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John Hancock Funds
- --------------------------------------------------------------------------------
California
Tax-Free
Income Fund
ANNUAL REPORT
August 31, 1996
<PAGE>
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TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
ANNE C. HODSDON
CHARLES L. LADNER*
LEO E. LINBECK, JR.*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5072
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in the mutual
fund industry. At that time, Securities and Exchange Commission Chairman Arthur
Levitt called on fund companies to make their prospectuses more user-friendly.
He noted that prospectuses are often overloaded with technical detail and are
hard for most investors to understand. Many industry observers agreed, and
rightly so.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
So it is my pleasure to let you know that after being under development for
a year, John Hancock Funds has introduced new simplified and consolidated
prospectuses. The prospectuses feature shorter, clearer language with a
streamlined design, and they incorporate several funds with similar investment
objectives into one document. They cover our income, growth, growth and income,
tax-free income, international/global and money market funds. We are gratified
at the favorable reviews that our new prospectuses have received from
shareholders, financial advisers, industry analysts and the press. We believe
they are a bold but sensible step forward. And while they are easier to read,
they still comply with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page spread
highlighting each fund's goals and investment strategy, the types of securities
it buys, its portfolio management and risk factors, all in plainer language.
Fund expenses and financial highlights are now found here, too, as is a new bar
chart that shows year-to-year volatility for each fund. Other features include a
better presentation of fund services, a new glossary of investment risks and a
discussion about how funds are organized, including a diagram showing the
connection of the various players that provide services to your Hancock fund(s).
We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in the end, we
did it for you, our shareholders.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY DIANNE SALES-SINGER, CFA, PORTFOLIO MANAGER
John Hancock
California Tax-Free
Income Fund
Bonds reverse course in 1996 as inflation fears build;
munis outperform U.S. Treasuries
Recently, the Fund's fiscal year end changed from December to August. What
follows is a discussion of the Fund's performance for the 12 months ended August
31, 1996.
Municipal bonds performed well over the last 12 months considering the see-saw
environment for bonds during that time. At the beginning of the Fund's fiscal
year in September 1995, the bond market was in the midst of a strong rally due
to slow economic growth, muted inflation and falling interest rates. While
municipals performed well in that time, they lagged their taxable brethren as
various flat-tax proposals created headlines. But starting in early 1996, bond
prices pulled back and yields rose as signs emerged of an economy growing faster
than had been expected. That sparked fears of inflation, a bondholder's nemesis
because of its corrosive effect on a bond's income stream. While inflation
hasn't surfaced to date, the numbers through August portrayed an economy growing
at a healthy clip. That kept the bond market concerned about the specter of
inflation through the Fund's year end.
Even with the upward pressure on rates this year, municipal bonds felt the
impact to a lesser
"Municipal bonds performed
well over the last 12 months..."
[A 2 1/4" x 3 1/2" photo of Fund management team. Caption reads: "Dianne
Sales-Singer (seated) and Fund management team members (l-r) Michael Roye, Holly
Morris, and Frank Lucibella".]
3
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John Hancock Funds - California Tax-Free Income Fund
The Fund turned in a strong
performance relative to its peers.
degree than taxable bonds and outperformed Treasuries in the second half of the
Fund's fiscal year. That's because municipals began the year with prices that
were relatively cheap compared to Treasuries due to earlier flat-tax fears.
Those fears began to dissipate in early 1996 and investors began to realize
municipals' value. In addition, municipal bonds were boosted by a growing
imbalance between supply and demand. There was a limited supply of new municipal
bonds in the last six months, while demand remained constant, if not growing.
The California municipal bond market in particular was given a boost during the
period by a strengthening state economy. Amid that backdrop, John Hancock
California Tax-Free Income Fund turned in a strong performance relative to its
peers. For the year ended August 31, 1996, the Fund's Class A and Class B shares
posted total returns of 7.56% and 6.87%, respectively, at net asset value. That
compared favorably to the 5.67% return for the average California municipal bond
fund, according to Lipper Analytical Services.(1) Please see pages seven and
eight for longer-term performance information.
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers". The first listing is CA
state-related debt followed by an up arrow and the phrase "Credit upgrade". The
second listing is Lower-rated bonds followed by an up arrow and the phrase
"Narrowing credit spreads boost prices". The third listing is Discount bonds
followed by a down arrow and the phrase "Higher interest-rate sensitivity hurt
prices". A footnote below states "See Schedule of Investments.' Investment
holdings are subject to change".]
Performance and strategy review
One reason that the Fund outperformed its competitors was our ability to manage
the Fund's duration during the period. Duration measures how much a bond's price
fluctuates with changes in interest rates. The longer the duration, the more a
bond's price will rise when interest rates fall, and fall when rates rise. We
had the Fund's duration fairly long at the beginning of the period as rates were
falling last year. But as the economy picked up steam in 1996, we became more
defensive and significantly shortened the Fund's duration in the second quarter
as interest rates rose. Overall, we've positioned the Fund conservatively this
year, keeping its duration in the neutral to shorter-than-average range. This
has served us well.
Another contributor to performance was the Fund's competitive yield. As
shareholders know, a bond fund's total return is made up of two components:
income and changes in share price, which reflect changes in individual bonds
within the Fund. As we had anticipated, coupon income has become a more
significant contributor to total return this year than bond prices. So our
higher-than-average level of income helped stabilize total return when bond
prices were falling.
Positive developments in California
We continue to see signs of California's rebounding economy reflected in job
growth, heightened real estate development and growing sales tax revenue. As we
had expected, the State received a credit upgrade shortly before the Fund's
fiscal year ended. That was a big plus for the Fund because all of our
state-related holdings, including California Public Works bonds and California
Statewide Facilities Program bonds, received upgrades. In this environment,
4
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John Hancock Funds - California Tax-Free Income Fund
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[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended August 31, 1996." The chart is
scaled in increments of 5%, with 10% at the top and 0% at the bottom. The first
represents the 7.56% total return for John Hancock California Tax-Free Income
Fund: Class A. The second represents the 6.87% total return for John Hancock
California Tax-Free Income Fund: Class B. The third represents the 5.67% total
return for the average California municipal bond fund. A Footnote below states
"Total returns for John Hancock California Tax-Free Income Fund are at net asset
value with all distributions reinvested. The average California municipal bond
fund is tracked by Lipper Analytical Services (1). See following two pages for
historical performance information."]
- --------------------------------------------------------------------------------
we have looked for value among some of the non-rated, higher-yielding bond
sectors that stand to reap the rewards of an improving economy. For example, we
recently purchased bonds to finance improvement and expansion of the renowned
Del Mar race track. With recent economic expansion in the San Diego economy,
track revenues are on the rise, benefiting the bondholders. However, additional
backing is available from revenues of the annual Del Mar fair held at the race
track, providing an additional layer of security and making the bonds an
attractive value. Another trend we have focused on is the recovery in
residential housing. In the past year, prices have stabilized and home sales
have increased as job growth has moved higher. One example is our Irvine,
California Improvement bonds for Northwood Point, a project being developed by
the Irvine Company. These bonds fit our criteria of strong demographics, solid
economic underpinnings and proven developers, factors which provide a solid
credit story with good upside as development expands.
