---------------------------
The latest report from your
Fund's management team
---------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
California
Tax-Free
Income Fund
AUGUST 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-----------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
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
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
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 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:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
- --------------------------------------------------------------------------------
[A 1" x 1 1/2" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
- --------------------------------------------------------------------------------
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
These modifications and replacements for all mission-critical systems are done
and successfully compliance tested. The rest of 1999 will be spent completing
the few remaining non mission-critical systems, testing with our business
partners and continuing to participate in industry testing. We have also
established additional contingency plans beyond our regular ones to prepare for
any challenges that the Year 2000 might present. In the end, John Hancock will
spend approximately $90-$95 million to ensure we make a successful transition to
the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Dianne Sales, CFA, Barry H. Evans, CFA, and
Frank A. Lucibella, CFA, Portfolio Managers
John Hancock California
Tax-Free Income Fund
Municipal bonds come under pressure as interest rates rise
----------------------------------------------------------
Growing inflationary fears and rising interest rates muted municipal bond
returns over the last 12 months. While significant price increases have yet to
appear, the fear of inflation has engineered a turnaround in interest rates
since last August. Although the period began amid a favorable interest-rate
environment, late 1998 signaled a change in both investor sentiment and the bond
market's direction. Three interest-rate cuts by the Federal Reserve last fall
appeared to have worked as intended: U.S. economic growth rebounded, while much
of Asia and Latin America started to show signs of life. But then,
better-than-expected global economic growth, combined with occasional spikes in
commodity prices and a tight labor market, fanned fears that inflation was on
the rise. Nervous investors pushed bond yields higher and bond prices lower in
response. To help choke off inflation and calm the bond markets, the Fed
reversed course by raising short-term interest rates in June and again in
August.
Relative to their taxable counterparts, municipals fared reasonably
well, although they still were unable to produce positive results over the last
year.
Performance recap
For the 12 months ended August 31, 1999, John Hancock California Tax-Free Income
Fund's Class A and Class B shares returned 0.11% and -0.63%, respectively, at
net asset value. By comparison, the average California municipal bond fund
returned -1.49%, according to Lipper, Inc.1 Class C shares, which were
introduced
- --------------------------------------------------------------------------------
[A 3 5/8" x 2 1/4" photo at bottom right side of page of John Hancock California
Tax-Free Income Fund. Caption below reads "Fund management team members (l-r):
"Barry Evans, Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
- --------------------------------------------------------------------------------
"...the fear of inflation has engineered a turnaround in interest rates since
last August."
3
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
"The Fund benefited from our stakes in issuers that refinanced debt..."
- --------------------------------------------------------------------------------
[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into twelve sections (from top to left): Other 26%, Pollution
Control 2%, Lease 2%, General Obligation 3%, Authority 4%, Housing 4%,
Correctional Facilities 5%, Electric Power 5%, Education 10%, Transportation
10%, Water & Sewer 10% and Health 19%. A note below the chart reads "As a
percentage of net assets on August 31, 1999."]
- --------------------------------------------------------------------------------
on April 1, 1999, returned -2.77% from inception through August 31, 1999. Keep
in mind that your net asset value return will be different from the Fund's
performance if you were not invested in the Fund for the entire period and did
not reinvest all distributions. Please see pages six and seven for longer-term
performance information.
Performance review
The Fund benefited from our stakes in issuers that refinanced debt, successfully
lowering their interest costs. Since most of our bonds have call protection,
refinancing usually means issuers must deposit AAA government securities as
security for our bonds until the first call dates. (This is known as an advance
refunding.) In 1999, advance refundings benefited the Fund as some of our
largest holdings were upgraded to reflect their new security pledge. For
example, the Foothill/Eastern Transportation Corridor
- --------------------------------------------------------------------------------
[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 High-coupon
bonds followed by an up arrow with the phrase "Income cushioned price declines
as rates rose." The second listing is Foothill/Eastern Trans. Agency followed by
an up arrow with the phrase "Credit upgrade." The third listing is Hospital
bonds followed by a down arrow with the phrase "Margins pressured by government
cutbacks." A note below the table reads "See `Schedule of Investments.'
Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
Agency and the City of Duarte both received credit upgrades and prices rose
accordingly. The State of California also received an upgrade, raising the
ratings on some 8% of the Fund.
Bonds that offered high amounts of current income - and were therefore
somewhat cushioned from price declines as rates rose - held up relatively well.
In contrast, many of the Fund's health-care holdings were disappointments. Last
year's bankruptcy of a large hospital system, the recent reduction in Medicare
and Medicaid reimbursements and a large municipal bond insurer's refusal to
continue insuring lower-quality health-care bonds cast a pall over the entire
health-care sector.
