Annual Report
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[GRAPHIC OMITTED]
California
Tax-Free
Income Fund
AUGUST 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, 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 and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
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 LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The Taxpayer Relief Act of 1997 recently signed into law by President Clinton
includes new twists and important changes to Individual Retirement Account (IRA)
laws. The provisions will, among other things, allow more people to qualify for
annual tax-deductible IRA contributions and to save tax-free for college. They
also allow IRA investors to withdraw money penalty-free from all IRAs to buy a
first home or pay for college expenses.
For existing deductible IRAs, the law doubles income limits over the next
eight to 10 years for those eligible to deduct an annual IRA contribution of up
to $2,000. For individuals, the annual income cap will increase incrementally
from the current $25,000 to $50,000 by 2005. For couples, the limit would
increase from $40,000 today to $80,000 in 2007. The new law allows non-working
spouses to make IRA contributions even if their spouse is covered by a pension
plan at work, provided the couple's joint income is less than $150,000.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The law also creates two new IRA investment vehicles. One, called the "Roth
IRA" after its principal congressional sponsor, allows for non-deductible annual
contributions up to a $2,000 maximum. But income accumulates tax-free and if the
account has been open for five years, distributions are tax-free if they are
used after age 591/2 or upon death, disability or a first-time home purchase.
Withdrawals for higher-education expenses would not be subject to a 10% penalty.
Eligible investors must earn less than $95,000 per year individually or $150,000
per couple.
A second new IRA plan is called the "Education IRA" which allows non-
deductible contributions of up to $500 per year, per child under age 18.
Earnings in the account accumulate tax-free, and withdrawals are also not taxed
when applied toward undergraduate or graduate-level expenses. Eligible investors
are subject to the same income restrictions as the Roth IRA.
The law has also made some important changes in capital gains tax rates and
estate tax laws. But the devil is in the details, and so we recommend exploring
how you can benefit from the changes with your investment professional and tax
advisor. The Taxpayer Relief Act of 1997 gives investors new options toward
savings. It's a move we applaud.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Dianne Sales, CFA, Portfolio Manager
John Hancock California
Tax-Free Income Fund
Municipal bonds turn in solid performance
as market fluctuations increase
The bond market rode waves of volatility over the last 12 months. Fear about a
rebirth of inflation -- dreaded by bond holders for its erosive effects on fixed
income payments -- alternated during the year with elation over economic data
that showed inflation at barely noticeable levels. When the economy picked up
steam early this year and investors' concerns grew, the Federal Reserve Board
raised interest rates a quarter percentage point as an insurance policy against
inflation. Interest rates rose and bond prices fell both leading up to, and in
the wake of, the Fed action. In fact, the conflicting opinions of analysts who
held to the traditional view that a surging economy inevitably leads to higher
inflation, and of those who embrace the "new era" belief that the economy can
grow at a faster pace today without inflation, added to the market's wavering.
But by the end of April, bonds staged a rally that lasted through July as it
became clear that the economy had slowed from its blistering first quarter 1997
pace and the Fed made no further attempts to rein it in.
"Our careful management of portfolio duration helped the Fund's performance."
Even with the increased volatility, bonds moved ahead overall during the
year. Municipal bond performance was further enhanced by the continuing positive
trends of reduced supply and strong demand. With this backdrop, John Hancock
California Tax-Free Income Fund turned in a strong absolute and relative
performance. For the 12 months ended August 31, 1997, the Fund posted total
returns for its Class A and Class B
[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
[Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into 11 sections. Going from top left to right;
Water & Sewer 11%; General Obligation 2%; Certificate of Participation 12%;
Education 11%; Electric 5%; Health 22%; Housing 4%; Industrial Development 1%;
Other 22%; Polution Control 2%; Transportation 8%. Footnote below states "As a
percentage of net assets on August 31, 1997".]
"The prospects for California remain bright."
shares of 9.71% and 8.88%, respectively, at net asset value. That compared
favorably to the 8.98% return of the average California municipal bond fund,
according to Lipper Analytical Services, Inc. 1 Please see pages six and seven
for longer-term performance information.
Strategy and performance review
Throughout the year, our careful management of portfolio duration helped the
Fund's performance. Duration is a measure of how much a bond's price changes in
response to changing interest rates. The shorter the duration, the less a bond's
price moves with rate changes. At the beginning of the period last September,
the Fund's duration was longer than average and we benefited from the market
rally last October and November. As the economy heated up earlier this year, we
became more conservative and shortened duration, only to lengthen again in May
when inflation fears ebbed. For now, we are keeping duration neutral relative to
our peers, given the rally that's already occurred and the market's skittishness
about the economy's strength.
[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 Puerto Rico
Acqueduct & Sewer Authority followed by an up arrow and the phrase "Good bond
call structure". The second listing is Foothills/Eastern Transportation Corridor
followed by an up arrow and the phrase "Impoving economy; yield scarcity". The
third listing is Housing bonds followed by a down arrow and the phrase "Short
call structure limits performance". A footnote below states "See 'Schedule of
Investments.' Investment holdings are subject to change".]
Performance boosts came from our bonds with attractive coupons and good
call protection (the length of time during which a security cannot be redeemed
prior to its maturity). In particular, our non-callable bonds, those that cannot
be redeemed until maturity, did well. Our focus on bonds with good structure has
been a priority for the Fund over the past several years. As we have discussed
in previous reports, having strong call protection helps the Fund maintain
greater income stability, because it prevents more of the Fund's holdings from
being called away by municipalities looking to refinance their debt at lower
interest rates. Early calls can reduce returns because bondholders are forced to
reinvest the proceeds at lower yields. In addition to providing a competitive
yield, bonds with good call protection have seen strong price gains as demand
for them has risen and they have become more rare.
By far the strongest contributors to the Fund's performance over the last
12 months were our uninsured, lower-rated bonds. Now that about 65% of municipal
bonds coming to the market have bond insurance (a policy that ensures the timely
payment of principal and interest), the supply of lower-rated, uninsured bonds
has dwindled. At the same time, demand for these higher-yielding bonds has
increased, causing their prices to rise significantly in the last 12 months. Our
in-depth credit analysis has led us to some uninsured bonds with solid
underlying fundamentals, strong liquidity and attractive yields.
