ANNUAL REPORT
- --------------------------------------------------------------------------------
[Graphic Omitted]
California
Tax-Free
Income Fund
AUGUST 31, 1998
[Logo] JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT AND MANAGEMENT FIRM
<PAGE>
================================================================================
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin
William H. Cunningham*
Ronald R. Dion
Harold R. Hiser, Jr.
Anne C. Hodsdon
Charles L. Ladner
Leo E. Linbeck, Jr.
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 and Chief Operating Officer
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
Vice President and Chief 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 02109-1803
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
-------------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term
is a roller coaster. That is because, while long-term history suggests the
market's general direction is up, its swings over the short term can be dra-
matic and, at times, violent. Recently, the market has given us a stark example
of this phenomenon. From the new highs set in mid-July, the major indices
plunged by 19% through the end of August. It was the worst such fall since 1990.
For the first time in a number of years, some bonds and bond mutual funds
outperformed stocks and stock mutual funds. Seeking safety in a world of global
economic uncertainties, investors everywherer converged on U.S. Treasury bonds
and pushed their yields to historic lows.
- --------------------------------------------------------------------------------
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
- --------------------------------------------------------------------------------
For the record-breaking number of investors who have entered the market
for the first time since 1990, it was their worst taste of stock market reality.
We are pleased to report that most individual investors did not panic, and we
hope that means they've taken our words to heart. Over the long term, markets do
not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering whether the global turmoil and the
prospects for slower U.S. economic and corporate earnings growth are signs that
the long bull market has finally run its course. While we don't make a practice
of opining on what the market will do next, we continue to believe it would be
wise for investors to set more realistic expectations. Over the long term, the
market's historical results have been more in the 10% per year range, which is
still a solid result, considering it has been produced despite wars, depressions
and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the last six months' divergence in
performance of stocks and higher-quality bonds is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Dianne Sales, CFA, Frank Lucibella, CFA and Barry Evans, CFA,
Portfolio Managers
John Hancock California
Tax-Free Income Fund
Municipals fare well in rallying bond market,
but lag Treasuries amid record supply
A healthy bond market buoyed municipal bonds during the past 12 months.
Continued slowdown in Asian markets constrained U.S. economic growth, while
turmoil in emerging markets drew investors to the safety of U.S. Treasuries. As
a result, U.S. interest rates fell and inflation remained under control. Against
this positive backdrop, municipal bonds turned in solid returns for the year.
Municipal performance was somewhat constrained compared to Treasury
bonds, however, as low interest rates resulted in an increased supply of
municipal bonds. During the first six months of 1998, the issuance of municipal
bonds increased more than 50% versus 1997. The reason was that many local
governments have been issuing large amounts of new tax-exempt bonds in order to
take advantage of lower interest rates. This strong influx of new bond issuance
has put pressure on municipal bond prices, causing them to lag Treasuries.
The silver lining, however, is that municipal bonds now offer their
best relative values versus U.S. Treasuries in almost five years. This has not
gone unnoticed, particularly among non-traditional buyers who have crossed over
into the tax-exempt market to take advantage of these attractive values. This
strong demand from non-traditional "crossover" buyers has helped to absorb the
recent flood of new issuance into the municipal bond market.
"A healthy bond market buoyed municipal bonds during the past 12 months."
- --------------------------------------------------------------------------------
[A 3 1/2" x 2 1/2" photo at bottom right of page of fund management team
members. Caption below reads "Fund management team members (l - r): Barry Evans,
Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
"...we continued to carefully manage the portfolio's duration and structure."
- --------------------------------------------------------------------------------
[Pie Chart at the top of left hand column with the heading "Portfolio
Diversification". The chart is divided into nine sections (from top to left):
General Obligation 2%, Other 31%, Water & Sewer 11%, Transportation 10%, Housing
5%, Health 20%, Electric Power 5%, Education 11% and Correctional Facilities 5%.
A note below the chart reads "As a percentage of net assets on August 31,
1998."]
- --------------------------------------------------------------------------------
Even with the supply pressures, municipal bonds turned in solid
performance during the period. For the 12 months ended August 31, 1998, John
Hancock California Tax-Free Income Fund's Class A and Class B shares returned
9.32% and 8.50%, respectively, at net asset value. Keep in mind that your net
asset value return will be different if you were not invested in the Fund for
the entire period and did not reinvest all distributions. The Fund's returns
were competitive with the average California municipal bond fund's return of
8.51%, according to Lipper Analytical Services, Inc.1 Please see pages six and
seven for longer-term performance information.
- --------------------------------------------------------------------------------
[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Sacramento
Power Authority followed by an up arrow with the phrase "Credit upgrade." The
second listing is Zero coupon bonds followed by an up arrow with the phrase
"High sensitivity to rate changes." The third listing is Housing bonds followed
by a down arrow with the phrase "Increased prepayments." A note below the table
reads "See 'Schedule of Investments.' Investment holdings are subject to
change."]
- --------------------------------------------------------------------------------
Narrowing credit spreads drive performance Credit spreads in the municipal
market narrowed substantially in the first six months of the period. Credit
spreads refer to the difference in yields between bonds with different credit
ratings. As the gap between yields on higher- and lower-quality bonds narrowed,
the Fund benefited significantly, thanks to its holdings in lower-quality bonds.
With in-depth credit analysis, we've been able to identify lower-quality bonds
not only with attractive yields, but also with improving credit profiles. One of
our best performers was the Sacramento Power Authority, one of two co-generation
plants for the Sacramento Municipal Utility District. This project got a boost
when its sister project was completed and gained a credit upgrade.
Focus on portfolio duration and call protection Throughout the year, we
continued to carefully manage the portfolio's duration and structure. Duration
is a measure of how sensitive the Fund's share price is to those changes. The
longer the duration, the more sensitive the Fund's share price is to those
changes. For most of the year, we've kept the Fund's duration relatively long.
That way we could take advantage of falling interest rates and the bond market's
strong rally.
We also maintained our long-term focus on call protection. As we've
discussed in previous reports, call protection guards a bond from being redeemed
early by its issuer for a certain period of time. Strong call protection is
especially important during periods of falling interest rates - when issuers
often try to refinance their bonds at lower interest rates. If a bond gets
called away, or redeemed early, investors are forced to reinvest their money in
bonds with lower yields. By focusing on issues with strong call protection,
we've been able to maintain the Fund's competitive yield levels.
