SEMIANNUAL REPORT
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[Graphic Omitted]
California
Tax-Free
Income Fund
FEBRUARY 28, 1998
[Logo] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
=========================== CHAIRMAN'S MESSAGE =================================
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 02109-1803
DEAR FELLOW SHAREHOLDERS:
The stock market astounded many in 1997 by producing a record-breaking third
straight year of 20%-plus returns. Bond investors also enjoyed the benefits of a
strong economy with no inflation. After such a remarkable performance, many are
wondering what the markets will do for an encore in 1998.
Within the first two months of the year, we saw two different sides of the
market. In January, the market underwent rapid mood swings and barely advanced
at all. While news on the domestic inflation and economic fronts remained good,
investors were still trying to determine how much of the Asian financial crisis
would filter through the U.S. economy and corporate profits. Each week, it
seemed, investors either had on their rose-colored glasses or had taken them
off. Then in February, fears apparently dissipated, and the market rallied to
new all-time highs by the month's end.
In the face of such fluctuations, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
2
<PAGE>
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BY DIANNE SALES, CFA, FRANK LUCIBELLA, CFA,
AND BARRY EVANS, CFA, CO-PORTFOLIO MANAGERS
John Hancock California Tax-Free Income Fund
Municipal bonds perform well,
despite increased supply pressures
Municipal bond investors continued to reap the benefits of a healthy bond market
during the last six months. Tame inflation and falling interest rates were the
key market drivers, pushing bond prices up and yields down. The financial crisis
in Southeast Asia also buoyed the bond market, particularly in the fourth
quarter of 1997. As worries about Asia's financial woes heightened, more
investors sought out a "safe haven" in U.S. bonds, particularly Treasuries.
Municipal bonds, however, had trouble keeping up with U.S. Treasuries in
the latest bond market rally because of the significant increase in new issues.
In order to take advantage of lower interest rates, more local governments have
been issuing new tax-exempt bonds. In fact, 1997 was the third most prolific
year of new issues ever in the municipal market. This flood of new issuance in
the last quarter of 1997 put pressure on the municipal market, causing muni
bonds to lag Treasuries during the period.
Even with the supply pressures, municipal bonds turned in a strong
performance during the period. For the six months ended February 28, 1998, John
Hancock California Tax-Free Income Fund's Class A and Class B shares returned
5.33% and 4.94%, respectively, at net asset value. Keep in mind that your net
asset
"Tame inflation and falling interest rates were the key market drivers..."
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Fund management
team memebers (l-r) Barry Evans, Mike Roye, Dianne Sales, Frank Lucibella and
Holly Morris.]
3
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John Hancock Funds - California Tax-Free Income Fund
"...we continued to carefully manage the portfolio's duration."
- --------------------------------------------------------------------------------
PORTFOLIO DIVERSIFICATION
Pollution Control 2%
Transportation 11%
Water & Sewer 11%
General Obligation 2%
Correctional Facilities 5%
Education 12%
Electric Power 5%
Health 20%
Housing 6%
Other 26%
["Pie chart with the heading "Portfolio Diversification" at the top left hand
column. The chart is divided into 10 sections. Going from top left to right;
Other 26%; Pollution control 2%; Transportation 11%; Water and Sewer 11%;
General obligation 2%; Correction facilities 5%; Education 12%; Electric Power
5%; Health 2%; Housing 6%. Footnote below states "As a percentage of net assets
on February 28, 1998."]
value return will be different from this performance if you were not invested in
the Fund for the entire period and did not reinvest all distributions. The
Fund's returns outpaced the average California fund's return of 4.73%, according
to Lipper Analytical Services, Inc.(1) Please see pages six and seven for
longer-term performance information.
Uninsured holdings buoy performance
By far, the most important trend in the municipal market continues to be the
collapse of credit spreads. All that means is that the difference in yield
between bonds with different credit ratings has narrowed considerably. There are
a few reasons for this phenomenon. First, with far more credit upgrades than
downgrades in the market, there's very little concern about credit risk -- that
is, the ability of a municipality to make good on its debt. What's more, because
roughly 70% of the new issues coming to market are insured, the supply of
uninsured bonds with higher yields has become more scarce. At the same time,
however, demand for these higher-yielding issues has remained strong.
Accordingly, their prices have risen and yields have fallen -- closing the yield
gap between insured and uninsured bonds.
The Fund has benefited tremendously from this compression in credit
spreads, thanks to its strong holdings in uninsured bonds. Through in-depth
credit analysis, we have been able to identify uninsured bonds with not only
attractive yields, but also solid fundamentals and improving credit profiles.
One of our best performing issues was the San Joaquin Hills Transportation
Corridor Agency. This toll-road project benefited from a refinancing that caused
the bonds to be upgraded to the highest rating of AAA without being subjected to
an early call or redemption from the issuer. This refinancing provided
substantial benefits to the portfolio's performance.
Portfolio duration and structure
Throughout the period, we continued to carefully manage the portfolio's
duration. Duration is a measure of how sensitive a fund's share price is to
interest-rate changes. The shorter the duration, the less sensitive the share
price is to changes in interest rates. During last summer and fall, we extended
the Fund's duration, which allowed us to reap the benefits of the bond market's
rally. More recently, however, we've moved to a more neutral stance, given the
market's strong upward move and the uncertainty surrounding the direction of the
U.S. economy.
["Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance...and what's behind the numbers. The first listing is San Joaquin
Transportation Corridor followed by an up arrow and the phrase "Upgrade to AAA
rating". The second listing is San Bernardino Medical Centers followed by a up
arrow with the phrase "Strong performance of non-callable bonds". The third
listing is Housing bonds followed by a up arrow with the phrase "Prepayments
hurt performance". The footnote at the bottom states See "Schedule of
Investments." Investment holdings are subject to change."]
4
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================================================================================
John Hancock Funds - California Tax-Free Income Fund
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended February 28, 1998."
The chart is scaled in increments of 1% with the 6% at the top and 0% at the
bottom. The first represents the 5.33% total return for John Hancock California
Tax-Free Income Fund: Class A. The second represents the 4.94% total return for
John Hancock California Tax-Free Income Fund: Class B. The third represent the
4.73% total return for Average California municipal bond fund. A Footnote below
reads "The 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."]
