================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
California
Tax-Free
Income Fund
SEMI-ANNUAL REPORT
June 30, 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
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in the mutual
fund industry. At that time, Securities and Exchange Commission Chairman Arthur
Levitt called on fund companies to make their prospectuses more user-friendly.
He noted that prospectuses are often overloaded with technical detail and are
hard for most investors to understand. Many industry observers agreed, and
rightly so.
So it is my pleasure to let you know that John Hancock Funds has introduced
the first in a series of new prospectuses. Covering the John Hancock growth
funds, the new prospectus made its debut on July 1 after being under development
for a year. It is simplified, using shorter, clearer language with a streamlined
design, and consolidated, incorporating several funds with similar investment
objectives into one document. We are excited about our new prospectus because we
believe it is a bold but sensible step forward. And while it is easier to read,
it still complies with all federal and state guidelines.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
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).
In the coming months, we will introduce similar prospectuses for our growth
and income, income, tax-free income, international/global and money market
funds. We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in the end, we
did it for you, our shareholders.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
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BY DIANNE SALES-SINGER, PORTFOLIO MANAGER
John Hancock
California Tax-Free
Income Fund
Inflation concerns bond investors; municipals
outperform Treasuries in first half of 1996
Bonds, including municipals, took a turn for the worse in the first half of
1996, after posting record returns in 1995. Investors reacted to surprisingly
good economic news -- particularly on the employment front -- by sending bond
yields to levels not seen in more than a year. As a result, bond prices, which
move in the opposite direction of interest rates, dropped. What worried the
market was that the economy's strength could lead to higher inflation, which
erodes the value of a bondholder's income stream.
But things weren't all bad for municipals. Having spent most of 1995
lagging Treasuries due to worries over various flat-tax proposals, municipals
entered 1996 with prices that were cheap relative to Treasuries. As flat-tax
fears started to wane, municipals began to outpace Treasuries. Positive
supply/demand factors also helped the municipal market. The total outstanding
supply of municipals shrunk, while demand for municipals rose. Furthermore, the
California municipal bond market witnessed two positive developments: the
improvement in the state's economy and Orange County's emergence from
bankruptcy.
"Bonds, including municipals, took a turn for the worse
in the first half of 1996..."
[A 2 1/4" x 3 1/2" photo of the Fund management team at bottom right. Caption
reads: "Dianne Sales-Singer (seated) and Fund management team members (l-r)
Michael Roye, Holly Morris, Frank Lucibella."]
3
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John Hancock Funds - California Tax-Free Income Fund
"...the Fund continued to post a very competitive yield."
A look at performance
For the six-month period ended June 30, 1996, John Hancock California Tax-Free
Income Fund's Class A and Class B shares posted total returns of -0.82% and
- -1.09%, respectively, at net asset value. Those returns outpaced the average
tax-exempt California fund's average -1.39% return for the same period,
according to Lipper Analytical Services.1 Please see pages six and seven for
longer-term performance.
There were two primary reasons why the Fund performed well relative to its
competitors. The first has to do with how we managed the Fund's duration.
Duration measures how sensitive a bond's price is to changes in interest rates.
The longer the duration, the more sensitive the bond is to rising and falling
rates. Conversely, the shorter the duration, the less sensitive a bond's share
price. By the end of the period, we had shortened our duration significantly. As
interest rates rose, the Fund's lessened interest-rate sensitivity -- or shorter
duration -- made it less susceptible to rising interest rates and declining bond
prices.
The second reason for our outperformance is that the Fund continued to post
a very 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 the prices of 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.
During the period, demand for municipals was fairly strong, and so credit
spreads (or the difference in yields between low- and high-quality bonds)
remained quite narrow, or small. That meant that investors were getting very
little additional yield for buying lower-quality bonds. Because yields were
rising during the period, we were able to sell some of our older, lower-rated
bonds at a time when current yields for AAA-rated and insured bonds exceeded the
yields offered by those older bonds. In effect, the exchange of lower-quality
for higher-quality bonds allowed us to increase the Fund's distribution yields
and improve its overall credit quality. That type of opportunity is pretty rare.
We also continued our focus on maintaining the Fund's call protection. When
bonds are issued, the issuer often maintains the right to redeem a bond prior to
its maturity, which may force bondholders to reinvest those proceeds at much
lower yields. Call protection refers to the length of time during which a
security cannot be redeemed by the issuer. Some bonds are even noncallable,
meaning that the issuer has given up the right to call bonds early. By ensuring
that the Fund maintains a high degree of call protection, we have minimized our
reinvestment risk, thereby providing greater stability to the Fund's income
stream. With the recent decline in outstanding supply of municipal bonds, bonds
with better call protection have become a scarce and valuable commodity. The
heightened demand for
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left hand column is "Category"; the header for the right hand column is
"Trend...and what's driving it." The first listing is "California Appropriation
Debt" followed by an up arrow and the phrase "Improving finances and economy."
The second listing is "BBB-Rated Debt" followed by a down arrow and the phrase
"Narrow credit spreads." The third listing is "Long-Maturity bonds" followed by
a down arrow and the phrase "Greater vulnerability to rising rates." Footnote
below reads: "See "Schedule of Investments." Investment holdings are subject to
change."]
4
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John Hancock Funds - California Tax-Free Income Fund
- --------------------------------------------------------------------------------
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the six months ended June 30, 1996." The chart is
scaled in increments of 1% from bottom to top, with 0% at the top and -2% at the
bottom. Within the chart, there are three solid bars. The first represents the
- -0.82% total return for John Hancock California Tax-Free Income Fund: Class A.
The second represents the -1.09% total return for John Hancock California
Tax-Free Income Fund: Class B. The third represents the -1.39% total return for
the average California municipal bond fund. Footnote below reads: "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. See following page for historical performance
information."]
- --------------------------------------------------------------------------------
call protection has allowed our holdings of long-call and noncallable bonds to
outperform in the first half, further benefiting the Fund's total return
performance.