4
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the year ended August 31, 1998". The chart
is scaled in increments of 2% with 0% at the bottom and 10% at the top. The
first bar represents the 9.32% total return for John Hancock California Tax-Free
Income Fund Class A. The second bar represents the 8.50% total return for John
Hancock California Tax-Free Income Fund Class B and the third bar represents the
8.51% total return for the Average California municipal bond fund. A note below
the chart 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, Inc. (1). See the
following two pages for historical performance information."]
- --------------------------------------------------------------------------------
Looking ahead
We are optimistic about the prospects for California's municipal bond market for
the remainder of the year. The state's fiscal situation is good, the economy
continues to grow steadily, unemployment is low and the housing market remains
strong. With one-third of U.S. exports to Asia coming from California, there's
been concern that Asia's financial woes might negatively impact certain sectors
of the state's economy. However, because of its diversity, the California
economy has weathered the crisis and there's been minimal impact on the state's
economic growth.
Of course, we are heading into an election year in California and we
will be keeping a close eye on any pressure that the political process may put
on the state's budget outlook.
The Federal Reserve has been vigilant about keeping inflation under
control and there's no reason to believe that will change in the near future.
The biggest question is the direction of the U.S. economy. We expect that Asia's
financial woes will continue to slow the U.S. economy in the second half of the
year. In this environment, we could see interest rates continue to fall. As a
result, we will be biased toward maintaining our longer duration. In addition,
we expect credit spreads to continue to remain narrow and yield opportunities to
be limited. Given our economic outlook and the narrow spreads in the market, we
will be highly selective in adding yield to the portfolio, instead focusing on
higher-quality credits.
The macro-environment for municipal bonds also remains favorable.
Current municipal bond prices represent historic values relative to U.S.
Treasuries. In addition, we believe that supply pressures are likely to moderate
in the second half of the year. Once the pace of new issues slows, municipal
bonds should have a chance to improve their performance relative to U.S.
Treasuries.
This commentary reflects the views of the portfolio managers 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.
"We expect that Asia's financial woes will continue to slow the U.S. economy..."
5
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
- --------------------------------------------------------------------------------
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
measures the change in value of an investment from the beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.50%. Class B performance reflects a maximum contingent deferred
sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
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 (AMT). Also note
that capital gains are taxable.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
One Five INCEPTION
Year Years (12/29/89)
------- ------- --------
Cumulative Total Returns 4.47% 30.92% 84.44%
Average Annual Total Returns (1) 4.47% 5.54% 7.47%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
One Five INCEPTION
Year Years (12/31/91)
------- ------- --------
Cumulative Total Returns 3.57% 30.04% 54.41%
Average Annual Total Returns (1) 3.57% 5.39% 6.91%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1998
SEC 30-DAY
YIELD
-------
John Hancock California Tax-Free Income Fund: Class A 3.89%
John Hancock California Tax-Free Income Fund: Class B 3.33%
Notes to Performance
(1) The Adviser has voluntarily reduced a portion of the management fee and
offset the custodian fees with balance credits during the period. Without the
limitation of expenses, the average annual total returns for the one-year,
five-year and since inception periods for Class A shares would have been 4.41%,
5.43% and 7.22%, respectively. The average annual total returns for the
one-year, five-year and since inception periods for Class B shares would have
been 3.50%, 5.28% and 6.78%, respectively.
6
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
- --------------------------------------------------------------------------------
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, assuming all distributions were
reinvested for the period indicated. 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. Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
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 $19,700 as of August 31, 1998. The second line
represents the value of the Lehman Brothers Municipal Bond Index and is equal to
$19,518 as of August 31, 1998. The third line represents the California Tax-Free
Income Fund after sales charge and is equal to $18,815 as of August 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 two lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $16,223 as of August 31, 1998. 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 $15,731 as of August 31, 1998.
- --------------------------------------------------------------------------------
*No contingent deferred sales charge applicable.
7
<PAGE>
==============================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, 1998. 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, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value -- Note C:
Tax-exempt long-term bonds (cost -- $352,703,190). $393,938,898
Cash................................................... 4,082,482
Receivable for investments sold........................ 1,968,615
Receivable for shares sold............................. 272,597
Interest receivable.................................... 5,504,465
Receivable for futures variation margin -- Note A...... 55,781
Other assets........................................... 85,080
-------------
Total Assets.................. 405,907,918
-------------------------------------------------------
Liabilities:
Payable for investments purchased.................... 6,304,231
Payable for shares repurchased....................... 117,489
Dividend payable..................................... 118,040
Payable to John Hancock Advisers, Inc.