Our long-time focus on call protection has also continued. As you may
remember from previous reports, call protection protects a bond from being
redeemed early by its issuer for a certain period of time. Good call protection
is especially important in a falling interest-rate environment. That's because
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
yields.
Outlook
Looking ahead, we're optimistic about California's economy. Because one-third of
U.S. exports to Asia come from California, there is some concern that certain
sectors of the state's economy will suffer from Asia's financial crisis. The
flip side, however, is that other sectors of the state's economy will benefit as
Asian countries export more goods to the U.S. in an attempt to export their way
out of trouble. We believe that since it is so large and diverse, California's
economy has significant depth to weather any temporary dislocation from the
Asian crisis.
The macro-economic environment is also favorable for municipal bonds. The
Federal Reserve has been vigilant about keeping a lid on inflation, and there's
no reason to believe that will change in the near future. The biggest question
is whether Asia's economic turmoil will slow the U.S. economy. Until the impact
becomes more clear, we are likely to see the Fed put their interest-rate policy
on hold and the bond market continue to trade in a narrow range. However, we
firmly believe that there's little risk of inflation. If anything, Asia's
financial woes will have a moderating effect on the U.S. economy, which should
help keep inflation in check. Against that backdrop, bonds should continue to
perform well.
Supply pressures in the municipal market are likely to continue through
the first part of 1998, as state and local governments continue to take
advantage of the low interest-rate environment. However, we view this market
pressure as a great buying opportunity. With many municipal bonds now trading at
attractive valuations, we're looking for opportunities to add new issues to the
portfolio, especially those with strong call protection.
"...California's economy has significant depth..."
- --------------------------------------------------------------------------------
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.
5
<PAGE>
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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 December 31, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/29/89)
------ -------- -----------
Cumulative Total Returns 5.17% 38.05% 79.53%
Average Annual Total Returns (1) 5.17% 6.66% 7.58%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended December 31, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
------ ------- -----------
Cumulative Total Returns 4.29% 37.24% 49.86%
Average Annual Total Returns (1) 4.29% 6.54% 6.98%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of February 28, 1998
SEC 30-DAY
YIELD
--------------
John Hancock California Tax-Free Income Fund: Class A 3.96%
John Hancock California Tax-Free Income Fund: Class B 3.39%
Notes to Performance
(1) 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
5.10%, 6.54% and 7.33%, 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 4.22%, 6.42% and
6.85%, respectively.
6
<PAGE>
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John Hancock Funds - California Tax-Free Income Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 $18,992 as of February 28, 1998. The second line
represents the value of the Lehman Brothers Municipal Bond Index and is equal to
$18,869 as of February 28, 1998. The third line represents the California
Tax-Free Income Fund after sales charge and is equal to $18,138 as of February
28, 1998.
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 two lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $15,683 as of February 28, 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 $15,683 as of February 28, 1998.
- --------------------------------------------------------------------------------
* No contingent 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 February 28, 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
February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $351,275,659) ............ $389,304,061
Options (cost - $3,940) ..................................... 3,438
-------------
389,307,499
Cash ......................................................... 5,682,838
Receivable for investments sold .............................. 3,352,544
Receivable for shares sold ................................... 322,295
Interest receivable .......................................... 5,477,794
Receivable for variation margin - Note A ..................... 16,875
Other assets ................................................. 66,829
-------------
Total Assets ............................... 404,226,674
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ............................ 10,792,694
Payable for shares repurchased ............................... 342,878
Dividend payable ............................................. 82,366
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ..................................... 230,016
Accounts payable and accrued expenses ........................ 31,865
-------------
Total Liabilities .......................... 11,479,819
-----------------------------------------------------------
Net Assets:
Capital paid-in .............................................. 366,102,813
Accumulated net realized loss on investments and
financial futures contracts ................................. (11,274,413)
Net unrealized appreciation of investments and
financial futures contracts ................................. 37,962,103
Distributions in excess of net investment income ............. (43,648)
-------------
Net Assets ................................. $392,746,855
============================================================
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 - $299,042,045/27,033,670 ............................ $11.06
===============================================================================
Class B - $93,704,810/8,470,999 .............................. $11.06
===============================================================================
Maximum Offering Price Per Share*
Class A - ($11.06 x 104.71%) ................................. $11.58
===============================================================================