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 year ended August 31, 1997." The chart is
scaled in increments of 2%, with 10% at the top and 0% at the bottom. The first
represents the 9.71% total return for John Hancock California Tax-Free Income
Fund: Class A. The second represents the 8.88% total return for John Hancock
California Tax-Free Income Fund: Class B. The third represents the 8.98% 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 the following two pages
for historical performance information."]
One of our best-performing BBB-rated bonds was also one of our largest holdings
- -- Foothills/Eastern Transportation Corridor Agency Bonds. This toll road
construction project, which is on time and on budget, will serve southern
California's rejuvenated and now robust Orange County. In addition to providing
attractive current income, the bonds' price gains continue to reflect the
improving California economy as well as the increased demand for uninsured
bonds. Other solid performers were our holdings issued by Duarte for the City of
Hope National Medical Center Project. This nationally renowned research and
cancer-care facility has been a solid credit due primarily to its healthy
endowment and strong fundraising track record that help ensure the non-profit
institution's future viability.
A look ahead
The prospects for California remain bright. The state today is on more solid
economic footing than it has been in years; its path of recovery is remarkably
widespread and the economy has become increasingly diverse. The state's revenue
growth is stronger than expected, but spending remains under control. One area
we're watching is how the state handles the growing pressures faced by counties
and cities as they adjust to welfare restructuring. This comes at a time when
voters are reluctant to approve new initiatives. It remains a key issue for the
state, and while we are not concerned about its impact on any of our holdings,
it could become a potential vulnerable spot for local governments if it's not
properly addressed.
"...we'll continue to focus on increasing the Fund's competitive yield..."
We're also encouraged about the overall outlook for municipal bonds, given that
the supply continues to be outstripped by demand, especially in California with
its buoyant state economy. That has caused more investors to seek ways to
shelter their rising incomes and benefit from the state's federal and state tax
exemption for municipal bonds. After their strong move up over the last year,
municipal bonds are not as inexpensive as they were a year ago, but in our view
they remain fairly valued. For now, we're keeping the Fund's duration fairly
neutral until we have a clearer picture on the national economy, and the Fed's
next moves. As always, we'll continue to focus on increasing the Fund's
competitive yield, while seeking ways to enhance overall return.
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This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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A LOOK AT PERFORMANCE
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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 applicable sales charge of 4.5% for
Class A shares. The effect of the maximum contingent deferred sales charge for
Class B shares (maximum 5% and declining to 0% over six years) is included in
Class B performance. 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.
Please note that a portion of the Fund's income may be subject to taxes,
and some investors may be subject to the Alternative Minimum Tax. Also note that
capital gains are taxable.
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CUMULATIVE TOTAL RETURNS
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For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock California Tax-Free
Income Fund: Class A 4.07% 35.01% 68.61%(1)
John Hancock California Tax-Free
Income Fund: Class B 3.15% 34.31% 41.23%(2)
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock California Tax-Free
Income Fund: Class A(3) 4.07% 6.19% 7.21%(1)
John Hancock California Tax-Free
Income Fund: Class B(3) 3.15% 6.08% 6.34%(2)
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YIELDS
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As of August 31, 1997
SEC 30-DAY
YIELD
-----
John Hancock California Tax-Free
Income Fund: Class A 4.44%
John Hancock California Tax-Free
Income Fund: Class B 3.89%
Notes to Performance
(1) Class A commenced operations on December 29, 1989.
(2) Class B commenced operations on December 31, 1991.
(3) The Adviser has voluntarily reduced a portion of the management fee and a
portion of the custodian fees during the period. Without the limitation of
expenses, the average annual total returns for one-year, five-year and
since inception periods for Class A shares would have been 3.98%, 6.05% and
6.93%, respectively. Without the limitation of expenses, the average annual
total returns for one-year, five-year and since inception periods for Class
B shares would have been 3.06%, 5.94% and 6.33%, respectively.
6
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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, 1997. They assume
that you invested on the day each class of shares started. They also assume that
you 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.
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California Tax-Free Income Fund:
Class A shares
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 hypothetical $10,000 investment made
in the California Tax-Free Income Fund on December 29, 1989, before sales
charge, and is equal to $18,032 as of August 31, 1997. The second line
represents the value of the Lehman Brothers Municipal Bond Index and is equal to
$17,964 as of August 31, 1997. The third line represents the California Tax-Free
Income Fund after sales charge and is equal to $17,220 as of August 31, 1997.
California Tax-Free Income Fund
Class B shares
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 $14,931 as of August 31, 1997. 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 $14,372 as of August 31, 1997. The third line represents the
California Tax-Free Income Fund after contingent deferred sales charge and is
equal to $14,272 as of August 31, 1997.
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7
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FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on August 31, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
August 31, 1997
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Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $348,318,365) ........... $376,637,464
Cash ......................................................... 1,163,851
Receivable for investments sold .............................. 61,200
Receivable for shares sold ................................... 428,818
Interest receivable .......................................... 5,618,268
Other assets ................................................. 79,832
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Total Assets ..................... 383,989,433
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Liabilities:
Payable for investments purchased ............................ 2,476,342
Payable for shares repurchased ............................... 382,693
Payable for futures variation margin - Note A ................ 21,250
Dividend payable ............................................. 137,283
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 250,185
Accounts payable and accrued expenses ........................ 61,492
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Total Liabilities ................ 3,329,245
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Net Assets:
Capital paid-in .............................................. 364,264,628
Accumulated net realized loss on investments and
financial futures contracts ................................ (11,964,620)
Net unrealized appreciation of investments and
financial futures contracts ................................ 28,325,177
Undistributed net investment income .......................... 35,003
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Net Assets ....................... $380,660,188
=================================================
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)
Class A - $291,166,813/27,034,368 ............................ $10.77
=============================================================================
Class B - $89,493,375/8,309,315 .............................. $10.77
=============================================================================
Maximum Offering Price Per Share*
Class A - ($10.77 x104.71%) .................................. $11.28
=============================================================================
* 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 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
Year ended August 31, 1997
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Investment Income:
Interest ..................................................... $23,384,662
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Expenses:
Investment management fee - Note B ......................... 2,090,799
Distribution and service fee - Note B
Class A .................................................. 441,051
Class B .................................................. 775,004
Transfer agent fee - Note B ................................ 205,909
Financial services fee - Note B ............................ 70,577
Custodian fee .............................................. 47,493
Auditing fee ............................................... 39,341
Trustees' fees ............................................. 35,870
Registration and filing fees ............................... 19,988
Printing ................................................... 19,374
Legal fees ................................................. 13,430
Miscellaneous .............................................. 13,337
Less management fee reduction - Note B ..................... (275,247)
-----------
Total Expenses ................... 3,496,926
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Net Investment Income ............ 19,887,736
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Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold ........................ (1,712,955)
Net realized loss on financial futures contracts ............. (1,946,118)
Change in net unrealized appreciation/depreciation
of investments ............................................. 19,006,860
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................. (497,344)
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Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ...... 14,850,443
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Net Increase in Net Assets
Resulting from Operations ........ $34,738,179
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SEE NOTES TO FINANCIAL STATEMENTS.