California municipals also benefited from Orange County's emergence from
bankruptcy. The relatively quick resolution of the bankruptcy and the fact that
long term, the bondholders never experienced a missed debt payment underscored
the ultimate security of municipal bonds that serve an essential purpose and
have economic value.
"...for now, we will
stay on the defensive..."
Outlook
In the short term, we believe the bond market will continue to be volatile as
long as stronger economic data fuels inflation fears and the market looks for
the Federal Reserve to counter the threat of inflation by raising interest
rates. Such a Fed move would help slow the economy and should lead to lower
rates. But for now, we will stay on the defensive, keeping the Fund's duration
fairly neutral. As for municipal bonds, we remain optimistic about their
prospects because the overall supply continues to diminish while demand remains
strong. Demand in specialty states with dual tax exemption, such as California,
has grown at an even higher rate, making California municipals even scarcer. As
long as these strong fundamentals remain in place, municipals will continue to
be attractive.
- --------------------------------------------------------------------------------
(1)Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end
of the Fund's period discussed in this report. Of course, the manager's
views are subject to change as market and other conditions warrant.
5
<PAGE>
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A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns for the John Hancock
California Tax-Free Income Fund. Total return is a performance measure that
equals the sum of all income and capital gain distributions, assuming
reinvestment of these distributions and the change in the price of the Fund's
shares, expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum contingent deferred sales charge for
Class A shares. The effect of the maximum applicable sales charge of 4.5% for
Class B shares (maximum 5% and declinging to 0% over six years) is included in
Class B performance. Performance is affected by a 12b-1 plan. Remember that all
figures represent past performance and are no guarantee of how the Fund will
perform in the future. Also, keep in mind that the total return and share price
of the Fund's investments will fluctuate. As a result, your Fund's shares may be
worth more or less than their original cost, depending on when you sell them.
A portion of the Fund's income may be taxable. Some investors may be subject to
the Alternative Minimum Tax. Capital gains are taxable.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
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For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock California Tax-Free
Income Fund: Class A 3.32% 38.95% 54.71%(1)
John Hancock California Tax-Free
Income Fund: Class B 2.33% 29.48%(2) N/A
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock California Tax-Free
Income Fund: Class A(3) 3.32% 6.80% 6.94%(1)
John Hancock California Tax-Free
Income Fund: Class B(3) 2.33% 5.91%(2) N/A
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YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1996
SEC 30-DAY
YIELD
-----
John Hancock California Tax-Free
Income Fund: Class A 5.15%
John Hancock California Tax-Free
Income Fund: Class B 4.63%
Notes to Performance
(1) Class A shares started on December 29, 1989.
(2) Class B shares started on December 31, 1991.
(3) The Advisor voluntarily waived a portion of the management fee and reduced
a portion of the custodian fees during the period. Without the waiver of
expenses, the average annualized total return for the one-year and
five-year periods and since inception for Class A shares would have bee
3.22%, 6.60% and 6.63%, respectively. The average annualized total returns
for the one-year period and since inception for Class B shares would have
been 2.23% and 5.73%, respectively.
6
<PAGE>
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
California Tax-Free Income Fund would be worth on August 31, 1996, assuming you
invested on the day shares started and have reinvested all distributions. For
comparison, we've shown the same $10,000 investment in the Lehman Brothers
Municipal Bond Index -- an unmanaged index that includes approximately 15,000
bonds and is commonly used as a measure of bond performance.
[Line chart with the heading California Tax-Free Income Fund: Class A,
representing growth of a hypothetical $10,000 investment over the life of the
fund. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $16,444 as of August 31, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the California Tax-Free
Income Fund on December 29, 1989, before sales charge, and is equal to $16,430
as of August 31, 1996. The third line represents the California Tax-Free Income
Fund after sales charge and is equal to $15,692 as of August 31, 1996.]
[Line chart with the heading California Tax-Free Income Fund: Class B,
representing growth of a hypothetical $10,000 investment over the life of the
fund. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $13,668 as of August 31, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the California Tax-Free
Income Fund on December 31, 1991, before contingent deferred sales charge, and
is equal to $13,319 as of August 31, 1996. The third line represents the
California Tax-Free Income Fund after contingent deferred sales charge and is
equal to $13,118 as of August 31, 1996.]
7
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Statement of Assets and Liabilities
August 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $354,022,763) ......... $ 363,340,131
Options (cost - $5,400) .................................. 2,344
-------------
363,342,475
Cash ...................................................... 3,864,042
Receivable for shares sold ................................ 1,187,006
Receivable for investments sold ........................... 340,999
Interest receivable ....................................... 5,799,734
Receivable for variation margin ........................... 291,406
Receivable from John Hancock Advisers Inc. - Note B ....... 43,188
Other assets .............................................. 62,748
-------------
Total Assets ............................ 374,931,598
------------------------------------------------------------
Liabilities:
Dividend payable .......................................... 53,650
Payable for shares repurchased ............................ 239,321
Payable for investments purchased ......................... 5,400
Payable to John Hancock Advisers, Inc. ....................