and affiliates -- Note B............................ 254,478
Accounts payable and accrued expenses................ 57,985
----------
Total Liabilities............. 6,852,223
-------------------------------------------------------
Net Assets:
Capital paid-in....................................... 367,677,904
Accumulated net realized loss on investments and
financial futures contracts......................... (9,908,066)
Net unrealized appreciation of investments and
financial futures contracts........................... 41,312,997
Distributions in excess of net investment income...... (27,140)
-------------
Net Assets.................... $399,055,695
-------------------------------------------------------
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 -- $300,483,260/26,843,669................... $11.19
================================================================================
Class B -- $98,572,435/8,805,967..................... $11.19
================================================================================
Maximum Offering Price Per Share*
Class A -- ($11.19 x 104.71%)......................... $11.72
================================================================================
* 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, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest............................................. $22,561,005
-------------
Expenses:
Investment management fee -- Note B................. 2,139,998
Distribution and service fee -- Note B
Class A.......................................... 443,709
Class B.......................................... 839,560
Transfer agent fee -- Note B........................ 217,439
Custodian fee....................................... 96,982
Financial services fee -- Note B.................... 66,577
Auditing fee........................................ 37,500
Trustees' fees...................................... 32,737
Registration and filing fees........................ 13,471
Printing............................................ 10,504
Miscellaneous....................................... 8,470
Legal fees.......................................... 2,050
Less management fee reduction -- Note B............. (219,457)
-------------
Total Expenses.................... 3,689,540
- --------------------------------------------------------------------------------
Less Expense Reductions --
Note B............................ (66,589)
- --------------------------------------------------------------------------------
Net Expenses...................... 3,622,951
- --------------------------------------------------------------------------------
Net Investment Income............. 18,938,054
- --------------------------------------------------------------------------------
Realized and Unrealized Gain on Investments and
Financial Futures Contracts:
Net realized gain on investments sold................ 1,280,106
Net realized gain on financial futures contracts..... 758,157
Change in net unrealized appreciation/depreciation
of investments........................................ 12,916,609
Change in net unrealized appreciation/depreciation
of financial futures contracts........................ 71,211
-------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts... 15,026,083
- --------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations..... $33,964,137
=======================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - California Tax-Free Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1997 1998
---------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income........................................................ $19,887,736 $18,938,054
Net realized gain (loss) on investments sold and financial futures contracts. (3,659,073) 2,038,263
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts.................................................. 18,509,516 12,987,820
-------------- -------------
Net Increase in Net Assets Resulting from Operations....................... 34,738,179 33,964,137
-------------- -------------
Distributions to Shareholders:
Distributions from net investment income
Class A -- ($0.5718 and $0.5575 per share, respectively)................ (15,922,912) (14,988,439)
Class B -- ($0.4909 and $0.4749 per share, respectively................. (3,998,280) (4,023,289)
-------------- -------------
Total Distributions to Shareholders..................................... (19,921,192) (19,011,728)
-------------- -------------
From Fund Share Transactions -- Net: *.......................................... (8,482,019) 3,443,098
-------------- -------------
Net Assets:
Beginning of period........................................................... 374,325,220 380,660,188
-------------- -------------
End of period (including undistributed net investment income of
$35,003 and distributions in excess of net investment income
of $27,140, respectively)................................................... $380,660,188 $399,055,695
============== =============
* Analysis of Fund Share Transactions:
YEAR ENDED AUGUST 31,
--------------------------------------------------------
1997 1998
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
CLASS A
Shares sold........................................... 15,577,087 $163,663,688 2,280,061 $25,129,803
Shares issued to shareholders in reinvestment
of distributions...................................... 667,751 7,067,034 612,940 6,744,970
---------- ------------ ----------- -----------
16,244,838 170,730,722 2,893,001 31,874,773
Less shares repurchased............................... (17,309,091) (182,073,253) (3,083,700) (33,902,668)
---------- ----------- --------- ----------
Net decrease.......................................... (1,064,253) ($11,342,531) (190,699) ($2,027,895)
========== =========== ========= ==========
CLASS B
Shares sold........................................... 1,334,549 $14,107,925 1,962,836 $21,603,294
Shares issued to shareholders in reinvestment of
distributions......................................... 179,889 1,903,812 167,576 1,844,388
---------- ----------- --------- ----------
1,514,438 16,011,737 2,130,412 23,447,682
Less shares repurchased............................... (1,243,410) (13,151,225) (1,633,760) (17,976,689)
---------- ----------- --------- ----------
Net increase.......................................... 271,028 $2,860,512 496,652 $5,470,993
========== =========== ========= ==========
</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 two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
============================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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
------------------------------ JANUARY 1, 1996 TO -------------------
1993 1994(1) 1995 AUGUST 31, 1996(9) 1997 1998
-------- -------- -------- ---------------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period............ $10.41 $10.85 $9.28 $10.69 $10.36 $10.77
------ ------ ----- ------ ------ -------
Net Investment Income........................... 0.62 0.58 0.57(2) 0.39(2) 0.57(2) 0.56(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts.... 0.76 (1.57) 1.41 (0.33) 0.41 0.42
------ ------ ----- ------ ------ ------
Total from Investment Operations............... 1.38 (0.99) 1.98 0.06 0.98 0.98
------ ------ ----- ------ ------ ------
Less Distributions:
Dividends from Net Investment Income (0.62) (0.58) (0.57) (0.39) (0.57) (0.56)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts (0.32) - - - - -
------ ------ ----- ------ ------ ------
Total Distributions............................. (0.94) (0.58) (0.57) (0.39) (0.57) (0.56)
------ ------ ----- ------ ------ ------
Net Asset Value, End of Period................... $10.85 $9.28 $10.69 $10.36 $10.77 $11.19
====== ====== ===== ====== ====== ======
Total Investment Return at Net Asset Value (3)... 13.60% (9.31%) 21.88% 0.61%(7) 9.71% 9.32%
Total Adjusted Investment Return at Net
Asset Value (3,4)................................ 13.42% (9.45%) 21.73% 0.55%(7) 9.64% 9.26%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted)................................. $279,692 $241,583 $309,305 $291,072 $291,167 300,483
Ratio of Expenses to Average Net Assets......... 0.69% 0.75% 0.75% 0.76%(8,10) 0.75% 0.77%(10)
Ratio of Adjusted Expenses to Average
Net Assets (5).................................. 0.87% 0.89% 0.90% 0.84%(8) 0.82% 0.83%
Ratio of Net Investment Income
to Average Net Assets........................... 5.69% 5.85% 5.76% 5.57%(8) 5.42% 5.05%
Ratio of Adjusted Net Investment Income
to Average Net Assets (5)....................... 5.51% 5.71% 5.61% 5.48%(8) 5.35% 4.99%
Portfolio Turnover Rate......................... 51% 62% 37%(6) 30% 15% 10%
Fee Reduction per Share......................... $0.02 $0.01 $0.01(2) $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>
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
------------------------------ JANUARY 1, 1996 TO -------------------------
1993 1994(1) 1995 AUGUST 31, 1996(9) 1997 1998
-------- -------- ------ ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period.... $10.41 $10.85 $9.28 $10.68 $10.36 $10.77
-------- -------- ------ -------- -------- --------
Net Investment Income................... 0.54 0.51 0.50(2) 0.33(2) 0.49(2) 0.47(2)
Net Realized and Unrealized-
Gain (Loss) on Investments-
and Financial Futures Contracts......... 0.76 (1.57) 1.40 (0.31) 0.41 0.42
-------- -------- ------ -------- -------- --------
Total from Investment Operations....... 1.30 (1.06) 1.90 0.02 0.90 0.89
-------- -------- ------ -------- -------- --------
Less Distributions:
Dividends from Net Investment Income..... (0.54) (0.51) (0.50) (0.34) (0.49) (0.47)
Distributions from Net Realized Gains on
Investments Sold and-
Financial Futures Contracts............ (0.32) - - - - -
-------- -------- ------ -------- -------- --------
Total Distributions.................... (0.86) (0.51) (0.50) (0.34) (0.49) (0.47)
-------- -------- ------ -------- -------- --------
Net Asset Value, End of Period........... $10.85 $9.28 $10.68 $10.36 $10.77 $11.19
======== ======== ====== ======== ======== ========
Total Investment Return at
Net Asset Value (3)...................... 12.76% (9.99%) 20.87% 0.20%(7) 8.88% 8.50%
Total Adjusted Investment Return at
Net Asset Value(3,4)..................... 12.58% (10.13%) 20.72% 0.14%(7) 8.81% 8.44%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $65,437 $77,365 $84,673 $83,253 $89,493 $98,572
Ratio of Expenses to Average Net Assets. 1.44% 1.50% 1.50% 1.52%(8,10) 1.50% 1.52%(10)
Ratio of Adjusted Expenses to-
Average Net Assets (5).................. 1.62% 1.64% 1.65% 1.59%(8) 1.57% 1.58%
Ratio of Net Investment Income to
Average Net Assets...................... 4.82% 5.10% 4.97% 4.81%(8) 4.66% 4.29%
Ratio of Adjusted Net Investment-
Income to Average Net Assets (5)........ 4.64% 4.96% 4.82% 4.72%(8) 4.59% 4.23%
Portfolio Turnover Rate................. 51% 62% 37%(6) 30% 15% 10%
Fee Reduction per Share................. $0.02 $0.01 $0.01(2) $0.01(2) $0.01(2) $0.01(2)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc., became the investment
adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover rate excludes merger activity.