Managing interest-rate sensitivity
The Fund was also well served by our opportune shifts in duration throughout the
year. Duration measures a bond's sensitivity to interest-rate changes. The
longer the duration, the more a bond's price rises when rates fall and falls
when rates rise. From September through December 1998, we maintained a somewhat
longer duration posture, which provided gains as interest rates fell. That
slightly longer duration was a slight disadvantage when interest rates suddenly
increased in early 1999, although we quickly shortened our duration beginning
about six months ago. During most of the spring and summer, we maintained a more
defensive posture, keeping the Fund's duration slightly shorter than the average
fund's based on our view that interest rates were headed higher.
Market shift presents opportunities
As interest rates rose, the municipal market presented us with attractive
opportunities to do some minor restructuring of the Fund's holdings. Rising bond
yields allowed us to swap some
4
<PAGE>
================================================================================
John Hancock Funds - California Tax-Free Income Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended August 31, 1999." The chart is
scaled in increments of .5% with -3.0% at the bottom and 0.5% at the top. The
first bar represents the 0.11% total return for John Hancock California Tax-Free
Income Fund Class A. The second bar represents the -0.63% total return for John
Hancock California Tax-Free Income Fund Class B. The third bar represents the
- -2.77%* total return for John Hancock California Tax-Free Income Fund Class C.
The fouth bar represents the -1.49% total return for 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, Inc.1 See the following two pages for historical performance
information. * From inception April 1, 1999 through August 31, 1999."]
- --------------------------------------------------------------------------------
lower-yielding bonds for some comparably rated higher-yielding securities with
similar maturities at relatively cheap prices.
We have continued to enhance call protection, adding bonds with
attractive call structures. Call protection guards against a bond being redeemed
by its issuer for a certain period of time. While good call protection is
especially important in periods when interest rates are falling and issuers tend
to refinance their bonds at lower rates, it is often overlooked when rates rise
because investors focus more on yield. In a rising interest-rate environment,
call protection can often be purchased inexpensively - adding real value to the
Fund's structure.
Outlook
Looking ahead, we remain optimistic about California's economy, which has been
powered by real productivity enhancements. Furthermore, the national economy
remains strong, with few signs of slowing down.
The macro environment is somewhat less clear. Although the Fed raised
interest rates to rein in the U.S. economy, the intended slowdown hasn't yet
materialized, or at least we haven't seen any consistent evidence of it. Our
view is that inflationary pressures have indeed increased, as demonstrated by
rising commodity prices and tight labor markets. However, excess capacity on the
global stage has kept the lid on price increases. Without definitive signs of a
slowdown, there is still a chance that the Fed could raise interest rates again.
Beyond that, however, we're more optimistic. We feel it's reasonable to
assume that higher interest rates and Y2K fears will slow economic growth by
year end. However, slower U.S. growth may be offset by strong growth overseas.
So for now, we plan to keep the Fund's duration a bit shorter than average and
emphasize bonds with high coupons that provide a cushion against price declines
when rates are on the rise.
As for the municipal market, technical factors continue to be
favorable. Since 1998, the supply of municipals has dwindled. In addition,
municipal bonds offer attractive values relative to U.S. Treasuries. At the same
time, tax revenues are up and municipal credits are generally improving.
Investors looking to add value and lower tax bills will find plenty of
opportunity in the tax-exempt arena.
- --------------------------------------------------------------------------------
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.
1Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"Investors looking to add value and lower tax bills will find plenty of
opportunity in the tax-exempt arena."
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). Class C
performance includes a contingent deferred sales charge (1% declining to 0%
after one year).
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, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/29/89)
------- ------- --------
Cumulative Total Returns (1.94%) 36.66% 89.36%
Average Annual Total Returns(1) (1.94%) 6.45% 6.95%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
------- ------- --------
Cumulative Total Returns (2.98%) 35.88% 57.33%
Average Annual Total Returns(1) (2.98%) 6.32% 6.23%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended June 30, 1999
SINCE
INCEPTION
(4/1/99)
--------
Cumulative Total Return (3.07%)
Average Annual Total Return(1) (3.07%)(2)
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1999
SEC 30-DAY
YIELD
--------
John Hancock California Tax-Free Income Fund: Class A 4.34%
John Hancock California Tax-Free Income Fund: Class B 3.79%
John Hancock California Tax-Free Income Fund: Class C 3.66%
Notes to Performance
(1) The Adviser voluntarily reduced a portion of the management fee,
the Distributor reduced the distribution and service fees applicable to
Class B shares and the custodian fees were offset with balance credits
during the periods shown. Without the reduction of expenses and the
offset, the average annual total return for the one-year, five-year and
since inception periods for Class A shares would have been (2.00%),
6.36% and 6.72%, respectively. Without the reduction of expenses and
the offset, the average annual total returns for the one-year,
five-year and since inception periods for Class B shares would have
been (3.14%), 6.14% and 6.01%, respectively. Without the reduction of
expenses and the offset, the average annual total return for Class C
shares since inception would have been (3.12%).
(2) Not annualized.