* 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
Six months ended February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest............................... $11,198,444
-----------
Expenses:
Investment management fee - Note B.... 1,055,205
Distribution and service fee - Note B
Class A............................. 219,272
Class B............................. 411,067
Transfer agent fee - Note B........... 108,807
Custodian fee......................... 45,461
Financial services fee - Note B....... 33,901
Auditing fee.......................... 18,100
Trustees' fees........................ 13,612
Registration and filing fees.......... 10,675
Printing.............................. 8,343
Miscellaneous......................... 4,235
Legal fees............................ 1,439
Less Management Fee Reduction - Note B (117,017)
----------
Total Expenses....... 1,813,100
---------------------------------------------
Less Expense Reductions -
Note B............... (31,629)
---------------------------------------------
Net Expenses......... 1,781,471
---------------------------------------------
Net Investment Income 9,416,973
---------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized gain on investments sold.. 326,170
Net realized gain on financial futures contracts 364,037
Change in net unrealized appreciation/depreciation
of investments........................ 9,708,801
Change in net unrealized appreciation/depreciation
of financial futures contracts........ (71,875)
----------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts 10,327,133
---------------------------------------------
Net Increase in Net Assets
Resulting from Operations $19,744,106
=============================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
=========================== FINANCIAL STATEMENTS ===============================
John Hancock Funds - California Tax-Free Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED FEBRUARY 28, 1998
AUGUST 31, 1997 (UNAUDITED)
--------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income................................................................ $19,887,736 $9,416,973
Net realized gain (loss) on investments sold and financial futures contracts......... (3,659,073) 690,207
Change in net unrealized appreciation of investments and financial futures contracts. 18,509,516 9,636,926
----------- -----------
Net Increase in Net Assets Resulting from Operations.............................. 34,738,179 19,744,106
----------- -----------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5718 and $0.2787 per share, respectively)............................. (15,922,912) (7,496,521)
Class B - ($0.4909 and $0.2379 per share, respectively)............................. (3,998,280) (1,999,103)
----------- -----------
Total Distributions to Shareholders............................................... (19,921,192) (9,495,624)
----------- -----------
From Fund Share Transactions - Net:*................................................... (8,482,019) 1,838,185
----------- -----------
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 $43,648, respectively).......... $380,660,188 $392,746,855
============ ============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED FEBRUARY 28, 1998
AUGUST 31, 1997 (UNAUDITED)
------------ ------------- -------------- ------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 15,577,087 $163,663,688 1,052,675 $11,596,905
Shares issued to shareholders in reinvestment of distributions 667,751 7,067,034 306,848 3,369,127
----------- ------------- ------------- ------------
16,244,838 170,730,722 1,359,523 14,966,032
Less shares repurchased ...................................... (17,309,091) (182,073,253) (1,360,221) (14,898,460)
----------- ------------- ------------- ------------
Net increase (decrease) ...................................... (1,064,253) ($11,342,531) (698) $67,572
=========== ============= ============= =============
CLASS B
Shares sold .................................................. 1,334,549 $14,107,925 870,948 $9,550,651
Shares issued to shareholders in reinvestment of distributions 179,889 1,903,812 82,983 911,261
----------- ------------- ------------- ------------
1,514,438 16,011,737 953,931 10,461,912
Less shares repurchased ...................................... (1,243,410) (13,151,225) (792,247) (8,691,299)
----------- ------------- ------------- ------------
Net increase ................................................. 271,028 $2,860,512 161,684 $1,770,613
=========== ============= ============= =============
</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,
-----------------------------------------------
1992 1993 1994(1) 1995
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................ $ 10.32 $ 10.41 $ 10.85 $ 9.28
-------- --------- ------- ---------
Net Investment Income ........................................... 0.66(2) 0.62 0.58 0.57(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts .................... 0.25 0.76 (1.57) 1.41
-------- --------- ------- ---------
Total from Investment Operations ............................... 0.91 1.38 (0.99) 1.98
-------- --------- ------- ---------
Less Distributions:
Dividends from Net Investment Income ............................ (0.67) (0.62) (0.58) (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)
-------- --------- ------- ---------
Net Asset Value, End of Period .................................. $ 10.41 $ 10.85 $ 9.28 $ 10.69
======== ========= ======= =========
Total Investment Return at Net Asset Value (3) .................. 9.15% 13.60% (9.31%) 21.88%
Total Adjusted Investment Return at Net Asset Value (3,4) ....... 8.90% 13.42% (9.45%) 21.73%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $217,014 $ 279,692 $241,583 $ 309,305
Ratio of Expenses to Average Net Assets ......................... 0.58% 0.69% 0.75% 0.75%
Ratio of Adjusted Expenses to Average Net Assets (5) ............ 0.83% 0.87% 0.89% 0.90%
Ratio of Net Investment Income to Average Net Assets ............ 6.36% 5.69% 5.85% 5.76%
Ratio of Adjusted Net Investment Income to Average Net Assets (5) 6.11% 5.51% 5.71% 5.61%
Portfolio Turnover Rate ......................................... 34% 51% 62% 37%(6)
Fee Reduction per Share ......................................... $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
JANUARY 1, 1996 TO YEAR ENDED FEBRUARY 28, 1998
AUGUST 31, 1996(9) AUGUST 31, 1997 (UNAUDITED)