(7 Not annualized.
(8 Annualized.
(9) Effective August 31, 1996, the fiscal period end changed from December 31
to August 31.
(10)For the period ended August 31, 1996 and the year ended August 31,
1998, the ratio of expenses to average net assets for the Fund
excludes the effect of expense reductions. If expense reductions were
included, the ratio of expenses to average net assets would have been
0.75% for Class A and 1.50% for Class B for both periods.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
=============================FINANCIAL STATEMENTS===============================
Schedule of Investments
August 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
California Tax-Free Income Fund on August 31, 1998. 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 (92.98%)
ABAG Finance Authority for Nonprofit Corps.,
Cert of Part Nat'l Ctr for Int'l Schools Proj............. 7.375% 05-01-18 BB+ $4,300 $4,563,504 6.95%
Cert of Part Peninsula Family YMCA Ser A.................. 6.800 10-01-11 A1 1,000 1,065,010 6.38
Alameda, County of,
Cert of Part Cap Projs.................................... 6.750 06-01-16 A 500 560,870 6.02
Anaheim Public Financing Auth,
Sub Lease Rev 1997 Cap Apprec Ser C Anaheim
Pub Imp Proj.............................................. Zero 09-01-18 AAA 3,000 1,110,780 5.03
Anaheim, City of,
Cert of Part Ref Reg RITES Convention Ctr................. 8.206# 07-16-23 AAA 2,000 2,350,000 6.98
Arcadia, County of,
Hosp Rev Methodist Hosp of Southern California............ 6.625 11-15-22 A 1,205 1,322,005 6.04
Avalon Community Improvement Agency,
Tax Alloc Community Imp Proj Ser B........................ 6.400 08-01-22 A- 1,865 2,073,488 5.76
Bakersfield Memorial Hospital,
Hosp Rev Ser A............................................ 6.500 01-01-22 A- 2,000 2,125,460 6.12
Beaumont Unified School District,
Cert of Part Cap Imp Proj................................. 7.700 01-01-21 BBB+ 1,000 1,105,010 6.97
Beverly Hills Public Financing Auth,
Lease Rev INFLOS.......................................... 7.320# 06-01-15 AAA 2,500 2,762,500 6.62
Brentwood Redevelopment Agency,
Tax Alloc Brentwood Redevel Proj Ser A.................... 7.700 11-01-08 BBB 135 142,120 7.31
Burbank Redevelopment Agency,
Tax Alloc Golden State Redevel Proj Ser A................. 6.000 12-01-23 A- 2,750 2,903,285 5.68
California Educational Facilities Auth,
Ref Rev Stanford Univ Ser O**............................. 5.125 01-01-31 AAA 2,000 2,009,860 5.10
Rev 1993 Ser B Pooled College & Univ Proj................. 6.125 06-01-09 Baa2 1,000 1,072,000 5.71
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc.................. 6.950 10-01-21 AA 250 278,002 6.25
Ins Hosp Rev Ser 1990 Children's Hosp San Diego........... 6.500 07-01-20 AAA 500 535,485 6.07
Ins Rev Ref Ser A Catholic Healthcare West
Obligated Group........................................... 5.750 07-01-15 AAA 2,000 2,148,740 5.35
Ins Rev Ser A San Diego Christian Foundation.............. 6.250 07-01-12 A+ 1,135 1,221,612 5.81
Ins Rev Ser B Hlth Facil Small Facil...................... 7.500 04-01-22 A+ 2,000 2,370,860 6.33
Rev 1990 Ser A Kaiser Permanente.......................... 7.000 12-01-10 A3 600 647,976 6.48
Rev Ser 1994A Scripps Research Institute.................. 6.300 07-01-09 A1 500 552,315 5.70
Sec Rev 1991 Ser Hosp of the Good Samaritan............... 7.000 09-01-21 BBB+ 2,250 2,418,930 6.51
</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 CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
California Housing Finance Agency,
Home Mtg Rev 1989 Ser A............................... 7.625% 08-01-09 AA- $10 $10,292 7.41%
Home Mtg Rev 1989 Ser B............................... 8.000 08-01-29 AA- 65 67,570 7.70
Home Mtg Rev 1989 Ser D............................... 7.500 08-01-29 AA- 105 108,575 7.25
Home Mtg Rev 1990 Ser D............................... Zero 08-01-20 AA- 7,070 1,312,121 7.83
Home Mtg Rev 1991 Ser A............................... 7.375 08-01-17 AA- 380 400,790 6.99
Home Mtg Rev 1994 Ser C............................... 6.650 08-01-14 AA- 1,000 1,070,290 6.21
Home Mtg Rev 1994 Ser G............................... 7.250 08-01-17 AA- 3,500 3,795,295 6.69
Hsg Rev 1991 Ser E.................................... 7.000 08-01-26 AAA 525 555,555 6.62
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co.... 6.900 12-01-17 A1 500 546,745 6.31
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co..... 6.625 06-01-09 AA- 500 545,850 6.07
Poll Control Rev 1997 Ser A Laidlaw Environmental Proj 6.700 07-01-07 BBB- 2,000 2,118,160 6.33
Solid Waste Disposal Rev Keller Canyon Landfill Co Proj 6.875 11-01-27 A 2,000 2,190,880 6.28
California Rural Home Mortgage Finance Auth,
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog..... 7.550 11-01-26 AAA 800 938,096 6.44
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog
Step Coupon......................................... 7.750# 05-01-27 AAA 805 943,927 6.61
California State Public Works Board,
Lease Rev 1992 Ser A Calif State Univ Various Univ Projs 6.700 10-01-17 AAA 1,500 1,694,250 5.93
Lease Rev 1993 Ser A Various Community College Projs.. 5.625 12-01-18 A 3,700 3,857,139 5.40
Lease Rev Ref 1993 Ser A Calif State Univ