8
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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>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996 TO YEAR ENDED
DECEMBER 31, 1995 AUGUST 31, 1996 (1) AUGUST 31, 1997
----------------- ------------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................... $19,253,594 $13,676,394 $19,887,736
Net realized loss on investments sold and financial futures contracts ..... (2,245,541) (1,771,705) (3,659,073)
Change in net unrealized appreciation/depreciation of investments
and financial futures contracts ......................................... 51,125,949 (10,264,530) 18,509,516
------------ ----------- -----------
Net Increase in Net Assets Resulting from Operations .................. 68,134,002 1,640,159 34,738,179
------------ ----------- -----------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5743, $0.3875 and $0.5718 per share, respectively) ........ (15,185,497) (11,033,084) (15,922,912)
Class B - ($0.4988, $0.3353 and $0.4909 per share, respectively) ........ (4,060,951) (2,654,650) (3,998,280)
------------ ----------- -----------
Total Distributions to Shareholders ................................... (19,246,448) (13,687,734) (19,921,192)
------------ ----------- -----------
From Fund Share Transactions - Net: * ....................................... 26,141,459 ( 7,604,371) (8,482,019)
------------ ----------- -----------
Net Assets:
Beginning of period ....................................................... 318,948,153 393,977,166 374,325,220
------------ ----------- -----------
End of period (including undistributed net investment income of
$147,647; $107,130 and $35,003, respectively) ........................... $393,977,166 $374,325,220 $380,660,188
============ ============ ============
* Analysis of Fund Share Transactions:
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996 TO YEAR ENDED
DECEMBER 31, 1995 AUGUST 31, 1996 (1) AUGUST 31, 1997
------------------------- ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold .................................... 2,339,818 $18,225,155 1,252,548 $13,030,082 15,577,087 $163,663,688
Shares issued in reorganization - Note D ....... 4,164,385 48,873,637 -- -- -- --
Shares issued to shareholders in reinvestment
of distributions ............................. 694,275 6,453,478 481,285 4,994,844 667,751 7,067,034
--------- ----------- --------- ---------- ---------- -----------
7,198,478 73,552,270 1,733,833 18,024,926 16,244,838 170,730,722
Less shares repurchased ........................ (4,285,570) (43,261,363) (2,582,406) (26,795,066) (17,309,091) (182,073,253)
--------- ----------- --------- ---------- ---------- -----------
Net increase (decrease) ........................ 2,912,908 $30,290,907 (848,573) ($8,770,140) (1,064,253) ($11,342,531)
========= =========== ========= ========== ========= ===========
CLASS B
Shares sold .................................... 861,939 $8,918,797 874,863 $9,083,702 1,334,549 $14,107,925
Shares issued to shareholders in reinvestment
of distributions ............................. 208,712 1,924,315 120,687 1,252,034 179,889 1,903,812
--------- ----------- --------- ---------- ---------- -----------
1,070,651 10,843,112 995,650 10,335,736 1,514,438 16,011,737
Less shares repurchased ........................ (1,484,859) (14,992,560) (882,160) (9,169,967) (1,243,410) (13,151,225)
--------- ----------- --------- ---------- ---------- -----------
Net increase (decrease) ........................ (414,208) ($4,149,448) 113,390 $1,165,769 271,028 $2,860,512
========= =========== ========= ========== ========= ===========
(1) Effective August 31, 1996, the fiscal period end changed from December 31 to August 31.
</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
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
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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 each
period indicated, investment returns, key ratios and supplemental data are as
follows:
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<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 YEAR ENDED
----------------------------------------- TO AUGUST 31, AUGUST 31,
1992 1993 1994(1) 1995 1996(9) 1997
-------- -------- -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $10.32 $10.41 $10.85 $9.28 $10.69 $10.36
-------- -------- -------- -------- -------- --------
Net Investment Income ................................... 0.66(2) 0.62 0.58 0.57(2) 0.39(2) 0.57(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ........... 0.25 0.76 (1.57) 1.41 (0.33) 0.41
-------- -------- -------- -------- -------- --------
Total from Investment Operations ...................... 0.91 1.38 (0.99) 1.98 0.06 0.98
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .................... (0.67) (0.62) (0.58) (0.57) (0.39) (0.57)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts ...... (0.15) (0.32) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ................................... (0.82) (0.94) (0.58) (0.57) (0.39) (0.57)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period .......................... $10.41 $10.85 $9.28 $10.69 $10.36 $10.77
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) .......... 9.15% 13.60% (9.31%) 21.88% 0.61%(7) 9.71%
Total Adjusted Investment Return at Net Asset Value (3,4) 8.90% 13.42% (9.45%) 21.73% 0.55%(7) 9.64%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $217,014 $279,692 $241,583 $309,305 $291,072 $291,167
Ratio of Expenses to Average Net Assets ................. 0.58% 0.69% 0.75% 0.75% 0.76%(8,10) 0.75%
Ratio of Adjusted Expenses to Average Net Assets (5) .... 0.83% 0.87% 0.89% 0.90% 0.84%(8) 0.82%
Ratio of Net Investment Income to Average Net Assets .... 6.36% 5.69% 5.85% 5.76% 5.57%(8) 5.42%