California: fiscal and economic rebound
California's economy continues to rebound, as evidenced by job growth,
especially in the entertainment and construction industries, and an increase in
import/export activity. On the fiscal front, the state closed its 1996 fiscal
year with an operating surplus for the fourth year in a row and also finished
paying off the deficits left over from the early 1990s. These healthy signs
indicate a credit on an upward trend, which should continue. The bond rating
agencies have begun to talk about the improving fundamentals of the state's
credit, preparing the way for a higher bond rating. In this environment, we have
looked for value among some of the non-rated bond sectors that stand to reap the
rewards of an improving economy. For example, we recently bought some bonds used
to fund the construction of residential housing. We chose areas with strong
demographics and developers with solid and long-standing track records. As the
California economy improved and housing prices began to stabilize, these bonds
generally performed well.
"California's economy continues to rebound..."
What's ahead
In the first half, the bond markets were fairly volatile in the wake of mixed,
and at times, contradictory, economic data. While it's true that the U.S.
economy is growing, we haven't yet seen any meaningful rise in inflation. We
believe that's because there are large-scale deflationary pressures at work.
Corporate restructurings continue and a global workforce keeps a lid on wage
price increases in the United States. The question going forward will be: Is the
economy growing at a strong enough pace to ignite inflation? If so, the Federal
Reserve Board could likely raise interest rates to keep inflation in check.
Until we have a clearer idea of where the economy is headed, we plan to keep the
Fund's duration fairly neutral. But we will remain flexible so that we can be
responsive to changes in the economic outlook. From a fundamental standpoint,
the outlook for municipals remains quite positive. With the outstanding supply
shrinking, municipals still have room to outperform.
- ----------
(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 and the average annual
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 net asset value per share. Performance figures include
the maximum applicable sales charge of 4.5% for Class A shares. The effect of
the maximum contingent deferred sales charge for Class B shares (maxi mum 5% and
declining 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
- --------------------------------------------------------------------------------
For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- -----
John Hancock California Tax-Free
Income Fund: Class A(1) 3.32% 38.95% 54.71%
John Hancock California Tax-Free
Income Fund: Class B(2) 2.33% 29.48% N/A
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1996(3)
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- -----
John Hancock California Tax-Free
Income Fund: Class A(1) 3.32% 6.80% 6.94%
John Hancock California Tax-Free
Income Fund: Class B(2) 2.33% 5.91% N/A
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of June 30, 1996
SEC 30-DAY
YIELD
-----
John Hancock California Tax-Free
Income Fund: Class A 5.32%
John Hancock California Tax-Free
Income Fund: Class B 4.83%
Notes to Performance
(1) Class A shares started on December 29, 1989.
(2) Class B shares started on December 31, 1991.
(3) The Adviser voluntarily waived a portion of the management fee and reduced a
portion of the custodian fees during the period. Without the waiver of
expenses, the average annualized total return for the one-year and five-year
periods and since inception for Class A shares would have been 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...
- --------------------------------------------------------------------------------
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 June 30, 1996, assuming you
have been invested and have reinvested all distributions for the entire time
periods presented in the graphs. 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 the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $16,300 as of June 30, 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 $16,198
as of June 30, 1996. The third line represents the California Tax-Free Income
Fund after sales charge and is equal to $15,471 as of June 30, 1996.]
[Line chart with the heading California Tax-Free Income Fund: Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $13,548 as of June 30, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the California Tax-Free
Income Fund on December 31, 1991, before contingent deferred sales charge, and
is equal to $13,148 as of June 30, 1996. The third line represents the
California Tax-Free Income Fund after contingent deferred sales charge and is
equal to $12,948 as of June 30, 1996.]
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Statement of Assets and Liabilities
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $358,799,379) ......... $ 366,692,687
Options (cost - $7,744) .................................. 25,781
-------------
366,718,468
Receivable for shares sold ................................. 240,039
Receivable for investments sold ............................ 3,322,815
Interest receivable ........................................ 7,671,191
Segregated assets for financial futures contracts .......... 1,174,215
Other assets ............................................... 62,748
-------------
Total Assets ............................. 379,189,476
-----------------------------------------------------------
Liabilities:
Dividend payable ........................................... 56,364
Temporary overdraft of cash ................................ 3,045,633
Payable for shares repurchased ............................. 162,861
Payable for investments purchased .......................... 1,961,720
Payable for variation margin ............................... 675,000
Payable to John Hancock Advisers, Inc. .....................