Various Univ Projs.................................. 5.500 06-01-21 A+ 1,250 1,290,387 5.33
Lease Rev 1994 Ser A Dept of Corrections
Calif State Prison Monterey County (Soledad II)......... 6.875 11-01-14 A 500 589,590 5.83
Lease Rev 1996 Ser A Dept of Corrections.............. 5.500 01-01-15 AAA 5,145 5,460,749 5.18
Lease Rev Ref 1993 Ser A Depart of Corrections
Various State Prisons............................... 5.000 12-01-19 AAA 5,000 5,105,100 4.90
Lease Rev Ser A Dept of Corrections................... 5.250 01-01-21 AAA 4,500 4,576,320 5.16
California Statewide Communities Development Auth,
Ins Cert of Part United Western Medical Centers........ 6.750 12-01-21 AA 7,500 8,329,500 6.08
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles.. 6.200 08-01-12 A+ 1,250 1,335,750 5.80
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles.. 6.250 08-01-22 A+ 2,590 2,771,300 5.84
Ins Rev Cert of Part Hlth Facil Eskaton Properties..... 6.700 05-01-11 A+ 1,250 1,355,612 6.18
Ins Rev Cert of Part Statewide Univ Northridge Proj.... 6.000 04-01-26 AAA 1,620 1,766,529 5.50
Ins Rev Ref Cert of Part Triad Healthcare Hosp......... 6.500 08-01-22 A+ 13,000 14,500,070 5.83
Campbell, City of,
1991 Cert of Part Preref Civic Ctr Proj................ 6.750 10-01-17 A 155 171,804 6.09
1991 Cert of Part Unref Bal Civic Ctr Proj............. 6.750 10-01-17 A 1,565 1,733,206 6.09
Capistrano Unified School District,
Spec Tax of Community Facil Dist 87-1.................. 7.500 09-01-07 Aaa 3,500 3,709,615 7.08
Spec Tax of Community Facil Dist 87-1.................. 8.375 10-01-20 Aaa 3,000 3,344,160 7.51
Spec Tax of Community Facil Dist 92-1.................. 7.000 09-01-18 BBB- 1,500 1,733,160 6.06
Spec Tax of Community Facil Dist 92-1.................. 7.100 09-01-21 BBB- 2,250 2,760,075 5.79
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No 1 Redevel Proj.............. 6.375 10-01-12 BBB+ 500 534,985 5.96
</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 CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj............... 7.350% 08-01-20 Aaa $200 $217,776 6.75%
Center Unified School District,
GO Cap Apprec Ser C.................................. Zero 09-01-16 AAA 2,145 883,354 4.99
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992........... 6.600 10-01-22 AAA 3,700 4,165,238 5.86
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993... 6.100 07-01-13 AA 3,300 3,677,751 5.47
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993... 6.200 07-01-20 AA 1,000 1,118,840 5.54
Clearlake Redevelopment Agency,
Tax Alloc Highlands Park Community Devel Proj........ 6.400 10-01-23 BBB 500 533,715 6.00
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A.......................... 7.100 08-01-21 BBB 220 230,384 6.78
Cucamonga School District,
Cert of Part......................................... 7.600 12-01-15 Baa 1,000 1,070,460 7.10
Davis Redevelopment Agency,
Tax Alloc Ref Davis Redevel Proj..................... 7.000 09-01-24 AAA 5,115 5,862,966 6.11
Del Mar Race Track Auth,
Rev Ref Ser 1996..................................... 6.000 08-15-06 BBB 2,240 2,394,582 5.61
Rev Ref Ser 1996..................................... 6.200 08-15-11 BBB 1,865 2,030,407 5.69
Delano, City of,
Cert of Part......................................... 7.000 04-01-10 BBB+ 2,000 2,097,980 6.67
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj. 8.000 07-01-10 AAA 300 329,208 7.29
Duarte, City of,
Cert of Part City of Hope National Medical Center Proj 6.250 04-01-23 Baa1 14,000 14,845,600 5.89
East Bay Municipal Utility District,
Wastewater Treatment Sys Rev Ref..................... 6.820# 06-01-20 AAA 6,000 6,450,000 6.34
Encinitas Public Finance Auth,
Cert of Part Ser A Civic Ctr Proj.................... 6.750 12-01-11 A- 1,300 1,443,780 6.08
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave Storm Drainage Proj.. 6.500 08-01-21 A- 1,085 1,184,538 5.95
Fontana Public Financing Auth,
Tax Alloc Rev 1990 Ser A North Fontana Redevel Proj.. 7.250 09-01-20 BBB 325 344,835 6.83
Tax Alloc Rev Sub Lien 1991 Ser A
North Fontana Redevel Proj......................... 7.750 12-01-20 AA 195 222,226 6.80
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A......... 6.500 01-01-32 BBB- 1,665 1,836,761 5.89
Toll Rd Rev Fixed Rate Current Int Ser 1995A......... 6.000 01-01-34 BBB- 14,775 15,781,030 5.62
Fremont Public Finance Auth,
Rev Ser A............................................ 5.500 09-02-10 BB+ 2,905 2,899,945 5.51
Fresno Joint Powers Financing Auth,
Rev Ser A............................................ 6.550 09-02-12 BBB 2,000 2,192,080 5.98
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center... 6.625 06-01-21 AA 250 279,350 5.93
Industry Urban-Development Agency,
Tax Alloc Ref Trans Dist Proj 3...................... 6.900 11-01-16 A- 1,020 1,119,460 6.29
</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 CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Inglewood, City of,
Cert of Part Civic Ctr Imp Proj...................... 7.000% 08-01-19 BBB- $1,000 $1,077,430 6.50%
Irvine, City of,
Imp Board Act of 1915 Assessment Dist 95-12 Ser B.... 6.550 09-02-21 BB+ 1,000 1,066,170 6.14