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) ........................................ 6.11% 5.51% 5.71% 5.61% 5.48%(8) 5.35%
Portfolio Turnover Rate ................................. 34% 51% 62% 37%(6) 30% 15%
Fee Reduction per Share ................................. $0.03(2) $0.02 $0.01 $0.01(2) $0.01(2) $0.01(2)
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 YEAR ENDED
----------------------------------------- TO AUGUST 31, AUGUST 31,
1992 1993 1994(1) 1995 1996(9) 1997
-------- -------- -------- -------- -------------- -----------
<S> <C> <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 $10.36
------- ------- ------- ------- ------- -------
Net Investment Income ................................... 0.58(2) 0.54 0.51 0.50(2) 0.33(2) 0.49(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ........... 0.25 0.76 (1.57) 1.40 (0.31) 0.41
------- ------- ------- ------- ------- -------
Total from Investment Operations ...................... 0.83 1.30 (1.06) 1.90 0.02 0.90
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .................... (0.59) (0.54) (0.51) (0.50) (0.34) (0.49)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts ...... (0.15) (0.32) -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions ................................... (0.74) (0.86) (0.51) (0.50) (0.34) (0.49)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period .......................... $10.41 $10.85 $9.28 $10.68 $10.36 $10.77
======= ======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (3) .......... 8.35% 12.76% (9.99%) 20.87% 0.20%(7) 8.88%
Total Adjusted Investment Return at Net Asset Value (3,4) 8.10% 12.58% (10.13%) 20.72% 0.14%(7) 8.81%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $26,595 $65,437 $77,365 $84,673 $83,253 $89,493
Ratio of Expenses to Average Net Assets ................. 1.35% 1.44% 1.50% 1.50% 1.52%(8,10) 1.50%
Ratio of Adjusted Expenses to Average Net Assets (5) .... 1.60% 1.62% 1.64% 1.65% 1.59%(8) 1.57%
Ratio of Net Investment Income to Average Net Assets .... 5.43% 4.82% 5.10% 4.97% 4.81%(8) 4.66%
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) ........................................ 5.18% 4.64% 4.96% 4.82% 4.72%(8) 4.59%
Portfolio Turnover Rate ................................. 34% 51% 62% 37%(6) 30% 15%
Fee Reduction per Share ................................. $0.03(2 $0.02 $0.01 $0.01(2) $0.01(2) $0.01(2)
(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 expenses offsets were included, the Ratio of Expenses to Average Net Assets
would be 0.75% for Class A and 1.50% for Class B.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
Schedule of Investments
August 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
California Tax-Free Income Fund on August 31, 1997. It has one main category:
tax-exempt long-term bonds. The tax-exempt long-term bonds are broken down by
state. Under each state is a list of the securities owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
California (93.27%)
ABAG Finance Auth for Nonprofit Corps,
Cert of Part Nat'l Ctr for Int'l Schools Proj ............. 7.375% 05-01-18 BB+ $4,300 $4,329,326 7.33%
Cert of Part Peninsula Family YMCA Ser A .................. 6.800 10-01-11 Baa1 1,000 1,054,280 6.45
Alameda, County of,
Cert of Part 1992 Cap Proj ................................ 6.750 06-01-16 A 500 548,725 6.15
Anaheim Public Financing Auth,
Sub Lease Rev 1997 Ser C Anaheim Pub Imp Proj ............. 6.000 09-01-16 AAA 1,000 1,089,500 5.51
Sub Lease Rev 1997 Cap Apprec Ser C Anaheim Pub Imp Proj .. Zero 09-01-18 AAA 3,000 932,670 5.64
Anaheim, City of,
Ref Cert of Part Reg RITES Convention Center .............. 8.220# 07-16-23 AAA 2,000 2,245,000 7.90
Arcadia, County of,
Hosp Rev Methodist Hosp of Southern California ............ 6.625 11-15-22 A 1,205 1,303,701 6.12
Avalon Community Improvement Agency,
Tax Alloc Community Imp Proj Ser B ........................ 6.400 08-01-22 A- 1,895 1,989,769 6.10
Bakersfield Central District Development Agency,
Tax Alloc Ref Downtown Bakersfield Redevel Proj ........... 6.625 04-01-15 BBB+ 4,000 4,495,040 5.90
Bakersfield Memorial Hospital,
Hosp Rev Ser A ............................................ 6.500 01-01-22 A- 2,000 2,085,000 6.24
Beaumont Unified School District,
Cert of Part Cap Imp Proj ................................. 7.700 01-01-21 BBB+ 1,000 1,122,970 6.86
Beverly Hills Public Financing Auth,
Lease Rev INFLOS .......................................... 7.470# 06-01-15 AAA 2,500 2,521,875 7.41
Brentwood Redevelopment Agency,
Tax Alloc Brentwood Redevel Proj Ser A .................... 7.700 11-01-08 BBB 135 142,534 7.29
Burbank Redevelopment Agency,
Tax Alloc Golden State Redevel Proj Ser A ................. 6.000 12-01-23 A- 2,750 2,807,062 5.88
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj ................. 6.125 06-01-09 Baa3 1,000 1,043,410 5.87
Rev Ref Ser A Univ of Southern California ................. 5.700 10-01-15 AA 1,000 1,034,590 5.51
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc .................. 6.950 10-01-21 A 250 271,027 6.41
Ins Hosp Rev Ser 1990 Children's Hosp San Diego ........... 6.500 07-01-20 AAA 500 540,730 6.01
Ins Rev Ref Ser A Catholic Healthcare West Obligated Group 5.750 07-01-15 AAA 2,000 2,055,800 5.59
Ins Rev Ser A San Diego Christian Foundation .............. 6.250 07-01-12 A+ 1,135 1,205,529 5.88
Ins Rev Ser B Hlth Facil Small Facil ...................... 7.500 04-01-22 A+ 2,000 2,327,480 6.44
Rev 1990 Ser A Kaiser Permanente .......................... 7.000 12-01-10 AA 600 658,734 6.38
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
California (continued)
Rev Ser 1994A Scripps Research Institute ................. 6.300% 07-01-09 A2 $500 $540,715 5.83%
Sec Rev 1991 Ser Hosp of the Good Samaritan .............. 7.000 09-01-21 BBB+ 2,250 2,393,527 6.58
California Housing Finance Agency,
Home Mtg Rev 1988 Ser B .................................. 8.600 08-01-19 AA- 40 41,468 8.30