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 John Hancock 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 made in the John Hancock California Tax-Free Income Fund on
December 29, 1989, before sales charge, and is equal to $19,722 as of August 31,
1999. The second line represents the Lehman Brothers Municipal Bond Index and is
equal to $19,616 as of August 31, 1999. The third line represents the value of
the same hypothetical investment made in the John Hancock California Tax-Free
Income Fund, after sales charge, and is equal to $18,836 as of August 31, 1999.
Line chart with the heading John Hancock 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
Lehman Brothers Municipal Bond Index and is equal to $16,304 as of August 31,
1999. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock California Tax-Free Income Fund on December
31, 1991, before sales charge, and is equal to $15,632 as of August 31, 1999.
Line chart with the heading John Hancock California Tax-Free Income Fund Class
C, 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 Lehman
Brothers Municipal Bond Index and is equal to $9,780 as of August 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock California Tax-Free Income Fund on April 1, 1999, before sales
charge, and is equal to $9,723 as of August 31, 1999. The third line represents
the value of the same hypothetical investment made in the John Hancock
California Tax-Free Income Fund, after sales charge, and is equal to $9,626 as
of August 31, 1999.
* 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, 1999. 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, 1999
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $382,617,022)..... $403,631,902
Joint repurchase agreement (cost - $ 4,003,000) ..... 4,003,000
---------------------
407,634,902
Cash ................................................. 992
Receivable for investments sold ...................... 65,300
Receivable for shares sold ........................... 1,745,402
Interest receivable .................................. 5,850,556
Other assets ......................................... 96,882
---------------------
Total Assets .................. 415,394,034
-----------------------------------------------------
Liabilities:
Payable for shares repurchased ....................... 60,684
Payable for investments purchased .................... 8,810,820
Dividend payable ..................................... 6,300
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ............................. 299,755
Accounts payable and accrued expenses ................ 40,987
---------------------
Total Liabilities ............. 9,218,546
-----------------------------------------------------
Net Assets:
Paid-in capital ...................................... 395,135,118
Accumulated net realized loss on investments and
financial futures contracts ......................... (10,022,063)
Net unrealized appreciation of investments ........... 21,014,880
Undistributed net investment income .................. 47,553
---------------------
Net Assets .................... $406,175,488
=====================================================
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 - $306,785,872/28,793,149 .................... $10.65
============================================================================
Class B - $98,530,101/9,247,466 ...................... $10.65
============================================================================
Class C* - $859,515/80,669 ........................... $10.65
============================================================================
Maximum Offering Price Per Share**
Class A - ($10.65 x 104.71%) ......................... $11.15
============================================================================
* Class C shares commenced operations on April 1, 1999.
** 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, 1999
- --------------------------------------------------------------------------------
Investment Income:
Interest ............................................. $23,894,307
------------------
Expenses:
Investment management fee - Note B .................. 2,262,938
Distribution and service fee - Note B
Class A ............................................ 460,627
Class B ............................................ 1,042,163
Class C ............................................ 1,423
Transfer agent fee - Note B ......................... 218,280
Custodian fee ....................................... 93,015
Legal and accounting services fee - Note B .......... 64,108
Auditing fee ........................................ 37,846
Trustees' fees ...................................... 26,335
Registration and filing fees ........................ 19,712
Printing ............................................ 18,914
Miscellaneous ....................................... 15,452
Legal fees .......................................... 4,923
Interest expense - Note A ........................... 1,416
Less: Management Fee Reduction - Note B ............. (234,216)
Distribution and Service Fee Reduction - Note B
Class B ..................................... (104,216)
------------------
Total Expenses ................ 3,928,720
-----------------------------------------------------
Less Expense Reductions -
Note B ........................ (58,180)
-----------------------------------------------------
Net Expenses .................. 3,870,540
-----------------------------------------------------
Net Investment Income ......... 20,023,767
-----------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized gain on investments sold ................ 630,209
Net realized loss on financial futures contracts ..... (745,601)
Change in net unrealized appreciation/depreciation
of investments ...................................... (20,224,406)
Change in net unrealized appreciation/depreciation
of financial futures contracts ...................... (73,711)
------------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ... (20,413,509)