Mobile Home Park Rev Ser A Meadows Mobile Home Park.. 5.700 03-01-28 BBB- 1,930 1,936,466 5.68
Irwindale Community Redevelopment Agency,
Sub Lien Tax Alloc Industrial Devel Proj............. 7.050 06-01-26 BBB 2,750 3,081,100 6.29
Lincoln Redevelopment Agency,
Tax Alloc Lincoln Redevel Proj....................... 7.650 08-01-17 BBB+ 745 838,349 6.80
Long Beach, City of,
Harbor Rev Ref Ser A................................. 6.000 05-15-18 AAA 2,660 3,019,605 5.29
Los Alamitos Unified School District,
Spec Tax of Community Facil Dist 90-1................ 7.150 08-15-21 Baa1 6,005 6,684,766 6.42
Los Angeles Community Facilities District,
Spec Tax No 3 Cascades Business Park Proj............ 6.400 09-01-22 BB+ 1,000 1,038,400 6.16
Los Angeles Community Redevelopment Financing Auth,
Rev Multi Family Ser A Grand Central Square.......... 5.850 12-01-26 BB 2,000 2,006,420 5.83
Los Angeles Department of Airports,
Airport Rev AMT Ser A Ontario International Airport Proj 6.000 05-15-26 AAA 2,000 2,165,440 5.54
Los Angeles Department of Water and Power,
Elec Plant Rev Ref 2nd Iss of 1993................... 5.400 11-15-12 A+ 1,000 1,048,150 5.15
Los Angeles Public Works Financing Auth,
Rev Regional Park & Open Space Dist A................ 6.000 10-01-15 AA 3,750 4,231,988 5.32
Los Angeles, County of,
Cert of Part Disney Pkg Proj......................... 6.500 03-01-23 BBB 2,000 2,150,760 6.04
Cert of Part Reg Linked SAVRS & RIBS Ref Proj........ 6.616# 06-01-15 BBB 1,200 1,311,084 6.06
Rev Ser B AMT Harbor Proj............................ 6.000 08-01-15 AA 2,000 2,202,100 5.45
Metropolitan Water District,
Wtr Rev Iss of 1991.................................. 6.625 07-01-12 AA 750 823,035 6.04
Wtr Rev Iss of 1992.................................. 5.000 07-01-20 AA 7,500 7,401,375 5.07
Millbrae, City of,
Residential Facil Rev Ser 1997A Magnolia of Millbrae Proj 7.375 09-01-27 BB 1,000 1,042,900 7.07
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 600 652,266 5.98
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj............. 7.000 05-01-13 AAA 100 125,143 5.59
Rev 1992 Ser A Calif-Oregon Transm Proj............. 6.500 05-01-16 AAA 1,000 1,099,540 5.91
Oakland, Port of,
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj 6.800 01-01-19 A- 500 544,585 6.24
Oceanside, City of,
Ref Cert of Part Ser A............................... 6.375 04-01-12 A 3,000 3,261,180 5.86
Orange County Development Agency,
Tax Alloc Santa Ana Heights Proj..................... 6.125 09-01-23 BBB 5,000 5,301,550 5.78
</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 CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Orange Cove Irrigation District,
Cert of Part Rehab Proj............................. 7.250% 02-01-12 AA $2,000 $2,198,240 6.60%
Cert of Part Rehab Proj............................. 7.000 02-01-15 AA 2,500 2,734,100 6.40
Orange, County of,
Cert of Part Recovery Ref Ser A..................... 5.800 07-01-16 AAA 2,000 2,160,380 5.37
Cert of Part Civic Ctr Exp Proj..................... 6.700 08-01-18 AAA 1,000 1,102,500 6.08
Ser A of 1990 Spec Tax of Community Facil Dist 87-3
Mission Viejo.................................... 7.800 08-15-15 AA 350 383,849 7.11
Ser A of 1992 Spec Tax of Community Facil Dist 88-1
Aliso Viejo...................................... 7.350 08-15-18 AAA 1,000 1,149,480 6.39
Pasadena, City of,
Cert of Part Ref Old Pasadena Pkg Facil Proj........ 6.250 01-01-18 A+ 1,205 1,375,267 5.48
Pittsburg Redevelopment Agency,
Spec Tax of Community Facil Dist 90-1 California Ave 7.400 08-15-20 BBB 3,040 3,404,283 6.61
Poway, City of,
Community Facil Dist No 88-1 Spec Tax Ref Pkwy Business Ctr 6.750 08-15-15 BB 1,000 1,096,350 6.16
Rancho Mirage, City of, Joint Powers Financing Auth,
Cert of Part Eisenhower Memorial Hosp............... 7.000 03-01-22 A2 4,500 5,049,810 6.24
Civic Center Rev Ref Ser 1991A Preref............... 7.500 04-01-17 BBB 195 216,481 6.76
Civic Center Rev Ref Ser 1991A Unref Bal............ 7.500 04-01-17 BBB 55 59,860 6.89
Redondo Beach Public Financing Auth,
Rev South Bay Center Redevel Proj................... 7.000 07-01-16 BBB+ 950 1,063,658 6.25
Richmond, County of,
Imp Bd Act of 1915 Ref Reassessment District No 855. 6.600 09-02-19 BBB- 3,000 3,103,680 6.38
Richmond Joint Powers Financing Auth,
Rev Ser A........................................... 7.700 10-01-10 BBB- 1,645 1,807,049 7.01
Riverside County Asset Leasing Corp,
Leasehold Rev 1993 Ser A Riverside County Hosp Proj. 6.500 06-01-12 A 1,000 1,174,010 5.54
Sacramento Power Auth,
Cogeneration Proj Rev Light & Pwr Imp............... 6.000 07-01-22 BBB- 12,000 12,883,680 5.59
Sacramento Unified School District,
Spec Tax of Community Facil Dist 1 Ser B............ 7.300 09-01-13 Baa 760 875,459 6.34
Saddleback Valley Unified School District,
Spec Tax of Community Facil Dist 89-3 Ser A......... 7.750 09-01-16 AA 3,200 3,397,696 7.30
San Bernardino, County of,
Cert of Part Ref Medical Ctr Fin Proj............... 5.500 08-01-17 A- 3,750 3,949,200 5.22
Cert of Part Ref Medical Ctr Fin Proj............... 5.500 08-01-17 AAA 5,000 5,405,650 5.09
Cert of Part Ref Medical Ctr Fin Proj Ser A......... 5.500 08-01-15 AAA 5,875 6,222,683 5.19
Cert of Part Ser B Cap Facil Proj................... 6.875 08-01-24 AAA 350 444,570 5.41