Home Mtg Rev 1988 Ser D .................................. 8.000 08-01-19 AA- 70 73,002 7.67
Home Mtg Rev 1989 Ser A .................................. 7.625 08-01-09 AA- 30 30,828 7.42
Home Mtg Rev 1989 Ser B .................................. 8.000 08-01-29 AA- 65 67,939 7.65
Home Mtg Rev 1989 Ser D .................................. 7.500 08-01-29 AA- 110 114,665 7.19
Home Mtg Rev 1990 Ser D .................................. Zero 08-01-20 AA- 8,500 1,477,385 6.65
Home Mtg Rev 1991 Ser A .................................. 7.375 08-01-17 AA- 380 400,634 7.00
Home Mtg Rev 1991 Ser C .................................. 7.450 08-01-11 AA- 15 15,373 7.27
Home Mtg Rev 1994 Ser C .................................. 6.650 08-01-14 AA- 1,000 1,049,270 6.34
Home Mtg Rev 1994 Ser G .................................. 7.250 08-01-17 AA- 3,500 3,766,350 6.74
Hsg Rev 1991 Ser E ....................................... 7.000 08-01-26 AAA 525 552,321 6.65
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co ....... 6.900 12-01-17 A+ 500 540,920 6.38
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co ........ 6.625 06-01-09 A+ 500 541,715 6.11
Poll Control Rev 1997 Ser A Ref Laidlaw Environmental Proj 6.700 07-01-07 BBB- 2,000 2,036,940 6.58
Solid Waste Disposal Rev Keller Canyon Landfill Co Proj .. 6.875 11-01-27 A 2,000 2,201,780 6.24
California Rural Home Mortgage Finance Auth,
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog ........ 7.550 11-01-26 AAA 800 907,400 6.66
Single Family Mtg Rev Ser A Step Coupon Mtg Backed
Sec's Prog ............................................. 6.450 05-01-27 AAA 805 914,102 5.68
California State Department of Water Resources,
Wtr Sys Rev Ser T Central Valley Proj** .................. 5.000 12-01-11 AA 2,500 2,423,050 5.16
California State Public Works Board,
Lease Rev 1992 Ser A The Trustees of the Calif State
Univ Various Univ Projs ................................ 6.700 10-01-17 A 1,500 1,691,475 5.94
Lease Rev 1994 Ser A Dept of Corrections
Calif State Prison Monterey County (Soledad II) ........ 6.875 11-01-14 A 500 582,350 5.90
Lease Rev 1996 Ser A Dept of Corrections ................. 5.500 01-01-15 AAA 5,145 5,197,119 5.44
Lease Rev Ref 1993 Ser A Dept of Corrections
Various State Prisons .................................. 5.000 12-01-19 AAA 7,970 7,618,921 5.23
Lease Rev Ref Ser A Various Univ Proj .................... 5.500 06-01-21 A 1,250 1,228,737 5.60
Lease Rev Ser A Dept of Corrections ...................... 5.250 01-01-21 AAA 4,500 4,352,760 5.43
Lease Rev Ser A Various Community College Proj ........... 5.625 12-01-18 A 3,700 3,703,256 5.62
California Statewide Communities Development Auth,
Lease Rev Ser A Spl Facs-United Airlines ................. 5.700 10-01-33 BB+ 1,500 1,455,510 5.87
Ins Cert of Part United Western Medical Centers .......... 6.750 12-01-21 A+ 7,500 8,366,400 6.05
Ins Rev Cert of Part Hlth Facil AIDS Proj Los Angeles .... 6.200 08-01-12 A+ 1,250 1,311,463 5.91
Ins Rev Cert of Part Hlth Facil AIDS Proj Los Angeles .... 6.250 08-01-22 A+ 2,590 2,715,615 5.96
Ins Rev Cert of Part Hlth Facil Eskaton Properties ....... 6.700 05-01-11 A+ 1,250 1,343,200 6.24
Ins Rev Cert of Part Statewide Univ Northridge Proj ...... 6.000 04-01-26 AAA 1,620 1,695,119 5.73
Ins Rev Ref Cert of Part Triad Healthcare Hosp ........... 6.500 08-01-22 A+ 13,000 13,810,160 6.12
Campbell, City of,
1991 Cert of Part Civic Center Proj ...................... 6.750 10-01-17 AAA 155 172,689 6.06
1991 Cert of Part Civic Center Proj ...................... 6.750 10-01-17 A- 1,565 1,681,593 6.28
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
California (continued)
Capistrano Unified School District,
Spec Tax of Community Facil Dist 87-1 .................... 7.500% 09-01-07 Aaa $3,500 $3,802,750 6.90%
Spec Tax of Community Facil Dist 87-1 .................... 8.375 10-01-20 Aaa 3,000 3,422,160 7.34
Spec Tax of Community Facil Dist 92-1 .................... 7.000 09-01-18 BBB- 1,500 1,577,715 6.66
Spec Tax of Community Facil Dist 92-1 .................... 7.100 09-01-21 BBB- 2,250 2,405,903 6.64
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No 1 Redevel Proj ................ 6.375 10-01-12 BBB+ 500 520,605 6.12
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj ................... 7.350 08-01-20 AAA 200 221,390 6.64
Center Unified School District,
GO Cap Apprec Ser C ...................................... Zero 09-01-16 AAA 2,145 748,090 5.62
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992 ............... 6.600 10-01-22 AAA 3,700 4,155,544 5.88
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ....... 6.100 07-01-13 BBB- 3,300 3,424,410 5.88
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ....... 6.200 07-01-20 BBB- 1,000 1,037,560 5.98
Clearlake Redevelopment Agency,
Tax Alloc Highlands Park Community Devel Proj ............ 6.400 10-01-23 BBB 500 513,925 6.23
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A .............................. 7.100 08-01-21 BBB 220 228,285 6.84
Covina Hospital,
Rev Cert of Part Intercommunity Hlth Serv Inc ............ 7.000 03-01-17 BBB+ 925 942,048 6.87
Cucamonga School District,
Cert of Part ............................................. 7.600 12-01-15 Baa 1,000 1,097,850 6.92
Davis Redevelopment Agency,
Tax Alloc Ref Davis Redevel Proj ......................... 7.000 09-01-24 AAA 5,115 5,787,367 6.19
Del Mar Race Track Auth,
Rev Ref Ser 1996 ......................................... 6.000 08-15-06 BBB 2,240 2,361,587 5.69
Rev Ref Ser 1996 ......................................... 6.200 08-15-11 BBB 1,865 1,969,776 5.87
Delano, City of,
Cert of Part ............................................. 7.000 04-01-10 BBB+ 2,000 2,100,660 6.66
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj ..... 8.000 07-01-10 AAA 300 336,549 7.13
Duarte, City of,