and affiliates - Note B ................................. 233,043
Accounts payable and accrued expenses ..................... 74,964
-------------
Total Liabilities ....................... 606,378
------------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 372,692,998
Accumulated net realized loss on investments
and financial futures contracts ......................... (8,290,569)
Net unrealized appreciation of investments
and financial futures contracts ......................... 9,815,661
Undistributed net investment income ....................... 107,130
-------------
Net Assets .............................. $ 374,325,220
============================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with
no par value, respectively)
Class A - $291,071,911 / 28,098,621 ....................... $ 10.36
==============================================================================
Class B - $83,253,309 / 8,038,287 ......................... $ 10.36
==============================================================================
Maximum Offering Price Per Share*
Class A - ($10.36 x 104.71%) .............................. $ 10.85
==============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on August 31, 1996. You'll also
find the net asset value per share as of that date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
1995 TO AUGUST 31, 1996(1)
---------- ---------------------
<S> <C> <C>
Investment Income:
Interest ........................................ $ 22,466,593 $ 15,989,775
---------- -----------
Expenses:
Investment management fee - Note B ............. 1,907,146 1,392,170
Distribution/service fee - Note B
Class A ...................................... 397,801 297,056
Class B ...................................... 733,981 495,761
Transfer agent fee - Note B .................... 314,090 167,539
Custodian fee .................................. 80,990 72,755
Auditing fee ................................... 73,605 12,806
Printing ....................................... 65,365 38,247
Trustees' fees ................................. 42,188 43,648
Registration and filing fees ................... 35,181 808
Advisory board ................................. 33,174 28,909
Legal fees ..................................... 28,065 21,890
Financial services fees - Note B ............... -- 11,694
Miscellaneous .................................. 19,047 3,318
Less Management Fee Reduction - Note B ......... (483,282) (221,455)
---------- -----------
Total Expenses ............................. 3,247,351 2,365,146
-------------------------------------------------------------------------------
Less Expense Reductions - Note B ........... (34,352) (51,765)
-------------------------------------------------------------------------------
Net Expenses ............................... 3,212,999 2,313,381
-------------------------------------------------------------------------------
Net Investment Income ...................... 19,253,594 13,676,394
-------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts:
Net realized loss on investments sold ........... (41,990) (2,165,224)
Net realized gain (loss) on
financial futures contracts .................... (2,203,551) 393,519
Change in net unrealized appreciation/
depreciation of investments .................... 51,754,949 (11,393,374)
Change in net unrealized appreciation/
depreciation of financial futures contracts ... (629,000) 1,128,844
---------- -----------
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts 48,880,408 (12,036,235)
-------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ........................... $ 68,134,002 $ 1,640,159
===============================================================================
</TABLE>
(1) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------- JANUARY 1, 1996 TO
1994 1995 AUGUST 31, 1996(1)
------------- ------------- -------------
<S> <C> <C> <C>
From Operations:
Net investment income .................................................... $ 19,825,410 $ 19,253,594 $ 13,676,394
------------- ------------- -------------
Net realized loss on investments sold and financial futures contracts .... (4,180,216) 2,245,541) (1,771,705)
Change in net unrealized appreciation/depreciation of investments ........ (51,218,323) 51,125,949 (10,264,530)
------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations ......... (35,573,129) 68,134,002 1,640,159
------------- ------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.5800, $0.5743 and $0.3875 per share, respectively) ........ (15,737,105) (15,185,497) (11,033,084)
Class B - ($0.5100, $0.4988 and $0.3353 per share, respectively) ........ (3,992,716) (4,060,951) (2,654,650)
------------- ------------- -------------
Total Distributions to Shareholders ................................... (19,729,821) (19,246,448) (13,687,734)
------------- ------------- -------------
From Fund Share Transactions -- Net* ....................................... 29,122,142 26,141,459 (7,604,371)
------------- ------------- -------------
Net Assets:
Beginning of period ...................................................... 345,128,961 318,948,153 393,977,166
------------- ------------- -------------
End of period (including undistributed net
investment income of $127,227, $147,647 and
$107,130, respectively) ................................................. $ 318,948,153 $ 393,977,166 $ 374,325,220
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
* Analysis of Fund Share Transactions:
YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------------------------------- JANUARY 1, 1996
1994 1995 TO AUGUST 31, 1996(1)
------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ................................. 5,288,858 $ 54,343,070 2,339,818 $ 18,225,155 1,252,548 $ 13,030,082
Shares issued in reorganization - Note D .... -- -- 4,164,385 48,873,637 -- --
Shares issued to shareholders in reinvestment
of distributions ........................... 669,253 6,642,113 694,275 6,453,478 481,285 4,994,844
--------- ------------ --------- ------------ --------- ------------
5,958,111 60,985,183 7,198,478 73,552,270 1,733,833 18,024,926
Less shares repurchased ..................... (5,712,088) (56,313,131) (4,285,570) (43,261,363) (2,582,406) (26,795,066)
--------- ------------ --------- ------------ --------- ------------
Net increase (decrease) ..................... 246,023 $ 4,672,052 2,912,908 $ 30,290,907 (848,573) ($ 8,770,140)
========= ============ ========= ============ ========= ============
CLASS B
Shares sold ................................. 3,496,364 $ 36,145,744 861,939 $ 8,918,797 874,863 $ 9,083,702
Shares issued to shareholders in reinvestment
of distributions ........................... 200,879 1,988,933 208,712 1,924,315 120,687 1,252,034
--------- ------------ --------- ------------ --------- ------------
3,697,243 38,134,677 1,070,651 10,843,112 995,550 10,335,736
Less shares repurchased ..................... (1,391,946) (13,684,587) (1,484,859) (14,992,560) (882,160) (9,169,967)
--------- ------------ --------- ------------ --------- ------------
Net increase (decrease) ..................... 2,305,297 $ 24,450,090 (414,208) ($ 4,149,448) 113,390 $ 1,165,769
========= ============ ========= ============ ========= ============
</TABLE>
(1) Effective August 31, 1996 the fiscal period changed from December 31 to
August 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
redeemed during the last two periods, along with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Financial Highlights
Selected data for each share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios, and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------------------------------------------- JANUARY 1, 1996 TO
1991 1992 1993 1994(1) 1995 AUGUST 31, 1996(9)
-------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ....... $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69
-------- -------- -------- -------- -------- --------
Net Investment Income ...................... 0.69 0.66(2) 0.62 0.58 0.57(2) 0.39(2)
Net Realized and Unrealized Gain
(Loss) on Investments and
Financial Futures Contracts ............... 0.47 0.25 0.76 (1.57) 1.41 (0.33)
-------- -------- -------- -------- -------- --------
Total from Investment Operations .......... 1.16 0.91 1.38 (0.99) 1.98 0.06
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ....... (0.70) (0.67) (0.62) (0.58) (0.57) (0.39)
Distributions from Net Realized
Gains on Investments Sold and
Financial Futures Contracts ............... (0.05) (0.15) (0.32) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ....................... (0.75) (0.82) (0.94) (0.58) (0.57) (0.39)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ............. $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69 $ 10.36
======== ======== ======== ======== ======== ========
Total Investment Return
at Net Asset Value (3) ................... 12.26% 9.15% 13.60% (9.31%) 21.88% 0.61%(7)
Total Adjusted Investment
Return at Net Asset Value (3,4) .......... 11.86% 8.90% 13.42% (9.45%) 21.73% 0.55%(7)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) .. $163,693 $217,014 $279,692 $241,583 $309,305 $291,072
Ratio of Expenses to Average Net Assets .... 0.40% 0.58% 0.69% 0.75% 0.75% 0.76%(8),(10)
Ratio of Adjusted Expenses to
Average Net Assets (5) ................... 0.80% 0.83% 0.87% 0.89% 0.90% 0.84%(8)
Ratio of Net Investment Income to
Average Net Assets ....................... 6.75% 6.36% 5.69% 5.85% 5.76% 5.57%(8)
Ratio of Adjusted Net Investment
Income to Average Net Assets (5) ......... 6.35% 6.11% 5.51% 5.71% 5.61% 5.48%(8)
Portfolio Turnover Rate .................... 45% 34% 51% 62% 37%(6) 30%
Fee Reduction per Share .................... $ 0.04 $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2) $ 0.01(2)
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------------------------- JANUARY 1, 1996 TO
1992 1993(1) 1994(1) 1995 AUGUST 31, 1996(9)
------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $10.32 $10.41 $10.85 $ 9.28 $10.68
------ ------ ------ ------ ------
Net Investment Income ................................... 0.58(2) 0.54 0.51 0.50(2) 0.33(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ........... 0.25 0.76 (1.57) 1.40 (0.31)
------ ------ ------ ------ ------
Total from Investment Operations ....................... 0.83 1.30 (1.06) 1.90 (0.02)
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment Income .................... (0.59) (0.54) (0.51) (0.50) (0.34)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts ...... (0.15) (0.32) -- -- --
------ ------ ------ ------ ------
Total Distributions .................................... (0.74) (0.86) (0.51) (0.50) (0.34)
------ ------ ------ ------ ------
Net Asset Value, End of Period .......................... $10.41 $10.85 $ 9.28 $10.68 $10.36
====== ====== ====== ====== ======
Total Investment Return at Net Asset Value (3) .......... 8.35% 12.76% (9.99%) 20.87% 0.20%(7)
Total Adjusted Investment Return at Net Asset Value (3,4) 8.10% 12.58% (10.13%) 20.72% 0.14%(7)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ............... $26,595 $65,437 $77,365 $84,673 $83,253
Ratio of Expenses to Average Net Assets ................. 1.35% 1.44% 1.50% 1.50% 1.52%(8),(10)
Ratio of Adjusted Expenses to Average Net Assets (5) 1.60% 1.62% 1.64% 1.65% 1.59%(8)
Ratio of Net Investment Income to Average Net Assets 5.43% 4.82% 5.10% 4.97% 4.81%(8)
Ratio of Adjusted Net Investment
Income to Average Net Assets (5) ...................... 5.18% 4.64% 4.96% 4.82% 4.72%(8)
Portfolio Turnover Rate ................................. 34% 51% 62% 37%(6) 30%
Fee Reduction per Share ................................. $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2) $0.01(2)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc., became the investment
adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover excludes merger activity.