-----------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ..... ($389,742)
=====================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<TABLE>
<CAPTION>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------
1998 1999
------------ ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ......................................................................... $18,938,054 $20,023,767
Net realized gain (loss) on investments sold and financial futures contracts .................. 2,038,263 (115,392)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts .................................................................. 12,987,820 (20,298,117)
------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations .............................. 33,964,137 (389,742)
------------- --------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5575 and $0.5609 per share, respectively) ...................................... (14,988,439) (15,529,991)
Class B - ($0.4749 and $0.4778 per share, respectively) ...................................... (4,023,289) (4,487,984)
Class C** - (none and $0.1843 per share, respectively) ....................................... - (5,792)
------------- --------------
Total Distributions to Shareholders .......................................................... (19,011,728) (20,023,767)
------------- --------------
From Fund Share Transactions - Net: * .......................................................... 3,443,098 27,533,302
------------- --------------
Net Assets:
Beginning of period ........................................................................... 380,660,188 399,055,695
------------- --------------
End of period (including distributions in excess of net investment income of $27,140 and
undistributed net investment income of $47,553, respectively) ................................ $399,055,695 $406,175,488
============= ==============
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
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------
1998 1999
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ -----------
CLASS A
Shares sold .................................................... 2,280,061 $25,129,803 4,985,184 $55,160,981
Shares issued to shareholders in reinvestment of distributions . 612,940 6,744,970 667,420 7,379,055
------------ ------------- ------------ -------------
2,893,001 31,874,773 5,652,604 62,540,036
Less shares repurchased ........................................ (3,083,700) (33,902,668) (3,703,124) (40,923,038)
------------ ------------- ------------ -------------
Net increase(decrease) ......................................... (190,699) ($2,027,895) 1,949,480 $21,616,998
============ ============= ============ =============
CLASS B
Shares sold .................................................... 1,962,836 $21,603,294 2,523,120 $28,092,730
Shares issued to shareholders in reinvestment of distributions . 167,576 1,844,388 218,896 2,402,251
------------ ------------- ------------ -------------
2,130,412 23,447,682 2,742,016 30,494,981
Less shares repurchased ........................................ (1,633,760) (17,976,689) (2,300,517) (25,454,751)
------------ ------------- ------------ -------------
Net increase ................................................... 496,652 $5,470,993 441,499 $5,040,230
============ ============= ============ =============
CLASS C**
Shares sold .................................................... - - 80,521 $874,475
Shares issued to shareholders in reinvestment of distributions . - - 148 1,599
------------ ------------- ------------ -------------
Net increase ................................................... - - 80,669 $876,074
============ ============= ============ =============
** Class C shares commenced operations on April 1, 1999.
SEE NOTES TO FINANCIAL STATEMENTS
10
<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:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
---------------------- JANUARY 1, 1996 TO ---------------------------
1994(1) 1995 AUGUST 31, 1996(9) 1997 1998 1999
-------- -------- ------------------- ------ ------- -------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period.................... $10.85 $9.28 $10.69 $10.36 $10.77 $11.19
------- -------- -------- ------- ------- --------
Net Investment Income .................................. 0.58 0.57(2) 0.39(2) 0.57(2) 0.56(2) 0.56(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ........... (1.57) 1.41 (0.33) 0.41 0.42 (0.54)
-------- -------- -------- ------- ------- --------
Total from Investment Operations ...................... (0.99) 1.98 0.06 0.98 0.98 0.02
-------- -------- -------- ------- ------- --------
Less Distributions:
Dividends from Net Investment Income ................... (0.58) (0.57) (0.39) (0.57) (0.56) (0.56)
------- -------- -------- ------- ------- --------
Net Asset Value, End of Period ......................... $9.28 $10.69 $10.36 $10.77 $11.19 $10.65
======= ======== ======== ======= ======= ========
Total Investment Return at Net Asset Value (3) ......... (9.31%) 21.88% 0.61%(7) 9.71% 9.32% 0.11%
Total Adjusted Investment Return at
Net Asset Value (3,4) ................................. (9.45%) 21.73% 0.55%(7) 9.64% 9.26% 0.04%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...............$241,583 $309,305 $291,072 $291,167 $300,483 $306,786
Ratio of Expenses to Average Net Assets ................ 0.75% 0.75% 0.76%(8,10) 0.75% 0.77%(10) 0.76%(10)
Ratio of Adjusted Expenses to Average Net Assets (5) ... 0.89% 0.90% 0.84%(8) 0.82% 0.83% 0.82%
Ratio of Net Investment Income to Average Net Assets ... 5.85% 5.76% 5.57%(8) 5.42% 5.05% 5.06%
Ratio of Adjusted Net Investment Income to
Average Net Assets (5) ................................ 5.71% 5.61% 5.48%(8) 5.35% 4.99% 4.99%
Portfolio Turnover Rate ................................ 62% 37%(6) 30% 15% 10% 3%
Fee Reduction Per Share ................................ $0.01 $0.01(2) $0.01(2) $0.01(2) $0.01(2) $0.01(2)
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.