Cert of Part City of Hope National Medical Center Proj ... 6.250 04-01-23 Baa1 15,960 16,399,698 6.08
Elk Grove Unified School District,
Spec Tax of Community Facil Dist 1 ....................... 7.125 12-01-24 AAA 1,000 1,167,540 6.10
Encinitas Public Finance Auth,
Cert of Part Ser A Civic Center Proj ..................... 6.750 12-01-11 A- 1,300 1,400,945 6.26
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave Storm Drainage Proj ...... 6.500 08-01-21 A- 1,085 1,141,626 6.18
Fontana Public Financing Auth,
Tax Alloc Rev 1990 Ser A North Fontana Redevel Proj ...... 7.250 09-01-20 BB+ 325 343,025 6.87
Tax Alloc Rev Sub Lien 1991 Ser A North Fontana
Redevel Proj ........................................... 7.750 12-01-20 AA 195 224,638 6.73
Foothill-Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A ............. 6.500 01-01-32 BBB- 1,665 1,775,156 6.10
Toll Rd Rev Fixed Rate Current Int Ser 1995A ............. 6.000 01-01-34 BBB- 14,775 15,091,185 5.87
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
California (continued)
Fresno Joint Powers Financing Auth,
Rev Ser A ................................................ 6.550% 09-02-12 BBB $2,000 $2,131,520 6.15%
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center ....... 6.625 06-01-21 AA 250 270,935 6.11
Industry Urban-Development Agency,
Tax Alloc Ref Trans Dist Proj 3 .......................... 6.900 11-01-16 A- 1,020 1,102,171 6.39
Inglewood, City of,
Cert of Part Civic Center Imp Proj ....................... 7.000 08-01-19 BBB- 1,000 1,073,520 6.52
Irvine, City of,
Imp Board Act of 1915 Assessment Dist 95-12 Ser B ........ 6.550 09-02-21 BB+ 1,000 1,025,950 6.38
Irwindale Community Redevelopment Agency,
Sub Lien Tax Alloc Industrial Devel Proj ................. 7.050 12-01-26 BBB 2,750 2,981,963 6.50
Lincoln Redevelopment Agency,
Tax Alloc Lincoln Redevel Proj ........................... 7.650 08-01-17 BBB+ 805 916,855 6.72
Los Alamitos Unified School District,
Spec Tax of Community Facil Dist 90-1 .................... 7.150 08-15-21 Baa1 6,005 6,737,610 6.37
Los Angeles Community Redevelopment Financing Auth,
Rev MultiFamily Ser A Grand Central Square ............... 5.850 12-01-26 BB 2,000 1,865,080 6.27
Los Angeles County Health Facilities Auth,
Lease Rev Ref Olive View Medical Center Proj ............. 7.500 03-01-08 AA 450 466,992 7.23
Los Angeles Department of Airports,
Airport Rev AMT Ser A Ontario International Airport Proj . 6.000 05-15-26 AAA 2,000 2,057,600 5.83
Los Angeles Department of Water and Power,
Elec Plant Rev Ref 2nd Iss of 1993 ....................... 5.400 11-15-12 A+ 1,000 1,007,960 5.36
Los Angeles Public Works Financing Auth,
Rev Regional Park & Open Space Dist A .................... 6.000 10-01-15 AA 3,750 3,953,775 5.69
Los Angeles, County of,
Cert of Part Disney Pkg Proj ............................. 6.500 03-01-23 BBB 2,000 2,071,920 6.27
Cert of Part Reg Linked SAVRS & RIBS-Ref PJ .............. 6.708# 06-01-15 BBB 1,200 1,257,120 6.40
Rev Ser B AMT Harbor Dept ................................ 6.000 08-01-15 AA 2,000 2,115,340 5.67
Metropolitan Water District,
Wtr Rev Iss of 1991 ...................................... 6.625 07-01-12 AA 750 827,723 6.00
Wtr Rev Iss of 1992 ...................................... 5.000 07-01-20 AA 7,500 7,024,350 5.34
Mountain View Capital Improvements Financing Auth,
1992 Rev City Hall/Community Theatre Complex & Shoreline
Regional Park Comm Tax Alloc Refin ..................... 6.500 08-01-16 AAA 600 651,630 5.98
Newport-Mesa Unified School District,
Community Facil Dist 90-1 Spec Tax Ser 1996 .............. 6.750 09-01-21 BBB- 3,000 3,091,350 6.55
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj .................. 7.000 05-01-13 AAA 100 120,325 5.82
Rev 1992 Ser A Calif-Oregon Transm Proj .................. 6.500 05-01-16 AAA 1,000 1,090,740 5.96
Oakland, Port of,
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj ... 6.800 01-01-19 A 500 538,470 6.31
Oceanside, City of,
Ref Cert of Part Ser A ................................... 6.375 04-01-12 A 3,000 3,210,900 5.96
Orange Cove Irrigation District,
Cert of Part Rehab Proj .................................. 7.250 02-01-12 BBB 2,000 2,225,340 6.52
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
California (continued)
Cert of Part Rehab Proj .................................. 7.000% 02-01-15 BBB $2,500 $2,761,950 6.34%
Orange County Development Agency,
Tax Alloc Santa Ana Heights Proj ......................... 6.125 09-01-23 BBB 5,000 5,135,050 5.96
Orange, County of,
1996 Ser A Recovery Cert of Part ......................... 5.800 07-01-16 AAA 2,000 2,053,260 5.65
Cert of Part Civic Center Exp Proj ....................... 6.700 08-01-18 AAA 1,000 1,108,790 6.04
Ser A of 1990 Spec Tax of Community Facil Dist 87-3
Mission Viego .......................................... 7.800 08-15-15 AA 350 391,129 6.98
Ser A of 1992 Spec Tax of Community Facil Dist 88-1
Aliso Viego ............................................ 7.350 08-15-18 AAA 1,000 1,154,050 6.37
Pasadena, City of,
1993 Ref Cert of Part Old Pasadena Parking Facil Proj .... 6.250 01-01-18 A+ 1,205 1,324,090 5.69
Pittsburg Redevelopment Agency,
Spec Tax of Community Facil Dist 90-1 California Ave ..... 7.400 08-15-20 BBB 3,040 3,438,331 6.54
Rancho Mirage, City of, Joint Powers Financing Auth,
Cert of Part Eisenhower Memorial Hosp .................... 7.000 03-01-22 A2 4,500 5,069,115 6.21
Civic Center Rev Ref Ser 1991A ........................... 7.500 04-01-17 BBB 195 219,428 6.67
Civic Center Rev Ref Ser 1991A ........................... 7.500 04-01-17 BBB 55 59,910 6.89
Redondo Beach Public Financing Auth,
Rev South Bay Center Redevel Proj ........................ 7.000 07-01-16 BBB+ 950 1,031,748 6.45
Richmond, County of,
Imp Bd Act of 1915 Ref Reassessment District No 855 ...... 6.600 09-02-19 BBB- 3,000 3,097,860 6.39
Richmond Joint Powers Financing Auth,