------------------- ---------------- ---------------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................ $ 10.69 $ 10.36 $ 10.77
-------- --------- --------
Net Investment Income ........................................... 0.39(2) 0.57(2) 0.28(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts .................... (0.33) 0.41 0.29
-------- --------- --------
Total from Investment Operations ............................... 0.06 0.98 0.57
-------- --------- --------
Less Distributions:
Dividends from Net Investment Income ............................ (0.39) (0.57) (0.28)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts ............... -- -- --
-------- --------- --------
Total Distributions ............................................ (0.39) (0.57) (0.28)
-------- --------- --------
Net Asset Value, End of Period .................................. $ 10.36 $ 10.77 $ 11.06
======== ========= ========
Total Investment Return at Net Asset Value (3) .................. 0.61%(7) 9.71% 5.33%(7)
Total Adjusted Investment Return at Net Asset Value (3,4) ....... 0.55%(7) 9.64% 5.29%(7)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $291,072 $ 291,167 $299,042
Ratio of Expenses to Average Net Assets ......................... 0.76%(8,10) 0.75% 0.76%(8,10)
Ratio of Adjusted Expenses to Average Net Assets (5) ............ 0.84%(8) 0.82% 0.82%(8)
Ratio of Net Investment Income to Average Net Assets ............ 5.57%(8) 5.42% 5.09%(8)
Ratio of Adjusted Net Investment Income to Average Net Assets (5) 5.48%(8) 5.35% 5.02%(8)
Portfolio Turnover Rate ......................................... 30% 15% 5%
Fee Reduction per Share ......................................... $ 0.01(2) $ 0.01(2) $ 0.00(2,11)
</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
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994(1) 1995
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $ 10.32 $ 10.41 $ 10.85 $ 9.28
-------- ------- -------- --------
Net Investment Income .............................. 0.58(2) 0.54 0.51 0.50(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ....... 0.25 0.76 (1.57) 1.40
-------- ------- -------- --------
Total from Investment Operations .................. 0.83 1.30 (1.06) 1.90
-------- ------- -------- --------
Less Distributions:
Dividends from Net Investment Income ............... (0.59) (0.54) (0.51) (0.50)
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)
-------- ------- -------- --------
Net Asset Value, End of Period ..................... $ 10.41 $ 10.85 $ 9.28 $ 10.68
======== ======= ======== ========
Total Investment Return at Net Asset Value (3) ..... 8.35% 12.76% (9.99%) 20.87%
Total Adjusted Investment Return at Net Asset
Value (3,4) ....................................... 8.10% 12.58% (10.13%) 20.72%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $ 26,595 $65,437 $ 77,365 $ 84,673
Ratio of Expenses to Average Net Assets ............ 1.35% 1.44% 1.50% 1.50%
Ratio of Adjusted Expenses to Average Net Assets (5) 1.60% 1.62% 1.64% 1.65%
Ratio of Net Investment Income to Average Net Assets 5.43% 4.82% 5.10% 4.97%
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) .................................... 5.18% 4.64% 4.96% 4.82%
Portfolio Turnover Rate ............................ 34% 51% 62% 37%(6)
Fee Reduction per Share ............................ $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
JANUARY 1, 1996 TO YEAR ENDED FEBRUARY 28, 1998
AUGUST 31, 1996(9) AUGUST 31, 1997 (UNAUDITED)
------------------ ---------------- -----------------
<S> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $ 10.68 $ 10.36 $ 10.77
------- ------- --------
Net Investment Income .............................. 0.33(2) 0.49(2) 0.24(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ....... (0.31) 0.41 0.29
------- ------- --------
Total from Investment Operations .................. 0.02 0.90 0.53
------- ------- --------
Less Distributions:
Dividends from Net Investment Income ............... (0.34) (0.49) (0.24)
Distributions from Net Realized Gains on
Investments Sold and Financial Futures Contracts .. -- -- --
------- ------- --------
Total Distributions ............................... (0.34) (0.49) (0.24)
------- ------- --------
Net Asset Value, End of Period ..................... $ 10.36 $ 10.77 $ 11.06
======== ======= ========
Total Investment Return at Net Asset Value (3) ..... 0.20%(7) 8.88% 4.94%(7)
Total Adjusted Investment Return at Net Asset
Value (3,4) ....................................... 0.14%(7) 8.81% 4.90%(7)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $83,253 $89,493 $ 93,705
Ratio of Expenses to Average Net Assets ............ 1.52%(8,10) 1.50% 1.51%(8,10)
Ratio of Adjusted Expenses to Average Net Assets (5) 1.59%(8) 1.57% 1.57%(8)
Ratio of Net Investment Income to Average Net Assets 4.81%(8) 4.66% 4.34%(8)
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) .................................... 4.72%(8) 4.59% 4.27%(8)
Portfolio Turnover Rate ............................ 30% 15% 5%
Fee Reduction per Share ............................ $ 0.01(2) $ 0.01(2) $ 0.00(2,11)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc., became the investment
adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover excludes merger activity.
(7) Not annualized.
(8) Annualized.
(9) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(10) For the period ended August 31, 1996 and six months ended February 28,
1998, the Ratio of Expenses to Average Net Assets for the Fund excludes
the effect of expense offsets. If expense offsets were included, the Ratio
of Expenses to Average Net Assets would be 0.75% for Class A and 1.50% for
Class B.
(11) Fee reduction per share is less than $0.01.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
=========================== FINANCIAL STATEMENTS ===============================
John Hancock Funds - California Tax-Free Income Fund
Schedule of Investments
February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
California Tax-Free Income Fund on February 28, 1998. It has two main
categories: tax-exempt long-term bonds and options. The tax-exempt long-term
bonds are broken down by state. Under each state is a list of the securities
owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY 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 (93.39%)
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 $4,517,881 7.02%
Cert of Part Peninsula Family YMCA Ser A ...... 6.800 10-01-11 A1 1,000 1,065,350 6.38