Financial Highlights (continued)
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
---------------------- JANUARY 1, 1996 TO ---------------------------
1994(1) 1995 AUGUST 31, 1996(9) 1997 1998 1999
-------- -------- ------------------- ------ ------- -------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period................... $10.85 $9.28 $10.68 $10.36 $10.77 $11.19
-------- -------- -------- -------- -------- --------
Net Investment Income ................................. 0.51 0.50(2) 0.33(2) 0.49(2) 0.47(2) 0.48(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts .......... (1.57) 1.40 (0.31) 0.41 0.42 (0.54)
-------- -------- -------- -------- -------- --------
Total from Investment Operations ..................... (1.06) 1.90 0.02 0.90 0.89 (0.06)
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .................. (0.51) (0.50) (0.34) (0.49) (0.47) (0.48)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........................ $9.28 $10.68 $10.36 $10.77 $11.19 $10.65
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ........ (9.99%) 20.87% 0.20%(7) 8.88% 8.50% (0.63%)
Total Adjusted Investment Return at
Net Asset Value (3,4) ................................ (10.13%) 20.72% 0.14%(7) 8.81% 8.44% (0.80%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............. $77,365 $84,673 $83,253 $89,493 $98,572 $98,530
Ratio of Expenses to Average Net Assets ............... 1.50% 1.50% 1.52%(8,10) 1.50% 1.52%(10) 1.51%(10)
Ratio of Adjusted Expenses to Average Net Assets (5) . 1.64% 1.65% 1.59%(8) 1.57% 1.58% 1.67%
Ratio of Net Investment Income to Average Net Assets 5.10% 4.97% 4.81%(8) 4.66% 4.29% 4.31%
Ratio of Adjusted Net Investment Income to
Average Net Assets (5) ............................... 4.96% 4.82% 4.72%(8) 4.59% 4.23% 4.14%
Portfolio Turnover Rate .............................. 62% 37%(6) 30% 15% 10% 3%
Fee Reduction Per Share ............................... $0.01 $0.01(2) $0.01(2) $0.01(2) $0.01(2) $0.01(2)
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM APRIL 1, 1999
(COMMENCEMENT OF OPERATIONS)
TO AUGUST 31, 1999
------------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period............................................. $11.14
--------
Net Investment Income (2) ....................................................... 0.18
Net Realized and Unrealized Loss on Investments and Financial Futures Contracts . (0.49)
--------
Total from Investment Operations ............................................... (0.31)
--------
Less Distributions:
Dividends from Net Investment Income ............................................ (0.18)
--------
Net Asset Value, End of Period .................................................. $10.65
========
Total Investment Return at Net Asset Value (3) .................................. (2.77%)(7)
Total Adjusted Investment Return at Net Asset Value (3,4) ....................... (2.80%)(7)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................................ $860
Ratio of Expenses to Average Net Assets ......................................... 1.61%(8,10)
Ratio of Adjusted Expenses to Average Net Assets (5) ............................ 1.67%(8)
Ratio of Net Investment Income to Average Net Assets ............................ 4.20%(8)
Ratio of Adjusted Net Investment Income to Average Net Assets (5) ............... 4.13%(8)
Portfolio Turnover Rate ......................................................... 3%
Fee Reduction Per Share (2) ..................................................... $0.01
(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 end changed from December 31 to
August 31.
(10) For the period ended August 31, 1996 and the years ended August 31, 1998
and 1999, 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 have been 0.75% for Class A, 1.50%
for Class B and 1.60% for Class C.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
Schedule of Investments
August 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
California Tax-Free Income Fund on August 31, 1999. It has two main categories:
tax-exempt long-term bonds and short-term investments. The tax-exempt long-term
bonds are broken down by state. Under each state is a list of the securities
owned by the Fund.
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
TAX-EXEMPT LONG-TERM BONDS
California (94.21%)
ABAG Finance Authority for Nonprofit Corps.,
Cert of Part Nat'l Center for Int'l Schools Proj...... 7.375% 05-01-18 BB+ $4,300 $4,503,734 7.04%