and affiliates - Note B ................................... 319,460
Accounts payable and accrued expenses ...................... 66,541
-------------
Total Liabilities ........................ 6,287,579
-----------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 372,844,291
Accumulated net realized loss on investments
and financial futures contracts ........................... (7,276,664)
Net unrealized appreciation of investments
and financial futures contracts ........................... 7,250,194
Undistributed net investment income ........................ 84,076
-------------
Net Assets ............................... $ 372,901,897
===========================================================
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 - $290,995,641 / 28,218,934 ........................ $ 10.31
=============================================================================
Class B - $81,906,256 / 7,943,968 .......................... $ 10.31
=============================================================================
Maximum Offering Price Per Share*
Class A - ($10.31 x 104.71%) ............................... $ 10.80
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on June 30, 1996. You'll also
find the net asset value per share as of that date.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest ................................................... $ 11,929,716
------------
Expenses:
Investment management fee - Note B ........................ 1,037,953
Distribution/service fee - Note B
Class A ................................................. 221,794
Class B ................................................. 367,705
Transfer agent fee - Note B ............................... 127,229
Custodian fee ............................................. 55,509
Trustees' fees ............................................ 34,911
Printing .................................................. 26,424
Advisory board ............................................ 21,434
Auditing fee .............................................. 7,656
Registration and filing fees .............................. 7,148
Miscellaneous ............................................. 3,368
Legal fees ................................................ 199
Less Management Fee Reduction - Note B .................... (151,611)
------------
Total Expenses ........................... 1,759,719
-----------------------------------------------------------
Less Expense Reductions -
Note B ................................... (36,074)
-----------------------------------------------------------
Net Expenses ............................. 1,723,645
-----------------------------------------------------------
Net Investment Income .................... 10,206,071
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized loss on investments sold ...................... (1,884,517)
Net realized gain on financial futures contracts ........... 1,046,884
Change in net unrealized appreciation/depreciation
of investments ............................................ (12,796,341)
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................ (33,656)
------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts .............. (13,667,630)
-----------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ................ ($ 3,461,559)
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1996
DECEMBER 31, 1995 (UNAUDITED)
----------------- ----------------
<S> <C> <C>
From Operations:
Net investment income ............................................... $ 19,253,594 $ 10,206,071
Net realized loss on investments sold and financial futures contracts (2,245,541) (837,633)
Change in net unrealized appreciation/depreciation of investments ... 51,125,949 (12,829,997)
------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations .... 68,134,002 (3,461,559)
------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.5743 and $0.2896 per share, respectively) ............ (15,185,497) (8,286,860)
Class B - ($0.4988 and $0.2509 per share, respectively) ............ (4,060,951) (1,982,782)
------------- -------------
Total Distributions to Shareholders .............................. (19,246,448) (10,269,642)
------------- -------------
From Fund Share Transactions-- Net* ................................... 26,141,459 (7,344,068)
------------- -------------
Net Assets:
Beginning of period ................................................. 318,948,153 393,977,166
------------- -------------
End of period (including undistributed net investment
income of $147,647 and $84,076, respectively) ....................... $ 393,977,166 $ 372,901,897
============= =============
* Analysis of Fund Share Transactions:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1996
DECEMBER 31, 1995 (UNAUDITED)
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .......................................................... 2,339,818 $ 18,225,155 863,738 $ 8,988,874
Shares issued in reorganization - Note D ............................. 4,164,385 48,873,637 -- --
Shares issued to shareholders in reinvestment of distributions ....... 694,275 6,453,478 360,910 3,744,779
------------ ------------ ------------ ------------
7,198,478 73,552,270 1,224,648 12,733,653
Less shares repurchased ................................................ (4,285,570) (43,261,363) (1,952,908) (20,255,643)
------------ ------------ ------------ ------------
Net increase (decrease) .............................................. 2,912,908 $ 30,290,907 (728,260) ($ 7,521,990)
============ ============ ============ ============
CLASS B
Shares sold .......................................................... 861,939 $ 8,918,797 587,344 $ 6,085,918
Shares issued to shareholders in reinvestment of distributions 208,712 1,924,315 90,043 933,969
------------ ------------ ------------ ------------
1,070,651 10,843,112 677,387 7,019,887
Less shares repurchased .............................................. (1,484,859) (14,992,560) (658,316) (6,841,965)
------------ ------------ ------------ ------------
Net increase (decrease) .............................................. (414,208) ($ 4,149,448) 19,071 $ 177,922
============ ============ ============ ============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
redeemed during the last two periods, along with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<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, SIX MONTHS ENDED
------------------------------------------------------ JUNE 30, 1996
1991 1992 1993 1994(1) 1995 (UNAUDITED)