Alamedia, County of,
Cert of Part 1992 Cap Proj .................... 6.750 06-01-16 A 500 560,740 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 1,038,390 5.24
Anaheim, City of,
Ref Cert of Part Reg RITES Convention Center .. 8.660# 07-16-23 AAA 2,000 2,335,000 7.42
Arcadia, County of,
Hosp Rev Methodist Hosp of Southern California 6.625 11-15-22 A 1,205 1,316,535 6.06
Avalon Community Improvement Agency,
Tax Alloc Community Imp Proj Ser B ............ 6.400 08-01-22 A- 1,895 2,017,114 6.01
Bakersfield Central District Development Agency,
Tax Alloc Ref Downtown Bakersfield Redevel Proj 6.625 04-01-15 BBB+ 4,000 4,521,040 5.86
Bakersfield Memorial Hospital,
Hosp Rev Ser A ................................ 6.500 01-01-22 A- 2,000 2,116,460 6.14
Beaumont Unified School District,
Cert of Part Cap Imp Proj ..................... 7.700 01-01-21 BBB+ 1,000 1,115,190 6.90
Beverly Hills Public Financing Auth,
Lease Rev INFLOS .............................. 7.320# 06-01-15 AAA 2,500 2,715,625 6.74
Brentwood Redevelopment Agency,
Tax Alloc Brentwood Redevel Proj Ser A ........ 7.700 11-01-08 BBB 135 142,887 7.27
Burbank Redevelopment Agency,
Tax Alloc Golden State Redevel Proj Ser A ..... 6.000 12-01-23 A- 2,750 2,876,252 5.74
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj ..... 6.125 06-01-09 Baa3 1,000 1,065,370 5.75
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc ...... 6.950 10-01-21 A 250 272,360 6.38
Ins Hosp Rev Ser 1990 Children's Hosp San Diego 6.500 07-01-20 AAA 500 539,250 6.03
Ins Rev Ref Ser A Catholic Healthcare West
Obligated Group .............................. 5.750 07-01-15 AAA 2,000 2,133,820 5.39
Ins Rev Ser A San Diego Christian Foundation .. 6.250 07-01-12 A+ 1,135 1,217,696 5.83
Ins Rev Ser B Hlth Facil Small Facil .......... 7.500 04-01-22 A+ 2,000 2,359,180 6.36
Rev 1990 Ser A Kaiser Permanente .............. 7.000 12-01-10 A+ 600 651,552 6.45
Rev Ser 1994A Scripps Research Institute ...... 6.300 07-01-09 A2 500 549,990 5.73
Sec Rev 1991 Ser Hosp of the Good Samaritan ... 7.000 09-01-21 BBB+ 2,250 2,426,940 6.49
</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 (continued)
California Housing Finance Agency,
Home Mtg Rev 1988 Ser B ............................... 8.600% 08-01-19 AA- $ 35 $ 36,055 8.35%
Home Mtg Rev 1988 Ser D ............................... 8.000 08-01-19 AA- 65 67,035 7.76
Home Mtg Rev 1989 Ser A ............................... 7.625 08-01-09 AA- 15 15,493 7.38
Home Mtg Rev 1989 Ser B ............................... 8.000 08-01-29 AA- 65 67,665 7.68
Home Mtg Rev 1989 Ser D ............................... 7.500 08-01-29 AA- 105 109,151 7.21
Home Mtg Rev 1990 Ser D ............................... Zero 08-01-20 AA- 7,385 1,328,266 7.80
Home Mtg Rev 1991 Ser A ............................... 7.375 08-01-17 AA- 380 401,782 6.98
Home Mtg Rev 1991 Ser C ............................... 7.450 08-01-11 AA- 15 15,280 7.31
Home Mtg Rev 1994 Ser C ............................... 6.650 08-01-14 AA- 1,000 1,064,200 6.25
Home Mtg Rev 1994 Ser G ............................... 7.250 08-01-17 AA- 3,500 3,782,065 6.71
Hsg Rev 1991 Ser E .................................... 7.000 08-01-26 AAA 525 554,636 6.63
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co .... 6.900 12-01-17 A+ 500 543,750 6.34
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co ..... 6.625 06-01-09 AA- 500 545,605 6.07
Poll Control Rev 1997 Ser A Laidlaw Environmental Proj 6.700 07-01-07 BBB- 2,000 2,102,040 6.37
Solid Waste Disposal Rev Keller Canyon Landfill Co Proj 6.875 11-01-27 A 2,000 2,213,680 6.21
California Rural Home Mortgage Finance Auth,
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog ..... 7.550 11-01-26 AAA 800 921,208 6.56
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog
Step Coupon ......................................... 7.750# 05-01-27 AAA 805 927,070 6.73
California State Department of Veteran Affairs,
Home Purchase Rev Ref Ser A** ......................... 5.450 12-01-19 AAA 3,000 3,017,850 5.42
California State Department of Water Resources,
Wtr Sys Rev Ser T Central Valley Proj ................. 5.000 12-01-11 AA 2,500 2,573,600 4.86
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 AAA 1,500 1,694,730 5.93
Lease Rev 1994 Ser A Dept of Corrections
Calif State Prison Monterey County (Soledad II) ..... 6.875 11-01-14 A 500 586,640 5.86
Lease Rev 1996 Ser A Dept of Corrections .............. 5.500 01-01-15 AAA 5,145 5,412,180 5.23
Lease Rev Ref 1993 Ser A Depart of Corrections
Various State Prisons ............................... 5.000 12-01-19 AAA 5,000 4,986,450 5.01
Lease Rev Ref Ser A Various Univ Proj ................. 5.500 06-01-21 A+ 1,250 1,274,600 5.39
Lease Rev Ser A Dept of Corrections ................... 5.250 01-01-21 AAA 4,500 4,505,400 5.24
Lease Rev Ser A Various Community College Proj ........ 5.625 12-01-18 A 3,700 3,820,509 5.45
California Statewide Communities Development Auth,
Ins Cert of Part United Western Medical Centers ..... 6.750 12-01-21 A+ 7,500 8,350,575 6.06
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles 6.200 08-01-12 A+ 1,250 1,329,987 5.83
Ins Rev Cert of Part Hlth Facil Aids Proj Los Angeles 6.250 08-01-22 A+ 2,590 2,754,413 5.88
Ins Rev Cert of Part Hlth Facil Eskaton Properties .. 6.700 05-01-11 A+ 1,250 1,355,862 6.18
Ins Rev Cert of Part Statewide Univ Northridge Proj . 6.000 04-01-26 AAA 1,620 1,742,018 5.58
Ins Rev Ref Cert of Part Triad Healthcare Hosp ...... 6.500 08-01-22 A+ 13,000 13,974,350 6.05
Campbell, City of,
1991 Cert of Part Civic Center Proj ................. 6.750 10-01-17 A 155 172,318 6.07
1991 Cert of Part Civic Center Proj ................. 6.750 10-01-17 A 1,565 1,736,508 6.08
</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)
Capistrano Unified School District,
Spec Tax of Community Facil Dist 87-1 ............... 7.500% 09-01-07 Aaa $ 3,500 $ 3,760,470 6.98%
Spec Tax of Community Facil Dist 87-1 ............... 8.375 10-01-20 Aaa 3,000 3,391,890 7.41
Spec Tax of Community Facil Dist 92-1 ............... 7.000 09-01-18 BBB- 1,500 1,609,425 6.52
Spec Tax of Community Facil Dist 92-1 ............... 7.100 09-01-21 BBB- 2,250 2,478,937 6.44
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No 1 Redevel Proj ........... 6.375 10-01-12 BBB+ 500 532,665 5.98
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj .............. 7.350 08-01-20 Aaa 200 220,058 6.68
Center Unified School District,