Rev Ser A ................................................ 7.700 10-01-10 BBB- 1,645 1,837,991 6.89
Riverside County Asset Leasing Corp,
Leasehold Rev 1993 Ser A Riverside County Hosp Proj ...... 6.500 06-01-12 A 1,000 1,123,860 5.78
Sacramento Power Auth,
Cogeneration Proj Rev Light & Pwr Imp .................... 6.000 07-01-22 BBB- 12,000 12,345,720 5.83
Sacramento Unified School District,
Spec Tax of Community Facil Dist 1 Ser B ................. 7.300 09-01-13 Baa 760 877,101 6.33
Saddleback Valley Unified School District,
Spec Tax of Community Facil Dist 89-3 Ser A .............. 7.750 09-01-16 BBB 3,200 3,485,568 7.12
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj ............ 5.500 08-01-17 A- 3,750 3,731,850 5.53
Cert of Part Ser 1994 Medical Center Fin Proj ............ 5.500 08-01-17 AAA 5,000 5,066,450 5.43
Cert of Part Ser A Medical Center Fin Proj ............... 5.500 08-01-15 AAA 5,875 5,932,869 5.45
Cert of Part Ser B Cap Facil Proj ........................ 6.875 08-01-24 AAA 350 426,125 5.65
San Diego County Regional Transportation Commission,
Sales Tax Rev 1991 Ser A ................................. 7.000 04-01-06 AA- 90 100,765 6.25
San Diego County Water Auth,
Rev Cert of Part Reg RITES ............................... 7.342# 04-23-08 AAA 1,000 1,127,500 7.84
Rev Cert of Part Reg RITES ............................... 7.342# 04-22-09 AAA 400 449,500 6.44
San Diego, County of,
Cert of Part Inmate Reception Center & Cooling ........... 6.750 08-01-19 AAA 3,000 3,459,090 5.85
San Francisco State Building Auth,
Lease Rev Ref 1993 Ser A Dept of Gen Serv ................ 5.000 10-01-13 A 2,145 2,082,602 5.15
San Francisco, City and County of,
Resid Facil Ser A Coventry Park Proj ..................... 8.500 12-01-26 BB 2,000 2,069,040 8.22
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
California (continued)
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec ........................... Zero% 01-01-03 BBB- $5,000 $3,650,450 5.98%
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-14 BBB 5,000 1,936,700 5.89
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-22 BBB 6,500 1,541,800 6.00
San Jose Financing Auth,
Reassessment Rev 1994 Ser C .............................. 6.750 09-02-11 BBB+ 810 828,306 6.60
San Mateo County Joint Powers Financing Auth,
Lease Rev Ref Cap Proj Prog .............................. 5.000 07-01-21 AAA 1,815 1,732,218 5.24
Santa Ana Financing Auth,
Lease Rev Ser A Police Admin & Holding Facil ............. 6.250 07-01-19 AAA 1,790 1,993,434 5.61
Lease Rev Ser A Police Admin & Holding Facil ............. 6.250 07-01-24 AAA 10,000 11,258,000 5.55
Santa Barbara, County of,
1990 Cert of Part ........................................ 7.500 02-01-11 AAA 250 272,010 6.89
1991 Cert of Part ........................................ 6.400 02-01-11 A+ 250 264,850 6.04
Santa Clarita Community Facilities,
Spec Tax of Community Facil Dist 92-1 Ser A .............. 7.450 11-15-10 BBB 3,600 3,873,024 6.92
Santa Rosa, City of,
Wastewater Rev 1992 Ser A Subregional Wastewater Proj .... 6.500 09-01-22 AAA 500 556,560 5.84
Saugus Unified School District,
Cert of Part ............................................. 7.500 08-01-09 BBB+ 700 745,850 7.04
Southern California Home Financing Auth,
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser A ....... 6.750 09-01-22 AAA 835 873,802 6.45
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser B ....... 7.750 03-01-24 AAA 45 47,622 7.32
Southern California Public Power Auth,
Rev Ref Southern Transmission Proj ....................... Zero 07-01-13 AAA 4,400 1,892,044 5.40
Stanislaus Waste to Energy Financing Agency,
Solid Waste Rev Ref Ogden Martin Sys Inc Proj ............ 7.625 01-01-10 BBB+ 940 1,008,065 7.11
Suisun Redevelopment Agency,
Tax Alloc Suisun City Redevel Agency ..................... 7.250 10-01-20 AAA 415 449,897 6.69
Torrance Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj ............. 7.125 09-01-21 BBB 500 540,465 6.59
Turlock Irrigation District,
Cert of Part ............................................. 7.300 01-01-11 AAA 4,165 4,296,364 7.08
University of California, The Regents of,
1993 Ref Cert of Part UCLA Central Chiller/Cogeneration
Facil .................................................. 5.400 11-01-11 Aa3 1,000 998,940 5.41
Upland Housing Auth,
Rev Iss A ................................................ 7.500 07-01-03 BBB 190 197,492 7.22
Rev Iss A ................................................ 7.850 07-01-20 BBB 1,280 1,325,094 7.58
Vallejo Sanitation and Flood Control District,
Cert of Part ............................................. 5.000 07-01-19 AAA 2,500 2,381,700 5.25
Victor Valley Unified High School District,
Cert of Part ............................................. 7.875 11-01-12 AA 1,255 1,413,331 6.99
West Covina Redevelopment Agency,
Ref Community Facil Dist Spec Tax Fashion Plaza Proj ..... 6.000 09-01-22 A 3,000 3,194,010 5.64
-----------
355,068,399
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Puerto Rico (5.67%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth
of Puerto Rico ......................................... 8.096%# 07-01-11 AAA $7,500 $8,990,625 6.86%
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref 1996 Ser Z ............................... 6.250 07-01-14 AAA 3,250 3,656,900 5.55
Puerto Rico Ports Auth,
Spec Facil Rev 1996 Ser A American Airlines Inc Proj ..... 6.250 06-01-26 BBB- 2,000 2,120,360 5.90
Puerto Rico, Commonwealth of,
GO Pub Imp Ser 1996 ...................................... 6.500 07-01-15 A 6,000 6,801,180 5.73
------------
21,569,065
------------
TOTAL TAX-EXEMPT LONG TERM BONDS
(Cost $348,318,365) (98.94%) $376,637,464
====== ============
</TABLE>
* Credit Ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Services, Fitch or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available.