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $ 9.91 $ 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) 0.29
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ....... 0.47 0.25 0.76 (1.57) 1.41 (0.38)
-------- -------- -------- -------- -------- --------
Total from Investment Operations .................. 1.16 0.91 1.38 (0.99) 1.98 (0.09)
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ............... (0.70) (0.67) (0.62) (0.58) (0.57) (0.29)
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) (0.29)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ..................... $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69 $ 10.31
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ...... 12.26% 9.15% 13.60% (9.31%) 21.88% (0.82%)(7)
Total Adjusted Investment Return at Net
Asset Value(3,4) ................................... 11.86% 8.90% 13.42% (9.45%) 21.73% (0.92%)(7)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) .......... $163,693 $217,014 $279,692 $241,583 $309,305 $290,996
Ratio of Expenses to Average Net Assets ............ 0.40% 0.58% 0.69% 0.75% 0.75% 0.75%(8)
Ratio of Adjusted Expenses to Average Net Assets(5) 0.80% 0.83% 0.87% 0.89% 0.90% 0.85%(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% 5.47%(8)
Portfolio Turnover Rate ............................ 45% 34% 51% 62% 37%(6) 25%
Fee Reduction per Share ............................ $ 0.04 $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2) $ 0.01
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------------ JUNE 30, 1996
1992 1993 1994(1) 1995 (UNAUDITED)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.68
---------- ---------- ---------- ---------- ----------
Net Investment Income .............................. 0.58(2) 0.54 0.51 0.50(2) 0.25
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts .... 0.25 0.76 (1.57) 1.40 (0.37)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations .................. 0.83 1.30 (1.06) 1.90 (0.12)
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ............... (0.59) (0.54) (0.51) (0.50) (0.25)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts .. (0.15) (0.32) -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ............................... (0.74) (0.86) (0.51) (0.50) (0.25)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ..................... $ 10.41 $ 10.85 $ 9.28 $ 10.68 $ 10.31
========== ========== ========== ========== ==========
Total Investment Return at Net Asset Value (3) ..... 8.35% 12.76% (9.99%) 20.87% (1.09%)(7)
Total Adjusted Investment Return at Net Asset
Value (3,4) ....................................... 8.10% 12.58% (10.13%) 20.72% (1.19%)(7)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) .......... $ 26,595 $ 65,437 $ 77,365 $ 84,673 $ 81,906
Ratio of Expenses to Average Net Assets ............ 1.35% 1.44% 1.50% 1.50% 1.50%(8)
Ratio of Adjusted Expenses to Average Net Assets (5) 1.60% 1.62% 1.64% 1.65% 1.60%(8)
Ratio of Net Investment Income to Average Net Assets 5.43% 4.82% 5.10% 4.97% 4.82%(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) 25%
Fee Reduction per Share ............................ $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2) $ 0.01
</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.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Schedule of Investments
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
California Tax-Free Income Fund on June 30, 1996. It has two main categories:
tax-exempt long-term bonds and options. The tax-exempt long-term bonds are
broken down by state. Under each state is a list of the securities owned by the
Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING** OMITTED) VALUE MARKET+
- -------------------------- ------ -------- ------ --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
California (92.68%)
ABAG Finance Auth for Nonprofit Corps,
Cert of Part Peninsula Family YMCA Ser A ...................... 6.800% 10-01-11 Baa1** $ 1,000 $ 1,019,900 6.67%
Alameda, County of,
Cert of Part 1992 Cap Proj .................................... 6.750 06-01-16 A 500 537,675 6.28
Anaheim, City of,
Ref Cert of Part Reg Rites Convention Center ................. 8.420# 07-16-23 AAA 2,000 2,027,500 8.31
Arcadia Hospital,
Methodist Hosp Rev of Southern Calif ......................... 6.625 11-15-22 A 1,205 1,237,969 6.45
Avalon Community Improvement Agency,
Tax Alloc Community Imp Proj Ser B ........................... 6.400 08-01-22 A- 1,950 1,965,756 6.35
Bakersfield Central District Development Agency,
Tax Alloc Ref Downtown Bakersfield Redevel Proj .............. 6.625 04-01-15 BBB+ 4,000 4,074,920 6.50
Bakersfield Memorial Hospital,
Hosp Rev Ser A ............................................... 6.500 01-01-22 A- 2,000 2,045,200 6.36
Beaumont Unified School District,
Cert of Part Cap Imp Proj .................................... 7.700 01-01-21 BBB+** 1,000 1,045,090 7.37
Brentwood Redevelopment Agency,
Tax Alloc Brentwood Redevel Proj Ser A ....................... 7.700 11-01-08 BBB** 135 141,117 7.37
Burbank Redevelopment Agency,
Tax Alloc Golden State Redevel Proj Ser A .................... 6.000 12-01-23 A- 2,750 2,670,690 6.18
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj .................... 6.125 06-01-09 Baa** 1,000 998,620 6.13
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc ..................... 6.950 10-01-21 A 250 264,380 6.57
Ins Hosp Rev Ser 1990 Children's Hosp San Diego .............. 6.500 07-01-20 AAA 500 543,320 5.98
Ins Rev Ref Ser A Catholic Healthcare West Obligated Group ... 5.750 07-01-15 AAA 2,000 1,979,480 5.81
Ins Rev Ser A San Diego Christian ............................ 6.250 07-01-12 A+ 1,135 1,157,882 6.13
Ins Rev Ser B Hlth Facil Small Facil ......................... 7.500 04-01-22 A 2,000 2,253,420 6.66
Rev 1990 Ser A Kaiser Permanente ............................. 7.000 12-01-10 AA 600 655,722 6.41
Rev Ser 1994A Scripps Research Institute ..................... 6.300 07-01-09 A** 500 514,950 6.12
Sec Rev 1991 Ser Hosp of the Good Samaritan .................. 7.000 09-01-21 A- 2,250 2,345,445 6.72
California Housing Finance Agency,
Home Mtg Rev 1986 Ser A ...................................... 8.100 08-01-16 AA- 75 76,798 7.91
Home Mtg Rev 1988 Ser B ...................................... 8.600 08-01-19 AA- 40 41,938 8.20
Home Mtg Rev 1988 Ser D ...................................... 8.000 08-01-19 AA- 85 89,653 7.58
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<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)