(7) Not annualized.
(8) Annualized.
(9) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(10) For the period ended August 31, 1996, the Ratio of Expenses to Average Net
Assets for the Fund excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would be
0.75% for Class A and 1.50% for Class B.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Schedule of Investments
August 31, 1996
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
California Tax-Free Income Fund on August 31, 1996. It has two main categories:
tax-exempt long-term bonds and options. The tax-exempt long-term bonds are
broken down by state. Under each state is a list of the securities owned by the
Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
California (91.75%)
ABAG Finance Auth for Nonprofit Corps,
Cert of Part Peninsula Family YMCA Ser A.................. 6.800% 10-01-11 Baa1* $ 1,000 $ 1,023,000 6.65%
Alameda, County of,
Cert of Part 1992 Cap Proj................................ 6.750 06-01-16 A 500 538,500 6.27
Anaheim, City of,
Ref Cert of Part Reg Rites Convention Center.............. 8.520# 07-16-23 AAA 2,000 2,065,000 8.25
Arcadia Hospital,
Methodist Hosp Rev of Southern Calif...................... 6.625 11-15-22 A 1,205 1,242,102 6.43
Avalon Community Improvement Agency,
Tax Alloc Community Imp Proj Ser B........................ 6.400 08-01-22 A- 1,925 1,943,884 6.34
Bakersfield Central District Development Agency,
Tax Alloc Ref Downtown Bakersfield Redevel Proj........... 6.625 04-01-15 BBB+ 4,000 4,077,400 6.50
Bakersfield Memorial Hospital,
Hosp Rev Ser A............................................ 6.500 01-01-22 A- 2,000 2,051,280 6.34
Beaumont Unified School District,
Cert of Part Cap Imp Proj................................. 7.700 01-01-21 BBB+* 1,000 1,047,140 7.35
Brentwood Redevelopment Agency,
Tax Alloc Brentwood Redevel Proj Ser A.................... 7.700 11-01-08 BBB* 135 141,071 7.37
Burbank Redevelopment Agency,
Tax Alloc Golden State Redevel Proj Ser A................. 6.000 12-01-23 A- 2,750 2,670,745 6.18
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj................. 6.125 06-01-09 Baa* 1,000 995,950 6.15
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc.................. 6.950 10-01-21 A 250 265,007 5.91
Ins Hosp Rev Ser 1990 Children's Hosp San Diego........... 6.500 07-01-20 AAA 500 542,340 4.43
Ins Rev Ref Ser A Catholic Healthcare West Obligated Group 5.750 07-01-15 AAA 2,000 1,959,300 5.87
Ins Rev Ser A San Diego Christian......................... 6.250 07-01-12 A+ 1,135 1,161,673 6.11
Ins Rev Ser B Hlth Facil Small Facil...................... 7.500 04-01-22 A 2,000 2,259,000 6.64
Rev 1990 Ser A Kaiser Permanente.......................... 7.000 12-01-10 AA 600 652,956 4.99
Rev Ser 1994A Scripps Research Institute.................. 6.300 07-01-09 A* 500 518,490 6.08
Sec Rev 1991 Ser Hosp of the Good Samaritan............... 7.000 09-01-21 BBB+ 2,250 2,351,655 6.21
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
California Housing Finance Agency,
Home Mtg Rev 1988 Ser B................................... 8.600% 08-01-19 AA- $ 40 $ 41,931 6.97%
Home Mtg Rev 1988 Ser D................................... 8.000 08-01-19 AA- 80 84,149 6.08
Home Mtg Rev 1989 Ser A................................... 7.625 08-01-09 AA- 30 30,518 7.19
Home Mtg Rev 1989 Ser B................................... 8.000 08-01-29 AA- 85 88,737 6.63
Home Mtg Rev 1989 Ser D................................... 7.500 08-01-29 AA- 145 150,517 6.57
Home Mtg Rev 1990 Ser D................................... Zero 08-01-20 AA- 8,500 1,337,815 7.37
Home Mtg Rev 1991 Ser A................................... 7.375 08-01-17 AA- 430 454,067 6.29
Home Mtg Rev 1991 Ser C................................... 7.450 08-01-11 AA- 45 46,866 6.68
Home Mtg Rev 1994 Ser C................................... 6.650 08-01-14 AA- 1,000 1,027,690 6.47
Home Mtg Rev 1994 Ser G................................... 7.250 08-01-17 AA- 3,500 3,721,025 6.82
Hsg Rev 1991 Ser E........................................ 7.000 08-01-26 AAA 525 545,848 6.73
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co........ 6.900 12-01-17 A+ 500 530,305 5.90
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co......... 6.625 06-01-09 A 500 524,040 5.87
Solid Waste Disposal Rev Keller Canyon Landfill Co Proj... 6.875 11-01-27 A 2,000 2,101,620 6.54
California Rural Home Mortgage Finance Auth,
SF Mtg Rev Ser A Mtg Backed Sec's Prog.................... 7.550 11-01-26 AAA 1,000 1,100,310 6.86
SF Mtg Rev Ser A Step Coupon.............................. 6.450 05-01-27 AAA 1,000 1,095,930 5.89
California State Public Works Board,
Lease Rev 1992 Ser A The Trustees of the Calif
State Univ Various University Projs..................... 6.700 10-01-17 A- 1,500 1,585,065 5.80
Lease Rev 1994 Ser A Depart of Corrections Calif
State Prison Montery County (Soledad II)................ 6.875 11-01-14 A- 500 545,585 6.30
Lease Rev 1996 Ser A Depart of Corrections................ 5.500 01-01-15 AAA 5,145 4,943,676 5.72
Lease Rev Ref Depart of Correction
1993 Ser A Calif State Prison........................... 5.000 12-01-19 AAA 7,970 7,207,909 5.53
Lease Rev Ref Ser A Various Univ Proj..................... 5.500 06-01-21 A 1,250 1,142,813 6.02
Lease Rev Ser A Depart of Corrections..................... 5.250 01-01-21 AAA 4,500 4,151,520 5.69
Lease Rev Ser A Various
Community College Proj.................................. 5.625 12-01-18 A- 3,700 3,453,099 6.03
California Statewide Communities Development Auth,
Ins Cert of Part United Western Medical Centers........... 6.750 12-01-21 A 7,500 7,861,875 6.44
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles..... 6.200 08-01-12 A 1,250 1,251,463 6.19
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles..... 6.250 08-01-22 A 2,590 2,591,425 6.25
Ins Rev Cert of Part Hlth Facil Eskaton Properties........ 6.700 05-01-11 A 1,250 1,308,488 6.40
Ins Rev Cert of Part Statewide Univ Northridge Proj....... 6.000 04-01-26 AAA 1,620 1,613,228 6.03
Rev Ref Cert of Part Triad Healthcare Hosp................ 6.500 08-01-22 A 13,000 13,305,500 6.35