Cert of Part Peninsula Family YMCA Ser A ............. 6.800 10-01-11 A3 1,000 1,071,930 6.34
Alameda Corridor Transportation Auth,
Rev Ser 1999 A ....................................... Zero 10-01-32 AAA 5,000 737,400 5.87
Alameda, County of,
Cert of Part Cap Projs ............................... 6.750 06-01-16 A2 500 543,575 6.21
Anaheim Public Financing Auth,
Sub Lease Rev 1997 Cap Apprec Ser C
Anaheim Pub Imp Proj ................................ Zero 09-01-18 AAA 3,000 1,025,550 5.73
Anaheim, City of,
Cert of Part Ref Reg RITES Convention Ctr ............ 8.691# 07-16-23 AAA 2,000 2,137,500 8.13
Antioch Public Financing Authority,
Reassessment Rev Ser B ............................... 5.850 09-02-15 BB+ 1,490 1,428,806 6.10
Arcadia, County of,
Hosp Rev Methodist Hosp of Southern California ....... 6.625 11-15-22 A 1,205 1,268,106 6.30
Avalon Community Improvement Agency,
Tax Alloc Community Imp Proj Ser B ................... 6.400 08-01-22 A- 1,830 1,979,035 5.92
Bakersfield Memorial Hospital,
Hosp Rev Ser A ....................................... 6.500 01-01-22 Baa1 2,000 2,142,940 6.07
Beaumont Unified School District,
Cert of Part Cap Imp Proj ............................ 7.700 01-01-21 AA 1,000 1,066,330 7.22
Beverly Hills Public Financing Auth,
Lease Rev INFLOS ..................................... 7.870# 06-01-15 AAA 2,500 2,575,000 7.64
Bonita Canyon Public Facilities Financing Auth,
Spec Tax Community Facils Dist No 98-1 ............... 5.375 09-01-28 BB+ 4,000 3,563,240 6.03
Brentwood Redevelopment Agency,
Tax Alloc Brentwood Redevel Proj Ser A ............... 7.700 11-01-08 BBB 135 139,442 7.45
Burbank Redevelopment Agency,
Tax Alloc Golden State Redevel Proj Ser A ............ 6.000 12-01-23 A- 2,750 2,766,748 5.96
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj ............ 6.125 06-01-09 Baa2 1,000 1,033,330 5.93
Univ of San Diego Rev Cap Apprec ..................... Zero 10-01-19 Aaa 1,510 481,766 5.77
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc ............. 6.950 10-01-21 AA 250 269,247 6.45
Ins Hosp Rev Ser 1990 Children's Hosp San Diego ...... 6.500 07-01-20 AAA 500 521,560 6.23
Ins Rev Ref Ser A Catholic Healthcare
West Obligated Group ................................ 5.750 07-01-15 AAA 2,000 2,032,580 5.66
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
California Health Facilities Financing Auth (cont.),
Ins Rev Ser A San Diego Christian Foundation ......... 6.250% 07-01-12 AA- $1,135 $1,177,903 6.02%
Ins Rev Ser B Hlth Facil Small Facil ................. 7.500 04-01-22 AA- 2,000 2,262,840 6.63
Rev 1990 Ser A Kaiser Permanente ..................... 7.000 12-01-10 A 600 634,686 6.62
Rev Ser 1994A Scripps Research Institute ............. 6.300 07-01-09 A1 500 532,325 5.92
Sec Rev 1991 Ser Hosp of the Good Samaritan .......... 7.000 09-01-21 BBB 2,250 2,344,770 6.72
California Housing Finance Agency,
Home Mtg Rev 1990 Ser D .............................. Zero 08-01-20 AA- 1,335 266,546 5.81
Home Mtg Rev 1991 Ser A .............................. 7.375 08-01-17 AA- 235 243,340 7.12
Home Mtg Rev 1994 Ser C .............................. 6.650 08-01-14 AA- 1,000 1,034,580 6.43
Home Mtg Rev 1994 Ser G .............................. 7.250 08-01-17 AA- 3,500 3,602,935 7.04
Hsg Rev 1991 Ser E ................................... 7.000 08-01-26 AAA 525 549,822 6.68
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co ... 6.900 12-01-17 A+ 500 530,945 6.50
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co .... 6.625 06-01-09 AA- 500 534,520 6.20
Poll Control Rev 1997 Ser A Laidlow Environmental Proj 6.700 07-01-07 BBB- 2,000 2,031,240 6.60
Poll Control Rev 1999 Ser A Southern Calif Edison Co** 5.450 09-01-29 AAA 2,720 2,645,635 5.60
Solid Waste Disposal Rev Keller Canyon Landfill Co Proj 6.875 11-01-27 BB- 2,000 2,031,360 6.77
California Rural Home Mortgage Finance Auth,
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog .... 7.550 11-01-26 AAA 640 701,568 6.89
Single Family Mtg Rev Ser A Mtg Backed Sec's Prog
Step Coupon .......................................... 6.450# 05-01-27 AAA 645 713,660 5.83
California State Public Works Board,
Lease Rev 1992 Ser A Calif State Univ Various Univ Projs 6.700 10-01-17 AAA 1,500 1,641,720 6.12
Lease Rev 1993 Ser A Various Community College Projs . 5.625 12-01-18 A+ 3,700 3,966,511 5.25
Lease Rev 1994 Ser A Dept of Corrections
Calif State Prison Monterey County (Soledad II) .... 6.875 11-01-14 A+ 500 568,320 6.05