Home Mtg Rev 1989 Ser A ....................................... 7.625% 08-01-09 AA- $ 35 $ 35,636 7.49%
Home Mtg Rev 1989 Ser B ....................................... 8.000 08-01-29 AA- 85 89,589 7.59
Home Mtg Rev 1989 Ser D ....................................... 7.500 08-01-29 AA- 150 155,941 7.21
Home Mtg Rev 1990 Ser D ....................................... Zero 08-01-20 AA- 8,500 1,327,190 7.29
Home Mtg Rev 1991 Ser A ....................................... 7.375 08-01-17 AA- 440 465,370 6.97
Home Mtg Rev 1991 Ser C ....................................... 7.450 08-01-11 AA- 55 57,356 7.14
Home Mtg Rev 1994 Ser C ....................................... 6.650 08-01-14 AA- 1,000 1,027,270 6.47
Home Mtg Rev 1994 Ser G ....................................... 7.250 08-01-17 AA- 3,500 3,726,415 6.81
Hsg Rev 1991 Ser E ............................................ 7.000 08-01-26 AAA 525 546,226 6.73
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co. ........... 6.900 12-01-17 A+ 500 530,145 6.51
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co. ............ 6.625 06-01-09 A 500 524,010 6.32
Solid Waste Disposal Rev Keller Canyon Landfill Co Proj ....... 6.875 11-01-27 A 2,000 2,107,300 6.52
California Rural Home Mortgage Finance Auth,
SF Mtg Rev Ser A Mtg Backed Sec's Prog ........................ 7.550 11-01-26 AAA 1,000 1,100,490 6.86
SF Mtg Rev Ser A Step Coupon .................................. 6.450 05-01-27 AAA 1,000 1,096,130 5.88
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 1,582,395 6.35
Lease Rev 1994 Ser A Depart of Corrections Calif State
Prison Monterey County (Soledad II) ......................... 6.875 11-01-14 A- 500 546,530 6.29
Lease Rev 1996 Ser A Dept of Corrections ...................... 5.500 01-01-15 AAA 5,145 4,959,934 5.71
Lease Rev Ref Depart of Correction 1993
Ser A Calif State Prison .................................... 5.000 12-01-19 AAA 7,970 7,177,224 5.55
Lease Rev Ref Ser A Various Univ Proj ......................... 5.500 06-01-21 A 1,250 1,149,987 5.98
Lease Rev Ser A Dept of Corrections ........................... 5.250 01-01-21 AAA 4,500 4,145,265 5.70
Lease Rev Ser A Various Community College Proj ................ 5.625 12-01-18 A- 3,700 3,482,255 5.98
California Statewide Communities Development Auth,
Ins Cert of Part United Western Medical Centers ............... 6.750 12-01-21 A 7,500 7,841,700 6.46
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles ......... 6.200 08-01-12 A 1,250 1,255,425 6.17
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles ......... 6.250 08-01-22 A 2,590 2,593,056 6.24
Ins Rev Cert of Part Hlth Facil Eskaton Properties ............ 6.700 05-01-11 A 1,250 1,304,762 6.42
Rev Cert of Part California Lutheran Homes .................... 5.600 11-15-17 A+ 2,435 2,326,813 5.86
Rev Ref Cert of Part Triad Healthcare Hosp .................... 6.500 08-01-22 A 13,000 13,260,780 6.37
Campbell, City of,
1991 Cert of Part Civic Center Proj ........................... 6.750 10-01-17 Aaa** 155 172,219 6.08
1991 Cert of Part Civic Center Proj ........................... 6.750 10-01-17 A- 1,565 1,647,147 6.41
Capistrano Unified School District,
Spec Tax of Community Facil Dist No 87-1 ...................... 7.500 09-01-07 BBB** 3,500 3,604,895 7.28
Spec Tax of Community Facil Dist No 87-1 ...................... 8.375 10-01-20 BBB** 3,000 3,192,750 7.87
Spec Tax of Community Facil Dist No 92-1 ...................... 7.000 09-01-18 BBB** 1,500 1,493,115 7.03
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No. 1 Redevel Proj .................... 6.375 10-01-12 BBB+ 500 500,730 6.37
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj ........................ 7.350 08-01-20 Aaa** 200 223,786 6.57
</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)
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992 .................... 6.600% 10-01-22 AAA $ 3,700 $ 3,944,089 6.19%
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ............ 6.100 07-01-13 BBB- 3,300 3,245,187 6.20
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ............ 6.200 07-01-20 BBB- 1,000 982,840 6.31
Clearlake Redevelopment Agency,
Tax Alloc Highlands Park Community Devel Proj ................. 6.400 10-01-23 BBB 500 482,470 6.63
Contra Costa Water District,
Wtr Treatment Rev Ser E ....................................... 6.250 10-01-12 AAA 1,000 1,067,570 5.85
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A ................................... 7.100 08-01-21 BBB** 220 222,660 7.02
Covina Hospital,
Rev Cert of Part Intercommunity Hlth Serv Inc. ................ 7.000 03-01-17 BBB+ 925 939,032 6.90
Cucamonga School District,
Cert of Part .................................................. 7.600 12-01-15 Baa** 1,000 1,054,640 7.21
Cupertino, City of,
Ref Cert of Part Ser A ........................................ 5.750 01-01-16 A+ 1,750 1,680,665 5.99
Davis, City of, Redevelopment Agency,
Tax Alloc Ref Davis Redevel Proj .............................. 7.000 09-01-24 AAA 5,115 5,611,206 6.38
Delano,City of,
Cert of Part .................................................. 7.000 04-01-10 BBB+ 2,000 2,064,520 6.78
Delta, County of,
Home Mtg Finance Auth Prog Ser A .............................. 6.750 12-01-25 AAA 2,000 2,055,340 6.57
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj .......... 8.000 07-01-10 AAA 300 341,712 7.02
Duarte, City of,
Cert of Part City of Hope National Medical Center Proj ........ 6.250 04-01-23 Baa1** 17,960 17,391,746 6.45
Elk Grove Unified School District,
Spec Tax of Community Facil Dist No. 1 ........................ 7.125 12-01-24 AAA 1,000 1,157,800 6.15
Encinitas, City of,
Cert of Part Civic Center Proj Ser A .......................... 6.750 12-01-11 A- 1,300 1,372,774 6.39
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave Storm Drainage Proj ........... 6.500 08-01-21 A- 1,085 1,074,324 6.56
Fontana Public Financing Auth,
Tax Alloc Rev 1990 Ser A North Fontana Redevel Proj ........... 7.250 09-01-20 A 325 325,192 7.25
Tax Alloc Rev Sub Lien 1991 Ser A North Fontana Redevel Proj .. 7.750 12-01-20 BBB 195 226,007 6.69
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center ........ 8.375 04-01-11 B** 6,275 5,576,906 9.42
Spec Tax of Community Facil Dist No 90-3 Empire Center ........ 8.400 04-01-15 B** 940 835,425 9.45
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A .................. 6.500 01-01-32 BBB- 1,665 1,674,807 6.46
Toll Rd Rev Fixed Rate Current Int Ser 1995A .................. 6.000 01-01-34 BBB- 14,775 14,038,614 6.31
</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)