GO Cap Apprec Ser C ................................. Zero 09-01-16 AAA 2,145 836,850 5.15
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992 ......... 6.600 10-01-22 AAA 3,700 4,164,942 5.86
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 .. 6.100 07-01-13 BBB- 3,300 3,499,782 5.75
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 .. 6.200 07-01-20 BBB- 1,000 1,060,320 5.85
Clearlake Redevelopment Agency,
Tax Alloc Highlands Park Community Devel Proj ....... 6.400 10-01-23 BBB 500 527,280 6.07
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A ......................... 7.100 08-01-21 BBB 220 230,501 6.78
Covina Hospital,
Rev Cert of Part Intercommunity Hlth Serv Inc ....... 7.000 03-01-17 BBB+ 925 935,730 6.92
Cucamonga School District,
Cert of Part ........................................ 7.600 12-01-15 Baa 1,000 1,085,200 7.00
Davis Redevelopment Agency,
Tax Alloc Ref Davis Redevel Proj .................... 7.000 09-01-24 AAA 5,115 5,829,207 6.14
Del Mar Race Track Auth,
Rev Ref Ser 1996 .................................... 6.000 08-15-06 BBB 2,240 2,424,688 5.54
Rev Ref Ser 1996 .................................... 6.200 08-15-11 BBB 1,865 2,030,295 5.70
Delano, City of,
Cert of Part ........................................ 7.000 04-01-10 BBB+ 2,000 2,107,580 6.64
Delta Counties Home Mortgage Finance Auth,
Single Family Rev Ref Mtg Backed Secs Ser A** ........ 5.350 06-01-24 AAA 2,000 1,997,020 5.36
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj . 8.000 07-01-10 AAA 300 333,621 7.19
Duarte, City of,
Cert of Part City of Hope National Medical Center Proj 6.250 04-01-23 Baa1 14,000 14,874,860 5.88
Elk Grove Unified School District,
Spec Tax of Community Facil Dist 1 ................... 7.120 12-01-24 AAA 1,000 1,172,390 6.08
Encinitas Public Finance Auth,
Cert of Part Ser A Civic Center Proj ................. 6.750 12-01-11 A- 1,300 1,447,433 6.06
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave Storm Drainage Proj .. 6.500 08-01-21 A- 1,085 1,172,484 6.02
Fontana Public Financing Auth,
Tax Alloc Rev 1990 Ser A North Fontana Redevel Proj .. 7.250 09-01-20 BBB 325 343,135 6.87
Tax Alloc Rev Sub Lien 1991 Ser A North Fontana
Redevel Proj ........................................ 7.750 12-01-20 AA 195 223,493 6.76
</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)
Foothill-Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A ............ 6.500% 01-01-32 BBB- $1,665 $ 1,818,663 5.95%
Toll Rd Rev Fixed Rate Current Int Ser 1995A ............ 6.000 01-01-34 BBB- 14,775 15,571,225 5.69
Fresno Joint Powers Financing Auth,
Rev Ser A ............................................... 6.550 09-02-12 BBB 2,000 2,175,020 6.02
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center ...... 6.625 06-01-21 AA 250 273,485 6.06
Industry Urban-Development Agency,
Tax Alloc Ref Trans Dist Proj 3 ......................... 6.900 11-01-16 A- 1,020 1,114,911 6.31
Inglewood, City of,
Cert of Part Civic Center Imp Proj ...................... 7.000 08-01-19 BBB- 1,000 1,080,110 6.48
Irvine, City of,
Imp Board Act of 1915 Assessment Dist 95-12 Ser B ....... 6.550 09-02-21 BB+ 1,000 1,065,020 6.15
Irwindale Community Redevelopment Agency,
Sub Lien Tax Alloc Industrial Devel Proj ................ 7.050 06-01-26 BBB 2,750 3,059,100 6.34
Lincoln Redevelopment Agency,
Tax Alloc Lincoln Redevel Proj .......................... 7.650 08-01-17 BBB+ 805 911,711 6.75
Long Beach Harbor,
Rev Ref Ser A ........................................... 6.000 05-15-18 AAA 2,660 2,959,569 5.39
Los Alamitos Unified School District,
Spec Tax of Community Facil Dist 90-1 ................... 7.150 08-15-21 Baa1 6,005 6,712,089 6.40
Los Angeles Community Facilities District,
Spec Tax No 3 Cascades Business Park Proj ............... 6.400 09-01-22 BB+ 1,000 1,025,380 6.24
Los Angeles Community Redevelopment Financing Auth,
Rev MultiFamily Ser A Grand Central Square .............. 5.850 12-01-26 BB 2,000 1,975,120 5.92
Los Angeles Department of Airports,
Airport Rev AMT Ser A Ontario International Airport Proj 6.000 05-15-26 AAA 2,000 2,149,140 5.58
Los Angeles Department of Water and Power,
Elec Plant Rev Ref 2nd Iss of 1993 ...................... 5.400 11-15-12 A+ 1,000 1,034,850 5.22
Los Angeles Public Works Financing Auth,
Rev Regional Park & Open Space Dist A ................... 6.000 10-01-15 AA 3,750 4,199,062 5.36
Los Angeles, County of,
Cert of Part Disney Parking Proj ........................ 6.500 03-01-23 BBB 2,000 2,143,400 6.07
Cert of Part Reg Linked SAVRS & RIBS-Ref Proj ........... 6.708# 06-01-15 BBB 1,200 1,317,744 6.11
Rev Ser B AMT Harbor Proj ............................... 6.000 08-01-15 AA 2,000 2,173,740 5.52
Metropolitan Water District,
Wtr Rev Iss of 1991 ..................................... 6.625 07-01-12 AA 750 825,637 6.02
Wtr Rev Iss of 1992 ..................................... 5.000 07-01-20 AA 7,500 7,283,325 5.15
Millbrae, City of,
Residential Facil Rev Ser 1997A Magnolia of Millbrae Proj 7.375 09-01-27 BB 1,000 1,031,330 7.15
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 600 652,200 5.98
Newport-Mesa Unified School District,
Community Facil Dist 90-1 Spec Tax Ser 1996 ............. 6.750 09-01-21 BBB- 3,000 3,092,460 6.55
</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)
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj .............. 7.000% 05-01-13 AAA $100 $ 123,882 5.65%
Rev 1992 Ser A Calif-Oregon Transm Proj .............. 6.500 05-01-16 AAA 1,000 1,096,350 5.93
Oakland, Port of,
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj 6.800 01-01-19 A- 500 536,685 6.34
Oceanside, City of,
Ref Cert of Part Ser A ............................... 6.375 04-01-12 A 3,000 3,254,010 5.88
Orange County Development Agency,
Tax Alloc Santa Ana Heights Proj ..................... 6.125 09-01-23 BBB 5,000 5,268,650 5.81
Orange Cove Irrigation District,
Cert of Part Rehab Proj .............................. 7.250 02-01-12 BBB 2,000 2,213,040 6.55
Cert of Part Rehab Proj .............................. 7.000 02-01-15 BBB 2,500 2,749,200 6.37
Orange, County of,
1996 Ser A Recovery Cert of Part ..................... 5.800 07-01-16 AAA 2,000 2,147,240 5.40
Cert of Part Civic Center Exp Proj ................... 6.700 08-01-18 AAA 1,000 1,106,170 6.06
Ser A of 1990 Spec Tax of Community Facil Dist 87-3
Mission Viego ...................................... 7.800 08-15-15 AA 350 388,426 7.03
Ser A of 1992 Spec Tax of Community Facil Dist 88-1