Campbell, City of,
1991 Cert of Part Civic Center Proj....................... 6.750 10-01-17 Aaa* 155 172,561 6.06
1991 Cert of Part Civic Center Proj....................... 6.750 10-01-17 A- 1,565 1,651,216 6.40
Capistrano Unified School District,
Spec Tax of Community Facil Dist No 87-1.................. 7.500 09-01-07 BBB* 3,500 3,860,395 6.80
Spec Tax of Community Facil Dist No 87-1.................. 8.375 10-01-20 BBB* 3,000 3,462,270 7.26
Spec Tax of Community Facil Dist No 92-1.................. 7.000 09-01-18 BBB* 1,500 1,491,675 7.04
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No 1 Redevel Proj................. 6.375 10-01-12 BBB+ 500 500,435 6.37
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj.................... 7.350% 08-01-20 Aaa* $ 200 $ 223,776 6.57%
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992................ 6.600 10-01-22 AAA 3,700 3,993,003 6.12
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993........ 6.100 07-01-13 BBB- 3,300 3,241,821 6.21
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993........ 6.200 07-01-20 BBB- 1,000 982,800 6.31
Clearlake Redevelopment Agency,
Tax Alloc Highlands Park Community Devel Proj............. 6.400 10-01-23 BBB 500 491,135 6.52
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A............................... 7.100 08-01-21 BBB* 220 222,853 6.85
Covina Hospital,
Rev Cert of Part Intercommunity Hlth Serv Inc............. 7.000 03-01-17 BBB+ 925 937,728 6.90
Cucamonga School District,
Cert of Part.............................................. 7.600 12-01-15 Baa* 1,000 1,054,810 7.21
Davis, City of, Redevelopment Agency,
Tax Alloc Ref Davis Redevel Proj.......................... 7.000 09-01-24 AAA 5,115 5,638,469 6.35
Del Mar Race Track Auth,
Rev Ref Ser 1996.......................................... 6.000 08-15-06 BBB 2,240 2,208,640 6.09
Rev Ref Ser 1996.......................................... 6.200 08-15-11 BBB 1,865 1,823,746 6.34
Delano, City of,
Cert of Part.............................................. 7.000 04-01-10 BBB+ 2,000 2,068,720 6.77
Delta, County of,
Home Mtg Finance Auth Prog Ser A.......................... 6.750 12-01-25 AAA 5,000 5,138,750 6.57
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990
Desert Hosp Corp Proj..................................... 8.000 07-01-10 AAA 300 341,646 4.48
Duarte, City of,
Cert of Part City of Hope
National Medical Center Proj.............................. 6.250 04-01-23 Baa1* 15,960 15,581,269 6.40
Elk Grove Unified School District,
Spec Tax of Community Facil Dist No 1..................... 7.125 12-01-24 AAA 1,000 1,157,070 6.16
Encinitas Union School District,
GO San Diego County Election of 1996 Ser 1996............. Zero 08-01-16 AAA 1,000 301,540 5.85
Encinitas, City of,
Cert of Part Civic Center Proj Ser A...................... 6.750 12-01-11 A- 1,300 1,376,063 6.38
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave
Storm Drainage Proj....................................... 6.500 08-01-21 A- 1,085 1,082,266 6.52
Fontana Public Financing Auth,
Tax Alloc Rev 1990 Ser A North Fontana Redevel Proj....... 7.250 09-01-20 A 325 316,368 7.25
Tax Alloc Rev Sub Lien 1991
Ser A North Fontana Redevel Proj......................... 7.750 12-01-20 BBB 195 225,730 4.62
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center.... 8.375 04-01-11 B* 6,175 5,372,250 9.63
Spec Tax of Community Facil Dist No 90-3 Empire Center.... 8.400 04-01-15 B* 940 817,800 9.66
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A.............. 6.500 01-01-32 BBB- 1,665 1,667,298 6.38
Toll Rd Rev Fixed Rate Current Int Ser 1995A.............. 6.000 01-01-34 BBB- 14,775 13,937,849 6.30
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center........ 6.625% 06-01-21 AA- $ 250 $ 257,982 6.11%
Fresno, City of, Joint Powers Financing Auth, Rev Ser A.... 6.550 09-02-12 BBB 2,000 2,038,180 6.43
Hawaiian Gardens Redevelopment Agency,
Tax Alloc Ref Proj No 1................................... 6.200 12-01-23 BBB 500 471,195 6.58
Industry Urban Development Agency,
Tax Alloc Ref Civic Recreational Proj 1-A................. 7.375 05-01-12 A+* 910 932,086 7.20
Tax Alloc Ref Trans District Proj 3....................... 6.900 11-01-16 A- 1,020 1,075,253 6.55
Tax Alloc Unref Bal Civic Recreation Al Proj 1-B.......... 7.375 05-01-15 A+* 235 242,017 7.16
Inglewood, City of,
Cert of Part Civic Center Imp Proj........................ 7.000 08-01-19 BBB 1,000 1,054,150 6.64
Irvine, City of,
Imp Board Act of 1915 Assessment District #95-12 Ser B.... 6.550 09-02-21 BB 1,000 957,430 6.84
Irwindale Community Redevelopment Agency,
Sub Lien Tax Alloc Industrial Devel Proj.................. 7.050 06-01-26 BBB 2,750 2,826,175 6.86
Lincoln Redevelopment Agency,
Tax Alloc Lincoln Redevel Proj............................ 7.650 08-01-17 BBB+ 860 980,649 6.71
Los Alamitos Unified School District,
Spec Tax of Community Facil Dist No 90-1.................. 7.150 08-15-21 Baa1* 6,005 6,312,876 6.80
Los Angeles City Department of Water and Power,
Elec Plant Ref Rev 2nd Iss of 1993........................ 5.400 11-15-12 AA- 1,000 964,550 5.60
Los Angeles County Health Facilities Auth,
Lease Rev Ref Olive View Medical Center Proj.............. 7.500 03-01-08 A* 450 480,042 4.05
Los Angeles Department Airport Auth,
Airport Rev AMT Ser A Ontario International Airport Proj.. 6.000 05-15-26 AAA 2,000 1,969,800 6.09
Los Angeles Public Works Financing Auth,
Rev Regional Park & Open Space District A................. 6.000 10-01-15 AA 3,750 3,711,975 6.06
Los Angeles, City of,
Rev Ser B AMT Harbor Proj................................. 6.000 08-01-15 AA 2,000 1,990,940 6.03
Los Angeles, County of, Metropolitan Transportation,
Sales Tax Rev Ref 2nd Tier Prop Ser A..................... 5.750 07-01-18 AAA 2,000 1,970,500 5.84
Los Angeles, County of,
Cert of Part Disney Pkg Proj.............................. 6.500 03-01-23 BBB 2,000 2,005,160 6.48
County Imp No 2656-M...................................... 8.375 09-02-18 BBB* 3,865 4,009,551 8.07
Metropolitan Water District,
Wtr Rev Iss of 1991....................................... 6.625 07-01-12 AA 750 826,477 6.01