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center ............. 6.625% 06-01-21 AA- $ 250 $ 257,187 6.44%
Fresno, City of, Joint Powers Financing Auth,
Rev Ser A ...................................................... 6.550 09-02-12 BBB 2,000 2,047,480 6.40
Hawaiian Gardens Redevelopment Agency,
Tax Alloc Ref Proj No. 1 ....................................... 6.200 12-01-23 BBB 1,250 1,168,975 6.63
Industry Urban Development Agency,
Tax Alloc Ref Civic Recreational Proj 1-A ...................... 7.375 05-01-12 A+** 910 932,950 7.19
Tax Alloc Ref Trans District Proj 3 ............................ 6.900 11-01-16 A- 1,020 1,073,917 6.55
Tax Alloc Unref Balance Civic Recreation Al Proj 1-B ........... 7.375 05-01-15 A+** 235 242,569 7.14
Inglewood, City of,
Cert of Part Civic Center Imp Proj ............................. 7.000 08-01-19 BBB 1,000 1,051,700 6.66
Irvine, City of,
Improvement Board Act of 1915 Assessment District #95-12 Ser B . 6.550 09-02-21 BB 1,000 953,760 6.87
Irwindale Community Redevelopment Agency,
Sub Lien Tax Alloc Industrial Devel Proj ....................... 7.050 12-01-26 BBB 2,750 2,819,383 6.88
Lincoln Redevelopment Agency,
Tax Alloc Lincoln Redevel Proj ................................. 7.650 08-01-17 BBB+ 915 1,044,180 6.70
Los Alamitos Unified School District,
Spec Tax of Community Facil Dist No 90-1 ....................... 7.150 08-15-21 Baa1** 6,005 6,297,443 6.82
Los Angeles City Department of Water and Power,
Elec Plant Ref Rev 2nd Iss of 1993 ............................. 5.400 11-15-12 AA- 1,000 961,060 5.62
Los Angeles County Health Facilities Auth,
Lease Rev Ref Olive View Medical Center Proj ................... 7.500 03-01-08 A** 450 483,179 6.98
Los Angeles County Metropolitan Transportation Auth,
Sales Tax Rev Ref 2nd Tier Prop Ser A .......................... 5.750 07-01-18 AAA 2,000 1,972,980 5.83
Los Angeles Department Airport Auth,
Airport Rev AMT Ser A Ontario International Airport Proj* ...... 6.000 05-15-26 AAA 2,000 1,988,840 6.03
Los Angeles Public Works Financing Auth,
Rev Regional Park & Open Space District A ...................... 6.000 10-01-15 AA 3,750 3,772,425 5.96
Los Angeles, City of,
Rev Ser B AMT Harbor Proj ...................................... 6.000 08-01-15 AA 2,000 1,979,720 6.06
Wastewater Sys Rev Ser 1992 B .................................. 6.250 06-01-12 AAA 1,260 1,304,440 6.04
Los Angeles, County of,
Cert of Part Disney Pkg Proj ................................... 6.500 03-01-23 BBB 2,000 2,006,340 6.48
County Imp No 2656-M ........................................... 8.375 09-02-18 BBB** 3,865 3,989,801 8.11
Trans Comm Sales Tax Rev 2nd Sr Ser A Proposition C ............ 6.250 07-01-13 AAA 1,600 1,650,752 6.06
Metropolitan Water District,
Wtr Rev Iss of 1991 ............................................ 6.625 07-01-12 AA 750 826,358 6.01
Wtr Rev Iss of 1992 ............................................ 5.000 07-01-20 AA 7,500 6,535,125 5.74
Moreno Valley, City of,
Cert of Part Ser 1995 City Hall Proj ........................... 6.500 05-01-16 Baa1** 1,500 1,514,235 6.44
</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)
Mountain View, City of, Capital Improvements Financing Auth,
1992 Rev City Hall/Community Theatre Complex & Shoreline
Regional Park Community Tax Alloc Refinancing ............... 6.500% 08-01-16 AAA $ 600 $ 625,512 6.23%
Newport-Mesa Unified School District,
Community Facil District No. 90-1 Spec Tax Ser 1996 ........... 6.750 09-01-21 BBB- 3,000 3,008,940 6.73
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj ....................... 7.000 05-01-13 AAA 100 114,534 6.11
Rev 1992 Ser A Calif-Oregon Transm Proj ....................... 6.500 05-01-16 AAA 1,000 1,046,070 6.21
Oakland, Port of,
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj ........ 6.800 01-01-19 A+ 500 518,870 6.55
Oceanside, City of,
Ref Cert of Part Ser A ........................................ 6.375 04-01-12 A** 3,000 3,069,270 6.23
Orange Cove Irrigation District,
Cert of Part Rehab Proj ....................................... 7.250 02-01-12 BBB 2,000 2,090,100 6.94
Cert of Part Rehab Proj ....................................... 7.000 02-01-15 BBB 2,500 2,580,800 6.78
Orange Redevelopment Agency,
Rev Ref Tax Alloc Northwest Redevel Proj B .................... 5.700 10-01-17 A 3,000 2,777,160 6.16
Orange, County of,
1996 Ser A Recovery Cert of Part .............................. 5.800 07-01-16 AAA 2,000 1,965,160 5.90
Cert of Part Civic Center Exp Proj ............................ 6.700 08-01-18 AAA 1,000 1,106,330 6.06
Ser A of 1990 Spec Tax of Community Facil
Dist No. 87-3 Mission Viego ................................. 7.800 08-15-15 A** 350 395,913 6.90
Ser A of 1992 Spec Tax of Community Facil
Dist No. 88-1 Aliso Viego ................................... 7.350 08-15-18 AAA 1,000 1,151,800 6.38
Orange, County of, Development Agency,
Tax Alloc Santa Ana Heights Proj .............................. 6.125 09-01-23 BBB 3,000 2,879,130 6.38
Pasadena, City of,
1993 Ref Cert of Part Old Pasadena Parking Facil Proj ......... 6.250 01-01-18 A+ 1,000 1,043,580 5.99
Pittsburg Redevelopment Agency,
Spec Tax of Community Facil Dist 90-1 California Avenue ....... 7.400 08-15-20 BBB 3,040 3,257,603 6.91
Pomona Public Financing Auth,
Rev Ref Ser L Pomona Redevel Proj ............................. 5.750 02-01-20 AAA 4,000 3,854,880 5.97
Rancho Mirage, City of, Joint Powers Financing Auth,
Cert of Part Eisenhower Memorial Hosp ......................... 7.000 03-01-22 A** 4,500 4,802,220 6.56
Civic Center Rev Ref Ser 1991A ................................ 7.500 04-01-17 BBB 195 221,146 6.61
Civic Center Rev Unref Ser 1991A .............................. 7.500 04-01-17 BBB 55 59,337 6.95
Richmond, City of, Joint Powers Financing Auth,
Rev Ser A ..................................................... 7.700 10-01-10 BBB** 1,745 1,832,739 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 1,054,980 6.16
Sacramento Power Auth,
Cogeneration Proj Rev Light & Pwr Imp ......................... 6.000 07-01-22 BBB- 12,000 11,454,000 6.29
Sacramento Unified School District,
Spec Tax of Community Facil Dist No. 1 Ser B .................. 7.300 09-01-13 Baa** 760 821,081 6.76
Saddleback Valley Unified School District,
Spec Tax of Community Facil Dist No 89-3 Ser A ................ 7.750 09-01-16 BBB** 3,200 3,398,016 7.30
</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)
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj .................. 5.500% 08-01-17 A- $ 11,250 $10,292,512 6.01%