Lease Rev 1996 Ser A Dept of Corrections ............. 5.500 01-01-15 AAA 5,145 5,178,751 5.46
Lease Rev Ref 1993 Ser A California State Univ
Various Univ Proj ................................... 5.500 06-01-21 A+ 1,250 1,215,900 5.65
Lease Rev Ref 1993 Ser A Depart of Corrections
Various State Prisons ............................... 5.000 12-01-19 AAA 5,000 4,673,350 5.35
Lease Rev Ser A Dept of Corrections .................. 5.250 01-01-21 AAA 4,500 4,283,460 5.52
California Statewide Communities Development Auth,
Cert of Part The Internex Group ...................... 5.375 04-01-30 BBB 2,500 2,237,375 6.01
Ins Cert of Part United Western Medical Centers ...... 6.750 12-01-21 AA- 7,500 8,077,875 6.27
Ins Rev Cert of Part Hlth Facil AIDS Proj Los Angeles 6.200 08-01-12 AA- 1,250 1,287,725 6.02
Ins Rev Cert of Part Hlth Facil AIDS Proj Los Angeles 6.250 08-01-22 AA- 2,590 2,654,646 6.10
Ins Rev Cert of Part Hlth Facil Eskaton Properties ... 6.700 05-01-11 A+ 1,250 1,328,437 6.30
Ins Rev Cert of Part Statewide Univ Northridge Proj .. 6.000 04-01-26 AAA 1,620 1,660,273 5.85
Ins Rev Ref Cert of Part Triad Healthcare Hosp ....... 6.500 08-01-22 A+ 13,000 14,094,210 6.00
Campbell, City of,
1991 Cert of Part Preref Civic Ctr Proj .............. 6.750 10-01-17 A 155 166,546 6.28
1991 Cert of Part Unref Bal Civic Ctr Proj .......... 6.750 10-01-17 A 1,565 1,680,262 6.29
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
Capistrano Unified School District,
Spec Tax of Community Facil Dist 87-1 ................ 7.500% 09-01-07 AAA $3,500 $3,570,000 7.35%
Spec Tax of Community Facil Dist 87-1 ................ 8.375 10-01-20 AAA 3,000 3,206,790 7.83
Spec Tax of Community Facil Dist 92-1 ................ 7.000 09-01-18 AA 1,500 1,675,050 6.27
Spec Tax of Community Facil Dist 92-1 ................ 7.100 09-01-21 AA 2,250 2,638,665 6.05
Carlsbad, City of,
Imp Bond Act of 1915 Assessment Dist No 96-1 ......... 5.500 09-02-28 BB+ 1,200 1,086,084 6.08
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No 1 Redevel Proj ............ 6.375 10-01-12 BBB+ 500 517,575 6.16
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj ............... 7.350 08-01-20 AAA 200 210,624 6.98
Center Unified School District,
GO Cap Apprec Ser C .................................. Zero 09-01-16 AAA 2,145 830,523 5.66
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992 ........... 6.600 10-01-22 AAA 3,700 4,038,957 6.05
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ... 6.100 07-01-13 AA 3,300 3,568,587 5.64
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ... 6.200 07-01-20 AA 1,000 1,084,890 5.71
Clearlake Redevelopment Agency,
Tax Alloc Highlands Park Community Devel Proj ........ 6.400 10-01-23 BBB 500 511,055 6.26
Corona Community Facilities District 97-2,
Special Tax Rev ...................................... 5.875 09-01-23 BB+ 1,500 1,441,335 6.11
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A .......................... 7.100 08-01-21 BBB 220 229,783 6.80
Cucamonga School District,
Cert of Part ......................................... 7.600 12-01-15 Baa 1,000 1,029,970 7.38
Davis Redevelopment Agency,
Tax Alloc Ref Davis Redevel Proj ..................... 7.000 09-01-24 AAA 5,115 5,622,459 6.37
Del Mar Race Track Auth,
Rev Ref Ser 1996 ..................................... 6.000 08-15-06 BBB 2,240 2,329,757 5.77
Rev Ref Ser 1996 ..................................... 6.200 08-15-11 BBB 1,865 1,951,592 5.92
Delano, City of,
Cert of Part ......................................... 7.000 04-01-10 BBB+ 2,000 2,068,040 6.77
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj . 8.000 07-01-10 AAA 300 316,644 7.58
Duarte, City of,
Cert of Part City of Hope Nat'l Medical Center Proj .. 6.250 04-01-23 Baa1 9,000 9,765,720 5.76
Cert of Part City of Hope Nat'l Medical Center Proj .. 5.250 04-01-24 BBB+ 4,000 3,496,200 6.01
East Bay Municipal Utility District,
Wastewater Treatment Sys Rev Ref ..................... 7.370# 06-01-20 AAA 6,000 5,850,000 7.56
Elk Grove Unified School District,
Community Facil Dist 1 Spec Tax Cap Apprec ........... Zero 12-01-16 AAA 2,780 1,040,332 5.78
Encinitas Public Finance Auth,
Cert of Part Ser A Civic Ctr Proj .................... 6.750 12-01-11 A- 1,300 1,401,049 6.26
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave Storm Drainage Proj .. 6.500 08-01-21 A- 1,085 1,134,704 6.22
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
Fontana Public Financing Auth,