Wtr Rev Iss of 1992....................................... 5.000 07-01-20 AA 7,500 6,520,650 5.75
Moreno Valley, City of,
Cert of Part Ser 1995 City Hall Proj...................... 6.500 11-01-16 Baa1* 1,500 1,519,710 6.42
Mountain View, City of, Capital Improvements Financing Auth,
1992 Rev City Hall/CommunityTheatre Complex & Shoreline
Regional, Park Community Tax Alloc Refinancing............ 6.500 08-01-16 AAA 600 638,988 6.10
Newport-Mesa Unified School District,
Community Facil District No 90-1 Spec Tax Ser 1996........ 6.750 09-01-21 BBB- 3,000 3,008,040 6.73
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj................... 7.000% 05-01-13 AAA $ 100 $ 114,679 5.58%
Rev 1992 Ser A Calif-Oregon Transm Proj................... 6.500 05-01-16 AAA 1,000 1,068,310 5.75
Oakland, Port of,
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj.... 6.800 01-01-19 A+ 500 518,970 6.55
Oceanside, City of,
Ref Cert of Part Ser A.................................... 6.375 04-01-12 A* 3,000 3,080,490 6.21
Orange Cove Irrigation District,
Cert of Part Rehab Proj................................... 7.250 02-01-12 BBB 2,000 2,242,660 6.47
Cert of Part Rehab Proj................................... 7.000 02-01-15 BBB 2,500 2,778,575 6.30
Orange Redevelopment Agency,
Rev Ref Tax Alloc Northwest Redevel Proj B................ 5.700 10-01-17 A- 2,000 1,867,520 6.10
Orange, County of,
1996 Ser A Recovery Cert of Part.......................... 5.800 07-01-16 AAA 2,000 1,960,600 5.92
Cert of Part Civic Center Exp Proj........................ 6.700 08-01-18 AAA 1,000 1,108,580 6.04
Ser A of 1990 Spec Tax of Community
Facil Dist No 87-3 Mission Viego........................ 7.800 08-15-15 A* 350 395,619 4.57
Ser A of 1992 Spec Tax of Community
Facil Dist No 88-1 Aliso Viego.......................... 7.350 08-15-18 AAA 1,000 1,154,290 6.37
Orange, County of, Development Agency,
Tax Alloc Santa Ana Heights Proj.......................... 6.125 09-01-23 BBB 3,000 2,890,890 6.36
Pasadena, City of,
1993 Ref Cert of Part Old Pasadena Parking Facil Proj..... 6.250 01-01-18 A+ 1,000 1,049,550 5.95
Pittsburg Redevelopment Agency,
Spec Tax of Community Facil Dist 90-1 California Ave...... 7.400 08-15-20 BBB 3,040 3,261,373 6.90
Rancho Mirage, City of, Joint Powers Financing Auth,
Cert of Part Eisenhower Memorial Hosp..................... 7.000 03-01-22 A* 4,500 4,810,410 6.55
Civic Center Rev Ref Ser 1991A............................ 7.500 04-01-17 BBB 195 221,029 6.62
Civic Center Rev Unref Ser 1991A.......................... 7.500 04-01-17 BBB 55 59,376 6.95
Redondo Beach Public Financing Auth,
Rev South Bay Center Redevel Proj......................... 7.000 07-01-16 BBB+* 950 945,848 7.03
Richmond, City of, Joint Powers Financing Auth,
Rev Ser A................................................. 7.700 10-01-10 BBB* 1,745 1,832,669 7.33
Riverside, County of, Asset Leasing Corp,
Leasehold Rev 1993 Ser A County of Riverside Hosp Proj.... 6.500 06-01-12 A 1,000 1,051,420 6.18
Sacramento Power Auth,
Cogeneration Proj Rev Light & Pwr Imp..................... 6.000 07-01-22 BBB- 12,000 11,468,880 6.28
Sacramento Unified School District,
Spec Tax of Community Facil Dist No 1 Ser B............... 7.300 09-01-13 Baa* 760 815,860 6.80
Saddleback Valley Unified School District,
Spec Tax of Community Facil Dist No 89-3 Ser A............ 7.750 09-01-16 BBB* 3,200 3,394,496 7.31
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj............. 5.500 08-01-17 A- 11,250 10,357,988 5.97
Cert of Part Ser A Medical Center Fin Proj................ 5.500 08-01-15 AAA 5,875 5,628,309 5.74
Cert of Part Ser B Cap Facil Proj......................... 6.875 08-01-24 AAA 350 404,929 5.64
San Diego, County of,
Cert of Part Inmate Reception Center & Cooling............ 6.750 08-01-19 AAA 3,000 3,274,980 6.18
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
San Diego, County of, Regional Transportation Commission,
Sales Tax Rev 1991 Ser A.................................. 7.000% 04-01-06 AA- $ 90 $ 95,305 6.61%
San Diego, County of, Water Auth,
Wtr Rev Cert of Part Reg Fixed............................ 5.681# 04-22-09 AAA 800 810,816 5.61
San Francisco State Building Auth,
Lease Rev Ref 1993 Ser A Depart of Gen Serv............... 5.000 10-01-13 A- 2,145 1,966,944 5.45
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec............................ Zero 01-01-03 BBB* 5,000 3,193,950 7.20
Toll Rd Rev Sr Lien Cap Apprec............................ Zero 01-01-14 BBB* 5,000 1,581,800 6.69
Toll Rd Rev Sr Lien Cap Apprec............................ Zero 01-01-22 BBB* 6,500 1,191,385 6.65
San Jose Financing Auth,
Reassessment Rev 1994 Ser C............................... 6.750 09-02-11 BBB+* 900 919,809 6.60
San Jose, City of,
1986 Cert of Part Convention Center Proj.................. 7.875 09-01-10 A+* 300 306,033 3.56
San Mateo, County of, Joint Powers Financing Aut,
Lease Rev Ref Cap Proj Prog............................... 5.000 07-01-21 AAA 1,815 1,636,041 5.55
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding Facil Ser A.............. 6.250 07-01-19 AAA 1,790 1,905,187 5.87
Lease Rev Police Admin & Holding Facil Ser A.............. 6.250 07-01-24 AAA 10,000 10,703,700 5.84
Santa Barbara, County of,
1990 Cert of Part......................................... 7.500 02-01-11 AAA 250 276,195 4.40
1991 Cert of Part......................................... 6.400 02-01-11 A+ 250 257,390 5.85
Santa Clarita Community Facilities,
Spec Tax of Community Facil Dist No 92-1 Ser A............ 7.450 11-15-10 BBB* 3,600 3,767,832 7.12
Santa Cruz Public Financing Auth,
Rev Tax Alloc Ser B....................................... 6.200 09-01-23 BBB+ 2,000 1,958,960 6.33
Santa Rosa, City of,
Wastewater Rev 1992 Ser A
Subregional Wastewater Proj............................... 6.500 09-01-22 AAA 500 554,490 4.63
Saugus Unified School District,
Cert of Part.............................................. 7.500 08-01-09 BBB+ 700 748,405 7.01
Sierra Unified School District,
Ref Cert of Part Cap Fin Proj............................. 6.000 03-01-12 Baa* 2,000 1,954,680 6.14