San Diego County Regional Transportation Commission,
Sales Tax Rev 1991 Ser A............................ 7.000 04-01-06 AA- 90 102,966 6.12
San Diego County Water Auth,
Water Rev Cert of Part Reg RITES.................... 7.434# 04-23-08 AAA 1,000 1,220,000 6.09
Water Rev Cert of Part Reg RITES.................... 7.531# 04-22-09 AAA 400 489,000 6.16
San Diego, County of,
Cert of Part Inmate Reception Ctr & Cooling Plant Fin 6.750 08-01-19 AAA 3,000 3,500,700 5.78
</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 CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
San Francisco Bay Area Rapid Transit District,
Sales Tax Rev Ref................................... 5.000% 07-01-28 AAA $3,000 $2,976,810 5.04%
San Francisco State Building Auth,
Lease Rev Ref 1993 Ser A Dept of Gen Serv........... 5.000 10-01-13 A 2,145 2,218,595 4.83
San Francisco, City and County of,
Resid Facil Ser A Coventry Park Proj................ 8.500 12-01-26 BB 2,000 2,252,200 7.55
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec...................... Zero 01-01-03 AAA 5,000 4,182,950 4.16
Toll Rd Rev Ref Conv Cap Apprec Ser A............... Zero 01-15-21 BBB- 5,000 3,485,700 3.12
Toll Rd Rev Sr Lien Cap Apprec...................... Zero 01-01-14 AAA 5,000 2,394,450 4.86
Toll Rd Rev Sr Lien Cap Apprec...................... Zero 01-01-22 AAA 6,500 2,062,710 4.98
San Marcos Public Facilities Auth,
Rev Ref............................................. 5.800 09-01-27 BB+ 1,000 1,004,290 5.78
San Mateo County Joint Powers Financing Auth,
Lease Rev Ref Cap Proj Prog......................... 5.000 07-01-21 AAA 1,815 1,849,703 4.91
Santa Ana Financing Auth,
Lease Rev Ser A Police Admin & Holding Facil........ 6.250 07-01-19 AAA 1,790 2,117,463 5.28
Lease Rev Ser A Police Admin & Holding Facil........ 6.250 07-01-24 AAA 10,000 12,006,900 5.21
Rev Ref Ser B South Harbor Blvd**................... 5.125 09-01-19 AAA 2,500 2,485,675 5.15
Rev Ref Ser D Mainplace Proj**...................... 5.600 09-01-19 BBB- 1,000 998,780 5.61
Santa Barbara, County of,
1990 Cert of Part................................... 7.500 02-01-11 AAA 250 266,028 7.05
1991 Cert of Part................................... 6.400 02-01-11 A+ 250 270,095 5.92
Santa Clarita Community Facilities,
Spec Tax of Community Facil Dist 92-1 Ser A......... 7.450 11-15-10 BBB 3,600 3,927,204 6.83
Santa Rosa, City of,
Wastewater Rev 1992 Ser A Subregional Wastewater Proj 6.500 09-01-22 AAA 500 557,890 5.83
Saugus Unified School District,
Cert of Part........................................ 7.500 08-01-09 BBB+ 700 739,368 7.10
Southern California Home Financing Auth,
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser A.. 6.750 09-01-22 AAA 740 780,841 6.40
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser B.. 7.750 03-01-24 AAA 40 42,081 7.37
Southern California Public Power Auth,
Rev Ref Southern Transmission Proj.................. Zero 07-01-13 AAA 4,400 2,183,456 4.78
Stanislaus Waste to Energy Financing Agency,
Solid Waste Rev Ref Ogden Martin Sys Inc Proj....... 7.625 01-01-10 BBB+ 895 945,433 7.22
Suisun Redevelopment Agency,
Tax Alloc Suisun City Redevel Agency................ 7.250 10-01-20 AAA 410 438,880 6.77
Torrance Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj........ 7.125 09-01-21 BBB 500 556,935 6.40
University of California, Regents of,
Cert of Part Ref UCLA Central Chiller/Cogeneration Proj 5.400 11-01-11 Aa3 1,000 1,029,840 5.24
Upland Housing Auth,
Rev Iss A........................................... 7.500 07-01-03 BBB 190 196,576 7.25
Rev Iss A........................................... 7.850 07-01-20 BBB 1,280 1,322,432 7.60
</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 CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
California (continued)
Vallejo Sanitation and Flood Control District,
Cert of Part........................................ 5.000% 07-01-19 AAA $2,500 $2,542,075 4.92%
Victor Valley Unified High School District,
Cert of Part........................................ 7.875 11-01-12 AA 1,255 1,387,892 7.12
West Covina Redevelopment Agency,
Ref Community Facil Dist Spec Tax Fashion Plaza Proj 6.000 09-01-22 A 3,000 3,375,810 5.33
-----------
371,054,990
-----------
Puerto Rico (5.74%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995
Gtd by the Commonwealth of Puerto Rico............. 8.120# 07-01-11 AAA 7,500 9,712,500 6.27
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref 1996 Ser Z........................... 6.250 07-01-14 AAA 3,250 3,844,068 5.28
Puerto Rico Ports Auth,
Spec Facil Rev 1996 Ser A American Airlines Inc Proj. 6.250 06-01-26 BBB- 2,000 2,174,620 5.75
Puerto Rico, Commonwealth of,
GO Pub Imp Ser 1996.................................. 6.500 07-01-15 A 6,000 7,152,720 5.45
-----------
22,883,908
-----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $352,703,190) (98.72%) 393,938,898
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (1.28%) 5,116,797
-------- -----------
TOTAL NET ASSETS (100.00%) $399,055,695
========= ============
</TABLE>
* Credit ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Service, Fitch or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available.