Cert of Part Ser A Medical Center Fin Proj ..................... 5.500 08-01-15 AAA 5,875 5,659,681 5.71
Cert of Part Ser B Cap Facil Proj .............................. 6.875 08-01-24 AAA 350 408,891 5.88
San Diego, City of,
Ind'l Dev Rev 1986 Ser A San Diego Gas & Elec Co. .............. 7.625 07-01-21 A+ 300 306,351 7.47
San Diego, County of,
Cert of Part Inmate Reception Center & Cooling ................. 6.750 08-01-19 AAA 3,000 3,243,780 6.24
San Diego, County of, Regional Transportation Commission,
Sales Tax Rev 1991 Ser A ....................................... 7.000 04-01-06 AA- 90 95,384 6.60
San Diego, County of, Water Auth,
Wtr Rev Cert of Part Reg Fixed ................................. 5.681# 04-22-09 AAA 800 806,520 5.64
San Francisco State Building Auth,
Lease Ref Rev 1993 Ser A Dept of Gen Serv ...................... 5.000 10-01-13 A- 2,145 1,950,534 5.50
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec ................................. Zero 01-01-03 BBB** 5,000 3,175,150 7.10
Toll Rd Rev Sr Lien Cap Apprec ................................. Zero 01-01-14 BBB** 5,000 1,590,550 6.69
Toll Rd Rev Sr Lien Cap Apprec ................................. Zero 01-01-22 BBB** 6,500 1,207,180 6.65
San Jose Financing Auth,
Reassessment Rev 1994 Ser C .................................... 6.750 09-02-11 BBB+** 930 950,451 6.60
San Jose, City of,
1986 Cert of Part Convention Center Proj ....................... 7.875 09-01-10 A+** 300 308,094 7.67
San Mateo, County of, Joint Powers Financing Auth,
Lease Rev Ref Cap Proj Prog .................................... 5.000 07-01-21 AAA 1,815 1,628,963 5.57
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding Facil Ser A ................... 6.250 07-01-19 AAA 1,790 1,898,671 5.89
Lease Rev Police Admin & Holding Facil Ser A ................... 6.250 07-01-24 AAA 10,000 10,605,000 5.89
Santa Barbara, County of,
1990 Cert of Part .............................................. 7.500 02-01-11 AAA 250 276,385 6.78
1991 Cert of Part .............................................. 6.400 02-01-11 A+ 250 256,728 6.23
Santa Clarita Community Facilities,
Spec Tax of Community Facil Dist No 92-1 Ser A ................. 7.450 11-15-10 BBB** 3,600 3,763,584 7.13
Santa Cruz Public Financing Auth,
Rev Tax Alloc Ser B ............................................ 6.200 09-01-23 BBB+ 2,000 1,946,060 6.37
Santa Rosa, City of,
Wastewater Rev 1992 Ser A Subregional Wastewater Proj .......... 6.500 09-01-22 AAA 500 553,340 5.87
Saugus Unified School District,
Cert of Part ................................................... 7.500 08-01-09 BBB+ 700 749,028 7.01
Sierra Unified School District,
Ref Cert of Part Cap Fin Proj .................................. 6.000 03-01-12 Baa** 2,000 1,954,180 6.14
Southern California Home Financing Auth,
Single Family Mtg Rev 1990 Iss B ............................... 7.750 03-01-24 AAA 45 47,575 7.33
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser A ............. 6.750 09-01-22 AAA 835 853,929 6.60
</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)
Southern California Public Power Auth,
Pwr Proj Rev 1987 Ref Ser A Palo Verde Proj .............. 6.875% 07-01-15 AA- $ 215 $ 219,356 6.74%
Rev Ref Southern Transmission Proj ....................... Zero 07-01-13 AAA 4,400 1,596,584 6.02
Stanislaus Waste To Energy Financing Agency,
Solid Waste Rev Ref Ogden Martin Sys Inc Proj ............ 7.625 01-01-10 BBB+ 970 1,043,904 7.09
Suisun, City of, Redevelopment Agency,
Tax Alloc Suisan City Redevel Agency ..................... 7.250 10-01-20 AAA 420 465,515 6.54
Torrance, City of, Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj ............. 7.125 09-01-21 BBB 500 519,950 6.85
Turlock Irrigation District,
Cert of Part ............................................. 7.300 01-01-11 AAA 4,165 4,454,343 6.83
University of California, The Regents of,
1993 Ref Cert of Part UCLA Central
Chiller/Cogeneration Facil .............................. 5.400 11-01-11 Aa** 1,000 947,970 5.70
Upland Housing Auth,
Rev Iss A ................................................ 7.500 07-01-03 BBB** 190 198,938 7.16
Rev Iss A ................................................ 7.850 07-01-20 BBB** 1,280 1,328,115 7.57
Vallejo Sanitation and Flood Control District,
Cert of Part ............................................. 5.000 07-01-19 AAA 5,000 4,507,100 5.55
Vallejo, City of,
Cert of Part ............................................. 8.000 02-01-06 BBB+** 2,000 2,074,980 7.71
Victor Valley Unified High School District,
Cert of Part ............................................. 7.875 11-01-12 A** 1,255 1,432,382 6.90
------------
345,624,415
------------
Puerto Rico (5.65%)
Puerto Rico Aqueduct and Sewer Auth,
Wtr & Swr Rev Ref Ser 1995 ............................... 6.250 07-01-13 A 5,160 5,466,452 5.90
Ref Pars & Inflos Ser 1995 Gtd by The
Commonwealth of Puerto Rico ............................. 8.220# 07-01-11 AAA 7,500 8,175,000 7.54
Puerto Rico Ports Auth,
Spec Facil Rev 1996 Ser A American Airlines Inc Proj ..... 6.250 06-01-26 BB+ 2,000 1,977,720 6.32
Puerto Rico, Commonwealth of,
GO Pub Imp Ser 1996 ...................................... 6.500 07-01-13 A 5,000 5,449,100 5.96
------------
21,068,272
------------
TOTAL TAX-EXEMPT LONG TERM BONDS
(Cost $358,799,379) (98.33%) $366,692,687
======= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
NUMBER
OF EXPIRATION MARKET
CONTRACTS DATE VALUE
--------- ---------- ------------
<S> <C> <C> <C>
OPTIONS (0.01%)
U.S. Treasury Bond Option 114 USU6C 75 08-24-96 $ 25,781
------------
TOTAL OPTIONS
(Cost $7,744) ( 0.01%) 25,781
======= ============
TOTAL INVESTMENTS (98.34%) $366,718,468
======= ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* This security having an aggregate value of $1,988,840. or 0.53% of the Fund's
net asset value, has been purchased as forward commitment - that is, the Fund
has agreed on the trade date, to take delivery of and make payment for such
securities on a delayed basis subsequent to the date of this schedule. The
purchase price and interest rate of such securities is fixed at trade date,
although the Fund does not earn any interest on such securities until
settlement date. The Fund has instructed its Custodian Bank to segregate
assets with the current value at least equal to the amount of its forward
commitment. Accordingly, the market value of $2,345,445. of California Health
Facilities Finance Auth, Sec Rev 1991 Ser Hosp of the Good Samaritan, 7.00%,
09-01-21 has been segregated to cover the forward commitment.