Southern California Home Financing Auth,
Single Family Mtg Rev 1990 Iss B.......................... 7.750 03-01-24 AAA 45 47,505 6.58
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser A........ 6.750 09-01-22 AAA 835 854,188 6.60
Southern California Public Power Auth,
Rev Ref Southern Transmission Proj........................ Zero 07-01-13 AAA 4,400 1,636,932 6.02
Stanislaus Waste to Energy Financing Agency,
Solid Waste Rev Ref Ogden Martin Sys Inc Proj............. 7.625 01-01-10 BBB+ 970 1,042,129 7.10
Suisun, City of, Redevelopment Agency,
Tax Alloc Suisan City Redevel Agency...................... 7.250 10-01-20 AAA 420 465,780 6.54
Torrance, City of, Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj.............. 7.125 09-01-21 BBB 500 521,345 6.37
Turlock Irrigation District,
Cert of Part.............................................. 7.300 01-01-11 AAA 4,165 4,422,230 6.88
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
University of California, The Regents of,
1993 Ref Cert of Part UCLA Central
Chiller/Cogeneration Facil................................ 5.400% 11-01-11 Aa* $ 1,000 $ 943,550 5.72%
Upland Housing Auth,
Rev Iss A................................................. 7.500 07-01-03 BBB* 190 198,620 7.17
Rev Iss A................................................. 7.850 07-01-20 BBB* 1,280 1,326,656 7.57
Vallejo Sanitation and Flood Control District,
Cert of Part.............................................. 5.000 07-01-19 AAA 5,000 4,502,700 5.55
Vallejo, City of,
Cert of Part.............................................. 8.000 02-01-06 BBB+* 2,000 2,074,540 7.71
Victor Valley Unified High School District,
Cert of Part.............................................. 7.875 11-01-12 A* 1,255 1,431,001 6.91
West Covina Redevelopment Agency,
Ref Community Facil Dist
Spec Tax Fashion Plaza Proj............................... 6.000 09-01-22 A 3,000 2,915,460 6.17
------------
343,425,693
------------
Puerto Rico (5.32%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the
Commonwealth of Puerto Rico............................... 8.220# 07-01-11 AAA 7,500 8,128,125 7.58
Wtr & Swr Rev Ref Ser 1995................................ 6.250 07-01-13 A 3,160 3,325,173 5.94
Puerto Rico Ports Auth,
Spec Facil Rev 1996 Ser A American
Airlines Inc Proj......................................... 6.250 06-01-26 BB+ 2,000 1,984,260 6.30
Puerto Rico, Commonwealth of,
GO Pub Imp Ser 1996....................................... 6.500 07-01-15 A 6,000 6,476,880 6.02
------------
19,914,438
------------
TOTAL TAX-EXEMPT LONG TERM BONDS
(Cost $354,022,763) (97.07%) 363,340,131
------- ------------
NUMBER
OF EXPIRATION
CONTRACTS DATE
--------- ----
OPTIONS (0.00%)
U.S. Treasury Bond Option 112 USV6C.......................... 75 09-21-96 2,344
------------
TOTAL OPTIONS
(Cost $5,400) ( 0.00%) 2,344
------- ------------
TOTAL INVESTMENTS (97.07%) $363,342,475
======= ============
</TABLE>
* Credit ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poors ratings are not available.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities Exchange Commission and is unaudited. Zero coupon yields are
at yield to maturity.
# Represents rate in effect on August 31, 1996.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Portfolio Concentration
- --------------------------------------------------------------------------------
The California Tax-Free Income Fund invests primarily in securities issued by
the state of California and its various political subdivisions. The performance
of the Fund is closely tied to economic conditions within California and the
financial condition of the state and its agencies and municipalities. The
concentration of investments by states and credit ratings for individual
securities held by the Fund are shown in the schedule of investments. In
addition, the concentration of investments can be aggregated by various sector
categories.
The table below shows the percentages of the Fund's investments at August 31,
1996 assigned to the various sector categories.
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
------------------- ----------------------
General Obligation................................ 1.73%
Revenue Bonds - Certificate of Participation...... 12.88
Revenue Bonds - Education......................... 9.02
Revenue Bonds - Electric Power.................... 4.58
Revenue Bonds - Health............................ 19.48
Revenue Bonds - Housing........................... 4.62
Revenue Bonds - Industrial Development Bond....... 2.57
Revenue Bonds - Other............................. 26.94
Revenue Bonds - Pollution Control Facilities...... 1.12
Revenue Bonds - Transportation.................... 7.58
Revenue Bonds - Water & Sewer..................... 6.55
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 97.07%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock California Tax-Free Income Fund (the "Fund") is a diversified
open-end management investment company, registered under the Investment Company
Act of 1940. The investment objective of the Fund is to provide as high a level
of current income exempt from both federal income taxes and California personal
income taxes as is consistent with preservation of capital.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution/service expenses under terms of
a distribution plan, have exclusive voting rights regarding such distribution
plan.
On June 25, 1996 the Trustees voted to change the fiscal period end from
December 31 to August 31. This change is effective August 31, 1996.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $7,860,974 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gains distribution will be made. The carryforwards expire as follows:
December 31, 2001 -- $44,815, December 31, 2002 -- $267,864, December 31, 2003
- -- $5,169,717 and December 31, 2004 -- $2,378,578. The unused capital loss
caryforward of $44,815 expiring in 2001 was transferred from the John Hancock
Series Fund --California Portfolio as of September 15, 1995. Effective August
31, 1996, the tax year of the Fund changed from December 31 to August 31.