** This security having an aggregate value of $2,423,050 or 0.64% of the Fund's
net asset value, has been purchased as a forward commitment -- that is, the
Fund has agreed on trade date, to take delivery of and make payment for such
security on a delayed basis subsequent to this schedule. The purchase price
and interest rate of such security is fixed at trade date, although the Fund
does not earn any interest on such security until settlement date. The Fund
has instructed its Custodian Bank to segregate assets with a current value at
least equal to the amount of the forward commitment. Accordingly, the market
value of $2,761,950 of Orange Cove Irrigation District, Cert of Part Rehab
Proj, 7.00%, 02-01-15, has been segregated to cover the forward commitment.
+ 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 the rate in effect on August 31, 1997.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
18
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================================================================================
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,
1997 assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF THE FUND'S
SECTOR DISTRIBUTION NET ASSETS:
- ------------------- -----------
General Obligation ........................................... 1.79%
Revenue Bonds - Certificate of Participation ................. 12.31
Revenue Bonds - Education .................................... 10.61
Revenue Bonds - Electric Power ............................... 5.36
Revenue Bonds - Health ....................................... 21.91
Revenue Bonds - Housing ...................................... 4.15
Revenue Bonds - Industrial Development Bond .................. 0.70
Revenue Bonds - Other ........................................ 21.96
Revenue Bonds - Pollution Control Facilities ................. 1.66
Revenue Bonds - Transportation ............................... 7.98
Revenue Bonds - Water & Sewer ................................ 10.51
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.94%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
19
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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 and service expenses under
terms of a distribution plan have exclusive voting rights regarding that
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 $7,866,496 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent such carryforwards are used by
the Fund, no capital gains distribution will be made. The carryforwards expire
as follows: August 31, 2001 -- $35,453, August 31, 2002 --$277,226, August 31,
2003 -- $5,169,717, August 31, 2004 -- $2,378,578 and August 31, 2005 -- $5,522.
Effective August 31, 1996, the tax year of the Fund changed from December 31 to
August 31. Additionally, net capital losses of $2,809,532 attributable to
security transactions incurred after October 31, 1996 are treated as arising on
the first day (September 1, 1997) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
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 Inter-
20
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
nal Revenue Code. The Fund records market discount on bonds purchased after
April 30, 1993 at time of disposition.
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 and 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.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and relative
size of the funds.
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.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with a bank which permits borrowings up to $400 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended August 31, 1997.
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. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. 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 on which it trades. 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
Funds gains and/or losses can be affected as a result of futures contracts.
At August 31, 1997, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
DEC 97 40 U.S. TREASURY BONDS LONG $2,500
======
At August 31, 1997, the Fund has deposited $5,115,000 par value of City of
Davis Redevelopment Agency, 7.00%, 09-01-24 bonds in a segregated account 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 cor-
21
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
responding liability. The amount of the liability will be subsequently
marked-to-market to reflect the current market value of the written option.
The Fund may use option contracts to manage its exposure to the stock market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
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 year ended August 31, 1997.
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.
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
$275,247 for the year ended August 31, 1997. The limitation may be discontinued
at any time.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended August 31,
1997, net sales charges received with regard to sales of Class A shares amounted
to $646,473. Out of this amount, $83,720 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $497,377 was
paid as sales commissions to unrelated broker-dealers and $65,376 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
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 year ended August 31, 1997,
contingent deferred sales charges paid to JH Funds amounted to $166,030.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B 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 0.30% 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 Class
A and Class B plans to 0.15% and 0.90% of the average daily net assets. Up to a
maximum of 0.25% of such payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers.
22
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
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 Signature Services,
Inc. ("Signature Services"), a wholly owned subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Advisor to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are directors and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. 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, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $3,578.
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 year
ended August 31, 1997, aggregated $56,930,304 and $61,701,464, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1997.
The cost of investments owned at August 31, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $348,318,365. Gross
unrealized appreciation and depreciation of investments aggregated $28,382,074
and $62,975, respectively, resulting in net unrealized appreciation of
$28,319,099.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1997, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of $14,979,
and a decrease in undistributed net investment income of $38,671 and an increase
in capital paid-in of $53,650. This represents the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
August 31, 1997. 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.
23
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - California Tax-Free Income Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock California Tax-Free Income Fund
We have audited the accompanying statement of assets and liabilities of the John
Hancock California Tax-Free Income Fund (the "Fund"), including the schedule of
investments, as of August 31, 1997, and the related statement of operations for
the year ended, and the statement of changes in net assets 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, 1997, by correspondence with the custodian and brokers, and other
auditing procedures when replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
John Hancock California Tax-Free Income Fund at August 31, 1997, the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 14, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund during its fiscal year ended August 31,
1997.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 99.79% tax-exempt. Approximately 5.78% of the 1997
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 1997 U.S. Treasury
Department Form 1099-DIV in January 1998 representing their proportionate share.
24
<PAGE>
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NOTES
John Hancock Funds - California Tax-Free Income Fund
25
<PAGE>
================================================================================
NOTES
John Hancock Funds - California Tax-Free Income Fund
26
<PAGE>
================================================================================
NOTES
John Hancock Funds - California Tax-Free Income Fund
27
<PAGE>
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- --------------------------------------------------------------------------------
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