Aliso Viego ........................................ 7.350 08-15-18 AAA 1,000 1,152,530 6.38
Pasadena, City of,
1993 Ref Cert of Part Old Pasadena Parking Facil Proj 6.250 01-01-18 A+ 1,205 1,373,326 5.48
Pittsburg Redevelopment Agency,
Spec Tax of Community Facil Dist 90-1 California Ave . 7.400 08-15-20 BBB 3,040 3,422,310 6.57
Rancho Mirage, City of, Joint Powers Financing Auth,
Cert of Part Eisenhower Memorial Hosp ................ 7.000 03-01-22 A2 4,500 5,059,980 6.23
Civic Center Rev Ref Ser 1991A ....................... 7.500 04-01-17 BBB 195 217,998 6.71
Civic Center Rev Ref Ser 1991A ....................... 7.500 04-01-17 BBB 55 60,086 6.87
Redondo Beach Public Financing Auth,
Rev South Bay Center Redevel Proj .................... 7.000 07-01-16 BBB+ 950 1,056,999 6.29
Richmond, County of,
Imp Bd Act of 1915 Ref Reassessment District No 855 .. 6.600 09-02-19 BBB- 3,000 3,104,460 6.38
Richmond Joint Powers Financing Auth,
Rev Ser A ............................................ 7.700 10-01-10 BBB- 1,645 1,827,069 6.93
Riverside County Asset Leasing Corp,
Leasehold Rev 1993 Ser A Riverside County Hosp Proj .. 6.500 06-01-12 A 1,000 1,153,780 5.63
Sacramento Power Auth,
Cogeneration Proj Rev Light & Pwr Imp ................ 6.000 07-01-22 BBB- 12,000 12,730,080 5.66
Sacramento Unified School District,
Spec Tax of Community Facil Dist 1 Ser B ............. 7.300 09-01-13 Baa 760 876,979 6.33
Saddleback Valley Unified School District,
Spec Tax of Community Facil Dist 89-3 Ser A .......... 7.750 09-01-16 AA 3,200 3,445,344 7.20
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj ........ 5.500 08-01-17 A- 3,750 3,881,738 5.31
Cert of Part Ser 1994 Medical Center Fin Proj ........ 5.500 08-01-17 AAA 5,000 5,295,400 5.19
Cert of Part Ser A Medical Center Fin Proj ........... 5.500 08-01-15 AAA 5,875 6,160,995 5.24
Cert of Part Ser B Cap Facil Proj .................... 6.875 08-01-24 AAA 350 443,881 5.42
</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 Diego County Regional Transportation Commission,
Sales Tax Rev 1991 Ser A .......................... 7.000% 04-01-06 AA- $ 90 $ 102,704 6.13%
San Diego County Water Auth,
Wtr Rev Cert of Part Reg RITES .................... 7.342# 04-23-08 AAA 1,000 1,210,000 6.07
Wtr Rev Cert of Part Reg RITES .................... 7.342# 04-22-09 AAA 400 483,000 6.08
San Diego, County of,
Cert of Part Inmate Reception Center & Cooling .... 6.750 08-01-19 AAA 3,000 3,485,790 5.81
San Francisco Bay Area Rapid Transit District,
Sales Tax Rev Ref** ............................... 5.000 07-01-28 AAA 3,000 2,917,620 5.14
San Francisco State Building Auth,
Lease Rev Ref 1993 Ser A Dept of Gen Serv ......... 5.000 10-01-13 A 2,145 2,182,173 4.91
San Francisco, City and County of,
Resid Facil Ser A Coventry Park Proj .............. 8.500 12-01-26 BB 2,000 2,239,700 7.59
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec .................... Zero 01-01-03 Aaa 5,000 4,084,200 4.22
Toll Rd Rev Ref Conv Cap Apprec Ser A ............. Zero 01-15-21 BBB- 5,000 3,371,350 5.15
Toll Rd Rev Sr Lien Cap Apprec .................... Zero 01-01-14 Aaa 5,000 2,289,900 4.99
Toll Rd Rev Sr Lien Cap Apprec .................... Zero 01-01-22 Aaa 6,500 1,939,925 5.14
San Jose Financing Auth,
Reassessment Rev 1994 Ser C ....................... 6.750 09-02-11 BBB+ 795 812,482 6.60
San Mateo County Joint Powers Financing Auth,
Lease Rev Ref Cap Proj Prog ....................... 5.000 07-01-21 AAA 1,815 1,802,513 5.03
Santa Ana Financing Auth,
Lease Rev Ser A Police Admin & Holding Facil ...... 6.250 07-01-19 AAA 1,790 2,078,029 5.38
Lease Rev Ser A Police Admin & Holding Facil ...... 6.250 07-01-24 AAA 10,000 11,764,500 5.31
Santa Barbara, County of,
1990 Cert of Part ................................. 7.500 02-01-11 AAA 250 269,548 6.96
1991 Cert of Part ................................. 6.400 02-01-11 A+ 250 271,178 5.90
Santa Clarita Community Facilities,
Spec Tax of Community Facil Dist 92-1 Ser A ....... 7.450 11-15-10 BBB 3,600 3,924,648 6.83
Santa Rosa, City of,
Wastewater Rev 1992 Ser A Subregional Wastewater
Proj ............................................. 6.500 09-01-22 AAA 500 557,840 5.83
Saugus Unified School District,
Cert of Part ...................................... 7.500 08-01-09 BBB+ 700 749,154 7.01
Southern California Home Financing Auth,
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser A 6.750 09-01-22 AAA 805 848,341 6.41
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser B 7.750 03-01-24 AAA 45 47,511 7.34
Southern California Public Power Auth,
Rev Ref Southern Transmission Proj ................ Zero 07-01-13 AAA 4,400 2,065,360 4.99
Stanislaus Waste to Energy Financing Agency,
Solid Waste Rev Ref Ogden Martin Sys Inc Proj ..... 7.625 01-01-10 BBB+ 895 959,225 7.11
Suisun Redevelopment Agency,
Tax Alloc Suisun City Redevel Agency .............. 7.250 10-01-20 AAA 410 442,263 6.72
Torrance Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj ...... 7.125 09-01-21 BBB 500 543,750 6.55
</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)
University of California, The Regents of,
1993 Ref Cert of Part UCLA Central Chiller/
Cogeneration Facil .......................... 5.400% 11-01-11 Aa3 %1,000 $1,021,970 5.28%
Upland Housing Auth,
Rev Iss A ................................... 7.500 07-01-03 BBB 190 196,508 7.25
Rev Iss A ................................... 7.850 07-01-20 BBB 1,280 1,321,536 7.60
Vallejo Sanitation and Flood Control District,
Cert of Part ................................ 5.000 07-01-19 AAA 2,500 2,464,350 5.07
Victor Valley Unified High School District,
Cert of Part ................................ 7.875 11-01-12 AA 1,255 1,404,232 7.04
West Covina Redevelopment Agency,
Ref Community Facil Dist Spec Tax Fashion
Plaza Proj .................................. 6.000 09-01-22 A 3,000 3,312,630 5.43
-----------
366,782,678
-----------
Puerto Rico (5.73%)
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 9,506,250 6.39
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref 1996 Ser Z .................. 6.250 07-01-14 AAA 3,250 3,795,513 5.35
Puerto Rico Ports Auth,
Spec Facil Rev 1996 Ser A American Airlines
Inc Proj .................................... 6.250 06-01-26 BBB- 2,000 2,169,080 5.76
Puerto Rico, Commonwealth of,
GO Pub Imp Ser 1996 ......................... 6.500 07-01-15 A 6,000 7,050,540 5.53
-----------
22,521,383
-----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $351,275,659) (99.12%) 389,304,061