DISTRIBUTIONS, DIVIDENDS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees if any, are calculated daily
21
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
at the class level based on the appropriate net assets of each class and the
specific expense rate(s) applicable to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at time of disposition.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues,
and expenses of the Fund. Actual results could differ from those estimates.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange. Subsequent payments, known as
"variation margin", to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At August 31, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION/(DEPRECIATION)
- ---------- -------------- -------- ---------------------------
SEP 1996 20 U.S Treasury Bonds SHORT ($ 71,875)
DEC 1996 335 U.S Treasury Bonds SHORT 571,719
--------
$499,844
========
At August 31, 1996, the Fund has deposited in a segregated account
$5,115,000 par value of City of Davis Redevelopment Agency, 7.00%, 9/01/24, to
cover margin requirements on open financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked-to-market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to fluctuation in
the stock market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument and buying puts and writing calls will
tend to decrease the Fund's exposure to the underlying instrument, or hedge
other Fund investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
22
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended August 31,
1996.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent at
an annual rate of 0.55% of the Fund's average daily net asset value.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit the Fund operating expenses to 0.75% and
1.50% of the average net assets attributable to Class A and Class B,
respectively. Accordingly, the reduction in the Adviser's fee amounted to
$221,455 for the period ended August 31, 1996.
The Fund has an agreement with its custodian bank under which $51,765 of
custodian fees have been reduced by balance credits applied during the period
ended August 31, 1996. If the Fund had not entered into this agreement, the
assets not invested, on which these balance credits were earned, could have
produced taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended August
31, 1996, net sales charges received with regard to sales of Class A shares
amounted to $407,599. Out of this amount, $684 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$343,614 was paid as sales commissions to unrelated broker-dealers and $63,301
was paid as sales commissions to sales personnel of John Hancock Distributors,
Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro
& Co., Inc. ("Sutro"), all of which are broker dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended August 31,
1996, contingent deferred sales charges paid to JH Funds amounted to $135,738.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds at an
annual rate not to exceed 0.15% of Class A average daily net assets and 1.00% of
Class B average daily net assets to reimburse JH Funds for its distribution and
service costs. JH Funds has temporarily agreed to limit the distribution and
service fees pursuant to the Class B plan to 0.90% of the average daily net
assets. Up to a maximum of 0.15% for Class A and 0.25% for Class B of these
payments may be service fees as defined by the amended Rules of Fair
23
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Practice of the National Association of Securities Dealers. Under the amended
Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1 payments
could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. The Fund pays Investor Services a fee based on the number of
shareholder accounts and certain out-of-pocket expenses.
On September 10, 1996, the Board of Trustees approved retroactively to
January 1, 1996, an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for 1996 is
estimated to be at an annual rate of 0.01875% of the average net assets of each
Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C. Hodson
are directors and/or officers of the Adviser and/or its affiliates, as well as a
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. Effective with the fees paid for 1995, the unaffiliated Trustees may elect
to defer for tax purposes their receipt of this compensation under the John
Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments
into other John Hancock funds, as applicable, to cover its liability for the
deferred compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The deferred
compensation liability and the related other asset are always equal and are
marked to market on a periodic basis to reflect any income earned by the
investment as well as any unrealized gains or losses. At August 31, 1996, the
Fund's investments to cover the deferred compensation liability had unrealized
appreciation of $1,505.
The Fund has an independent advisory board composed of certain retired
Directors who provide advice to the current Board of Directors in order to
facilitate a smooth management transition. The Fund pays the advisory board and
its counsel a fee.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended August 31, 1996, aggregated $113,405,711 and $129,692,943, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended August 31, 1996.
The cost of investments owned at August 31, 1996 for federal income tax
purposes was $354,028,163. Gross unrealized appreciation and depreciation of
investments aggregated $12,767,953 and $3,453,641, respectively, resulting in
net unrealized appreciation of $9,314,312.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1996, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss of $79,833, a decrease in
undistributed net investment income of $29,177 and an increase in capital
paid-in of $109,010. This represents the cumulative amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
August 31, 1996. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to certain differences in the computation
of distributable income and capital gains under federal tax rules versus
generally accepted accounting principles. The calculation of net investment
income per share in the financial highlights excludes these adjustments.
24
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
REPORTS OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock California Tax-Free Income Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock California Tax-Free Income Fund (the "Fund"), including the schedule of
investments, as of August 31, 1996, and the related statements of operations for
the period from January 1, 1996 to August 31, 1996 and for the year ended
December 31, 1995, the statements of changes in net assets for the period from
January 1, 1996 to August 31, 1996 and for each of the two periods in the period
ended December 31, 1995 and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996, by correspondence with the custodian and brokers or other
appropriate audit procedures when replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
John Hancock California Tax-Free Income Fund at August 31, 1996, the results of
its operations for the period from January 1, 1996 to August 31, 1996 and for
the year ended December 31, 1995, the changes in its net assets for the period
from January 1, 1996 to August 31, 1996 and for each of the two periods in the
period ended December 31, 1995 and the financial highlights for each of the
indicated periods, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 9, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended August 31,
1996.
Income dividends are 99.2% tax-exempt. Approximately 3% of the 1996 income
dividends are subject to the alternative minimum tax. None of the income was
derived from U.S. Treasury obligations, or qualify for the corporate dividends
received deductions. Shareholders will be mailed a 1996 U.S. Treasury Department
Form 1099-DIV in January 1997 representing their proportionate share.
For specific information on exemption provisions in your state, consult
your local state tax office or your tax adviser.
25
<PAGE>
================================================================================
Additional Information
John Hancock Funds - California Tax-Free Income Fund
SHAREHOLDER MEETING
On June 26, 1996, a special meeting of John Hancock California Tax-Free Income
Fund (the "Fund") was held.
Shareholders approved an Amended and Restated Declaration of Trust for the
Fund. The shareholder votes were 19,328,734 FOR, 699,854 AGAINST and 1,511,799
ABSTAINING.
The shareholders elected the following trustees with the votes tabulated as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- --- --------
Edward J. Boudreau, Jr............................. 23,435,671 519,909
James F. Carlin.................................... 23,441,321 514,259
William H. Cunningham.............................. 23,436,570 519,010
Charles F. Fretz................................... 23,432,765 522,815
Harold R. Hiser, Jr................................ 23,441,461 514,119
Anne C. Hodsdon.................................... 23,440,307 515,273
Charles L. Ladner.................................. 23,422,276 533,304
Leo E. Linbeck, Jr................................. 23,423,707 531,873
Patricia P. McCarter............................... 23,420,371 535,209
Steven R. Pruchansky............................... 23,427,899 527,681
Richard S. Scipione................................ 23,428,458 527,122
Norman H. Smith.................................... 23,426,873 528,707
John P. Toolan..................................... 23,416,691 538,890
26
<PAGE>
================================================================================
NOTES
John Hancock Funds - California Tax-Free Income Fund
27
<PAGE>
================================================================================
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right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."]
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- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
California Tax-Free Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies. C Printed on Recycled Paper
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Paper."
5300A 8/96
10/96