** These securities having an aggregate value of $5,494,315 or 1.38% of the
Fund's net asset value, have been purchased as forward commitments -- that is,
the Fund has agreed on trade date, to take delivery of and make payment for such
securities on a delayed basis subsequent to this schedule. The purchase price
and interest rate of such securities are 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 a current value at
least equal to the amount of the forward commitment. Accordingly, a market value
of $2,136,180 of Foothill/Eastern Transportation Corridor Agency, 6.00%,
01-01-34, a market value of $2,552,550 of California State Public Works Board,
5.00%, 12-01-19, and a market value of $1,020,076, County of Richmond, 6.60%,
09-02-19, have been segregated to cover the forward commitments.
+ The yield is not calculated in accordance with guidelines established by the
U.S. Securities and Exchange Commission and is unaudited. Zero coupon yields are
at yield to maturity.
# Represents the rate in effect on August 31, 1998.
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.
18
<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 August 31,
1998 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 -- Authority......................................... 1.85
Revenue Bonds -- Correctional Facility............................. 5.34
Revenue Bonds -- Education......................................... 11.27
Revenue Bonds -- Electric Power.................................... 5.00
Revenue Bonds -- Facility.......................................... 2.31
Revenue Bonds -- Harbor/Channel.................................... 0.76
Revenue Bonds -- Health............................................ 19.84
Revenue Bonds -- Housing........................................... 4.71
Revenue Bonds -- Industrial Development............................ 0.68
Revenue Bonds -- Lease............................................. 1.50
Revenue Bonds -- Other............................................. 19.30
Revenue Bonds -- Parking Garage/Authority.......................... 0.88
Revenue Bonds -- Pollution Control Facilities...................... 1.59
Revenue Bonds -- Tax............................................... 1.02
Revenue Bonds -- Transportation.................................... 9.54
Revenue Bonds -- Various Purpose................................... 0.33
Revenue Bonds -- Water & Sewer..................................... 11.01
--------
Total tax-exempt long-term bonds 98.72%
=========
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - California Tax-Free Income Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock California Tax-Free Income Fund (the "Fund") is a diversified
open-end management investment company registered under the Investment Company
Act of 1940. The investment objective of the Fund is to provide as high a level
of current income exempt from both federal income taxes and California personal
income taxes as is consistent with preservation of capital.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to 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,
Inc., 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
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $8,548,263 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:
August 31, 2001 - $35,453, August 31, 2002 - $277,226, August 31, 2003 -
$5,169,717, August 31, 2004 - $2,378,578, August 31, 2005 - $7,774 and August
31, 2006 - $679,515.
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 Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the 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 relative 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.
20
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - California Tax-Free Income Fund
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 unsecured
lines of credit with banks which permit borrowings up to $1 billion,
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
rates ranging from 0.070% to 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, 1998.
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, 1998, open positions in financial futures contracts were
as follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
DEC 98 85 U.S. Treasury Bonds LONG $73,711
=============
At August 31, 1998, the Fund has deposited $500,000 par value of City of Davis
Redevelopment Agency, 7.00%, 09-01-24, in a segregated account to cover margin
requirements on open financial futures contracts.
OPTIONS The Fund may purchase options contracts. 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 changing
security prices. 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 Funds 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. 21
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - California Tax-Free Income Fund
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Funds are 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 Statement of
Assets and Liabilities.
There were no written options transactions for the year ended August
31, 1998.
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 voluntarily agreed to limit the Fund's 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 $219,457 for the year ended August 31, 1998. This limitation may be
discontinued at any time.
The Fund has an agreement with its custodian bank under which $66,589
of custodian fees have been reduced by balance credits applied during the year
ended August 31, 1998. 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 year ended
August 31, 1998, net sales charges received with regard to sales of Class A
shares amounted to $561,946. Out of this amount, $75,119
was retained and used for printing prospectuses, advertising, sales literature
and other purposes, $440,840 was paid as sales commissions to unrelated
broker-dealers and $45,987 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, 1998,
contingent deferred sales charges paid to JH Funds amounted to $175,197.
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 at an
annual rate not to exceed 0.15% of Class A average daily net assets and 1.00% of
Class B average daily net assets to reimburse JH Funds for its distribution and
service costs. JH Funds has temporarily agreed to limit the distribution and
service fees pursuant to the Class B plan to 0.90% of the average daily net
assets. Up to a maximum of 0.25% of such 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.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect 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 Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of the Fund.
22
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - California Tax-Free Income 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, 1998 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, 1998, aggregated $41,324,694 and $38,873,119, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1998.
The cost of investments owned at August 31, 1998 (including the joint
repurchase agreement) for federal income tax purposes was $352,703,190. Gross
unrealized appreciation and depreciation of investments aggregated $41,236,928
and $1,220, respectively, resulting in net unrealized appreciation of
$41,235,708.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1998, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $18,291, a
decrease in distributions in excess of net investment income of $11,531 and a
decrease in capital paid-in of $29,822. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of August 31, 1998. 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 the 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>
================================================================================
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, 1998, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended 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, 1998, by correspondence with the custodian and brokers, and other
auditing procedures where 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, 1998,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Boston, Massachusetts
October 9, 1998
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,
1998.
None of the 1998 income dividends qualify for the corporate dividends
received deduction. Shareholders, who are not subject to the alternative minimum
tax, received income dividends which are 99.94% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 6.54%
None of the income dividends were derived from U.S. Treasury Bills.
For specific information on exemption provisions in your state, consult
your local state tax office or your tax adviser.
Shareholders will receive a 1998 U.S. Treasury Department Form 1099-DIV
in January 1999. This will reflect the total of all distributions which are
taxable for calendar year 1998.
24
<PAGE>
===================================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>
================================================================================
------------------
[LOGO] John Hancock Funds Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ------------------
- --------------------------------------------------------------------------------
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.
[Recycle Logo] Printed on Recycled Paper 5300A 8/98
10/98