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF EXPIRATION
CONTRACTS DATE
----------- ----------
<S> <C> <C> <C>
OPTIONS
U.S. Treasury Bond Option USJ8C 123.......... 20 03-21-98 3,438
------------
TOTAL OPTIONS
(Cost $3,940) (0.00%) 3,438
---------- ------------
TOTAL INVESTMENTS (99.12%) 389,307,499
---------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.88%) 3,439,356
---------- ------------
TOTAL NET ASSETS (100.00%) $392,746,855
========== ============
</TABLE>
* Credit Ratings are unaudited and rated by 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 $7,932,490 or 2.02% of the
Fund's net asset value, have 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 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 $5,164,061 of Foothill-Eastern
Transportation Corridor Agency, 6.00%, 01-01-34, plus a market value of
$3,079,313 of Los Angeles Public Works Financing Auth, 6.00%, 10-01-15, have
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 February 28, 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 February 28,
1998 assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF THE FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ---------------
General Obligations........................................ 1.79%
Revenue Bonds - Correctional Facility...................... 5.37
Revenue Bonds - Education.................................. 11.93
Revenue Bonds - Electric Power............................. 4.98
Revenue Bonds - Facility................................... 2.35
Revenue Bonds - Health..................................... 20.20
Revenue Bonds - Housing.................................... 5.59
Revenue Bonds - Industrial Development..................... 0.69
Revenue Bonds - Lease...................................... 1.52
Revenue Bonds - Other...................................... 20.78
Revenue Bonds - Pollution Control Facilities............... 1.62
Revenue Bonds - Transportation............................. 11.13
Revenue Bonds - Various Purpose............................ 0.33
Revenue Bonds - Water & Sewer.............................. 10.84
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 99.12%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
======================= NOTES TO FINANCIAL STATEMENTS ==========================
John Hancock Funds - California Tax-Free Income Fund
(UNAUDITED)
NOTE A -
ACCOUNTING POLICIES
John Hancock California Tax-Free Income Fund (the "Fund") is a diversified
open-end management investment company registered under the Investment Company
Act of 1940. The investment objective of the Fund is to provide as high a level
of current income exempt from both federal income taxes and California personal
income taxes as is consistent with preservation of capital.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution 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 $7,852,454 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 -- $26,933, August 31, 2002 -- $277,226, August 31, 2003 --
$5,169,717 and August 31, 2004 -- $2,378,578. Effective August 31, 1996, the tax
year 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
20
<PAGE>
======================= NOTES TO FINANCIAL STATEMENTS ==========================
John Hancock Funds - California Tax-Free Income Fund
the date of purchase over the life of the security, as required by the
Internal Revenue Code. The Fund records market discount on bonds purchased after
April 30, 1993 at time of disposition.
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.
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 $600 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 period ended February 28, 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
Fund's gains and/or losses can be affected as a result of futures contracts.
At February 28, 1998, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
JUN 98 60 U.S. TREASURY BONDS LONG ($69,375)
==========
At February 28, 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.
21
<PAGE>
======================= NOTES TO FINANCIAL STATEMENTS ==========================
John Hancock Funds - California Tax-Free Income Fund
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.
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 Funds 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 period ended February 28,
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 to
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
$117,017 for the period ended February 28, 1998. This limitation may be
discontinued at any time.
The Fund has an agreement with its custodian bank under which $31,629 of
custodian fees have been reduced by balance credits applied during the period
ended February 28, 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 period ended February
28, 1998, net sales charges received with regard to sales of Class A shares
amounted to $284,853. Out of this amount, $35,448 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$229,090 was paid as sales commissions to unrelated broker-dealers and $20,315
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 period ended February 28,
1998, contingent deferred sales charges paid to JH Funds amounted to $88,529.
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 A and Class B plans to 0.15% and 0.90% of the
average daily
22
<PAGE>
======================= NOTES TO FINANCIAL STATEMENTS ==========================
John Hancock Funds - California Tax-Free Income Fund
net assets, respectively. 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 Fund. The compensation for the period 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 February 28, 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 period
ended February 28, 1998, aggregated $20,885,727 and $18,549,028, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended February 28, 1998.
The cost of investments owned at February 28, 1998 (including the joint
repurchase agreement) for federal income tax purposes was $351,279,599. Gross
unrealized appreciation and depreciation of investments aggregated $38,033,807
and $5,907 respectively, resulting in net unrealized appreciation of
$38,027,900.
23
<PAGE>
--------------
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- --------------------------------------------------------------------------------
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preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
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