fund's prospectus. Class A Shares are subject to
fees under the Fund's Class A Rule 12b-1 Distribution Plan on the terms set
forth in the Fund's prospectus. The Class A Shareholders have exclusive voting
rights, if any, with respect to the Class A Distribution Plan. Class A Shares
shall be entitled to the shareholder services set forth from time to time in the
Fund's prospectus with respect to Class A Shares.
Class B Shares
Class B Shares are sold at net asset value per share without the imposition of
an initial sales charge. However, Class B shares redeemed within a specified
number of years of purchase will be subject to a contingent deferred sales
charge as set forth in the Fund's prospectus. Class B Shares are sold subject to
the minimum purchase requirements set forth in the Fund's prospectus. Class B
Shares are subject to fees under the Class B Rule 12b-1 Distribution Plan on the
terms set forth in the Fund's prospectus. The Class B Shareholders of the Fund
have exclusive voting rights, if any, with respect to the Fund's Class B
Distribution Plan. Class B Shares shall be entitled to the shareholder services
set forth from time to time in the Fund's prospectus with respect to Class B
Shares.
Class B Shares will automatically convert to Class A Shares of the Fund at the
end of a specified number of years after the initial purchase date of Class B
shares, except as provided in the Fund's prospectus. The initial purchase date
for Class B shares acquired through reinvestment of dividends on Class B Shares
will be deemed to be the date on which the original Class B shares were
purchased. Such conversion will occur at the relative net asset value per share
of each class. Redemption requests placed by shareholders who own both Class A
and Class B Shares of the Fund will be satisfied first by redeeming the
shareholder's Class A Shares, unless the shareholder has made a specific
election to redeem Class B Shares.
The conversion of Class B Shares to Class A Shares may be suspended if it is
determined that the conversion constitutes or is likely to constitute a taxable
event under federal income tax law.
Class C Shares
Class C Shares are sold at net asset value per share without the imposition of
an initial sales charge. However, Class C shares redeemed within one year of
purchase will be subject to a contingent deferred sales charge as set forth in
the Fund's prospectus. Class C Shares are sold subject to the minimum purchase
requirements set forth in the Fund's prospectus. Class C Shares are subject to
fees under the Class C Rule 12b-1 Distribution Plan on the terms set forth in
the Fund's prospectus. The Class C Shareholders of the Fund have exclusive
voting rights, if any, with respect to the Fund's Class C Distribution Plan.
Class C Shares shall be entitled to the shareholder services set forth from time
to time in the Fund's prospectus with respect to Class C Shares.
s:\agrcont\plans\multicla\3clsplan.doc
<PAGE>
APPENDIX A
John Hancock Bond Trust
- John Hancock Government Income Fund
- John Hancock High Yield Bond Fund
- John Hancock Intermediate Maturity Government Fund
John Hancock California Tax-Free Income Fund
John Hancock Capital Series
- John Hancock Independence Equity Fund
John Hancock Current Interest
- John Hancock Money Market Fund
John Hancock Investment Trust
- John Hancock Growth and Income Fund
John Hancock Investment Trust II
- John Hancock Financial Industries Fund
- John Hancock Regional Bank Fund
- John Hancock Special Value Fund
John Hancock Investment Trust III
- John Hancock Global Fund
- John Hancock Growth Fund
- John Hancock Short-Term Strategic Income Fund
- John Hancock Special Opportunities Fund
- John Hancock International Fund
John Hancock Series Trust
- John Hancock Emerging Growth Fund
- John Hancock Global Technology Fund
John Hancock Sovereign Bond Fund
- John Hancock Bond Fund
John Hancock Strategic Series
- John Hancock Strategic Income Fund
John Hancock Tax-Exempt Series Fund
- John Hancock Massachusetts Tax-Free Income Fund
- John Hancock New York Tax-Free Income Fund
John Hancock Tax-Free Bond Trust
- John Hancock High Yield Tax-Free Fund
- John Hancock Tax-Free Bond Fund
John Hancock World Fund
- John Hancock European Equity Fund
- John Hancock Global Health Sciences Fund
- John Hancock Pacific Basin Equities Fund
Dated: April 1, 1999
s:\agrcont\plans\multicla\3clsplan.doc