** Credit Ratings are rated by Moody's Investors Services, Fitch or John Hancock
Advisers, Inc. where Standard & Poor's ratings are not available.
+ The yield is not calculated with guidelines established by the U.S.
Securities Exchange Commission. Zero coupon yields are at yield to maturity.
# Represents the rate in effect on June 30, 1996.
The 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 (Unaudited)
- --------------------------------------------------------------------------------
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 June 30, 1996
assigned to the various sector categories.
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
------------------- ----------------------
General Obligation.............................. 1.46%
Revenue Bonds - Certificate of Participation.... 12.82
Revenue Bonds - Education....................... 8.83
Revenue Bonds - Electric Power.................. 4.65
Revenue Bonds - Health.......................... 20.64
Revenue Bonds - Housing......................... 3.84
Revenue Bonds - Industrial Development Bond..... 2.66
Revenue Bonds - Other........................... 26.43
Revenue Bonds - Pollution Control Facilities.... 1.13
Revenue Bonds - Transportation.................. 8.08
Revenue Bonds - Water & Sewer................... 7.79
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.33%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
(UNAUDITED)
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.
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 $5,482,396 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 and December 31,
2003 -- $5,169,717. The unused capital loss carryforward of $44,815 expiring in
2001 was transferred from the John Hancock Series Fund -- California Portfolio
as of September 15, 1995. Additionally, net capital losses of $230,463
attributable to security transactions occurring after October 31, 1995 are
treated as arising on the first day (January 1, 1996) of the Fund's next taxable
year.
DIVIDENDS, INTEREST 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 principals. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees if any, are calculated daily at the class level based
on the appropriate net assets of each class and the specific expense rate(s)
applicable to each class.
21
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at time of disposition.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues,
and expenses of the Fund. Actual results could differ from these estimates.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange. Subsequent payments, known as
"variation margin", to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At June 30, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
SEP 1996 605 U.S TREASURY BONDS SHORT $662,656
--------
At June 30, 1996, the Fund has deposited in a segregated account $1,174,215
to cover margin requirements on open financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked-to-market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and writing calls will tend to
decrease the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity
22
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
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 June 30,
1996.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent at
an annual rate of 0.55% of the Fund's average daily net asset value.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit 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
$151,611 for the period ended June 30, 1996.
The Fund has an agreement with its custodian bank under which $36,074 of
custodian fees have been reduced by balance credits applied during the period
ended June 30, 1996. If the Fund had not entered into this agreement, the assets
not invested, on which these balance credits were earned, could have produced
taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended June 30,
1996, net sales charges received with regard to sales of Class A shares amounted
to $308,709. Out of this amount, $37,467 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $212,415 was
paid as sales commissions to unrelated broker-dealers and $58,827 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., Inc. ("Sutro"), all of which are broker dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended June 30, 1996,
contingent deferred sales charges paid to JH Funds amounted to $106,853.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.15% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution/service costs. JH Funds has
temporarily agreed to limit the distribution and service fees pursuant to 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 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.
23
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
The Fund has a transfer agent agreement with John Hancock Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. The Fund pays Investor Services a fee based on the number of
shareholder accounts and certain out-of-pocket expenses.
Mr. Edward J. Boudreau, Jr., 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 June 30, 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 June 30, 1996, aggregated $91,705,243 and $103,411,058, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30, 1996.
The cost of investments owned at June 30, 1996 for federal income tax
purposes was $358,807,123. Gross unrealized appreciation and depreciation of
investments aggregated $11,887,463 and $3,976,118, respectively, resulting in
net unrealized appreciation of $7,911,345.
NOTE D --
REORGANIZATION
On September 8, 1995, the shareholders of John Hancock Tax-Exempt Series Fund --
California Portfolio (JHCP) approved a plan of reorganization between JHCP and
the Fund providing for the transfer of substantially all of the assets and
liabilities of JHCP to the Fund in exchange solely for ClassAshares of the Fund.
The acquisition was accounted for as a tax free exchange of 4,164,385 Class A
shares of John Hancock California Tax-Free Income Fund for the net assets of
JHCP, which amounted to $48,873,637, including $2,253,412 of unrealized
appreciation, after the close of business at September 15, 1995.
24
<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 involving the election of trustees and certain other
matters concerning the Fund.
Specifically, shareholders first approved an Amended and Restated
Declaration of Trust for the Fund to provide the Trustees with greater
flexibility to manage the Fund and to take advantage of potential investment
opportunities. The shareholder votes tallied were 19,328,734 FOR, 699,854
AGAINST and 1,511,799 ABSTAINING.
Lastly, the following trustees were elected to serve until their respective
successors shall become duly elected and qualified, with the votes tabulated as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- --- --------
Edward J. Boudreau, Jr........... 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
25
<PAGE>
================================================================================
NOTES
John Hancock Funds - California Tax-Free Income Fund
26
<PAGE>
================================================================================
NOTES
John Hancock Funds - California Tax-Free Income Fund
27
<PAGE>
================================================================================
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
101 Huntington Avenue, Boston MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
This report is for the information of shareholders of the John Hancock
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.
[A recycled logo in lower left hand corner with the caption "Printed on Recycled
Paper."]
530SA 6/96
8/96