Tax Alloc Rev 1990 Ser A North Fontana Redevel Proj.... 7.250% 09-01-20 BBB $325 $336,586 7.00%
Tax Alloc Rev Sub Lien 1991 Ser A
North Fontana Redevel Proj ........................... 7.750 12-01-20 AA 195 214,180 7.06
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A .......... 6.500 01-01-32 BBB- 1,665 1,851,147 5.85
Toll Rd Rev Fixed Rate Current Int Ser 1995A .......... 6.000 01-01-34 BBB- 14,775 16,039,592 5.53
Toll Road Rev Ref Cap Apprec .......................... Zero 01-15-25 BBB- 6,615 1,376,449 6.28
Toll Road Rev Ref Conv Cap Apprec ..................... Zero 01-15-26 BBB- 5,000 2,662,150 6.17
Fremont Public Finance Auth,
Rev Ser A ............................................. 5.500 09-02-10 BB+ 2,905 2,773,491 5.76
Fresno Joint Powers Financing Auth,
Rev Ser A ............................................. 6.550 09-02-12 BBB 2,000 2,106,460 6.22
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center .... 6.625 06-01-21 AA 250 270,982 6.11
Industry Urban-Development Agency,
Tax Alloc Ref Trans Dist Proj 3 ....................... 6.900 11-01-16 A- 1,020 1,082,026 6.50
Inglewood, City of,
Cert of Part Civic Ctr Imp Proj ....................... 7.000 08-01-19 BBB- 1,000 1,072,740 6.53
Irvine, City of,
Imp Board Act of 1915 Assessment Dist 95-12 ........... 6.000 09-02-21 BB+ 1,750 1,704,185 6.16
Imp Board Act of 1915 Assessment Dist 95-12 Ser B ..... 6.550 09-02-21 BB+ 1,000 1,107,410 5.91
Mobile Home Park Rev Ser A Meadows Mobile Home Park ... 5.700 03-01-28 BBB- 1,930 1,851,391 5.94
Irwindale Community Redevelopment Agency,
Sub Lien Tax Alloc Industrial Devel Proj .............. 7.050 06-01-26 BBB 2,750 2,933,645 6.61
Lincoln Redevelopment Agency,
Tax Alloc Lincoln Redevel Proj ........................ 7.650 08-01-17 BBB+ 680 738,460 7.04
Long Beach, City of,
Harbor Rev Ref Ser A .................................. 6.000 05-15-18 AAA 2,660 2,801,140 5.70
Los Alamitos Unified School District,
Spec Tax of Community Facil Dist 90-1 ................. 7.150 08-15-21 Baa1 6,005 6,473,150 6.63
Los Angeles Community Facilities District,
Spec Tax No 3 Cascades Business Park Proj ............. 6.400 09-01-22 BB+ 1,000 1,011,400 6.33
Los Angeles Community Redevelopment Financing Auth,
Rev MultiFamily Ser A Grand Central Square ............ 5.850 12-01-26 BB 2,000 1,918,400 6.10
Los Angeles Department of Airports,
Airport Rev AMT Ser A Ontario International Airport Proj 6.000 05-15-26 AAA 2,000 2,036,800 5.89
Los Angeles Department of Water and Power,
Elec Plant Rev Ref 2nd Iss of 1993 .................... 5.400 11-15-12 A+ 1,000 1,005,140 5.37
Los Angeles Public Works Financing Auth,
Rev Regional Park & Open Space Dist A ................. 6.000 10-01-15 AA 3,750 4,100,362 5.49
Los Angeles, County of,
Cert of Part Disney Parking Proj ...................... 6.500 03-01-23 BBB 2,000 2,183,760 5.95
Cert of Part Reg Linked SAVRS & RIBS Ref Proj ......... 6.708 06-01-15 BBB 1,200 1,269,720 6.34
Rev Ser B AMT Harbor Proj ............................. 6.000 08-01-15 AA 2,000 2,059,680 5.83
Metropolitan Water District,
Wtr Rev Iss of 1991 ................................... 6.625 07-01-12 AA 750 798,915 6.22
Wtr Rev Iss of 1992 ................................... 5.000 07-01-20 AA 7,500 6,915,525 5.42
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
Millbrae, City of,
Residential Facil Rev Ser 1997A Magnolia of
Millbrae Proj........................................ 7.375% 09-01-27 BB $1,000 $1,032,310 7.14%
Modesto Irrigation District,
Cert of Part Ref & Cap Imps Proj Ser 1999B ........... 5.300 07-01-22 A+ 965 901,966 5.67
Mountain View Capital Improvements Financing Auth,
1992 Rev City Hall/Community Theatre Complex and
Shoreline Regional Park Comm Tax Alloc Refin ........ 6.500 08-01-16 AAA 600 634,296 6.15
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj .............. 7.000 05-01-13 AAA 100 116,692 6.00
Rev 1992 Ser A Calif-Oregon Transm Proj .............. 6.500 05-01-16 AAA 1,000 1,064,550 6.11
Oakland, Port of,
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj 6.800 01-01-19 BBB+ 500 516,515 6.58
Oceanside, City of,
Ref Cert of Part Ser A ............................... 6.375 04-01-12 A3 3,000 3,176,100 6.02
Orange County Development Agency,
Tax Alloc Santa Ana Heights Proj ..................... 6.125 09-01-23 BBB 5,000 5,041,100 6.08
Orange Cove Irrigation District,
Cert of Part Rehab Proj .............................. 7.250 02-01-12 AA 2,000 2,128,020 6.81
Cert of Part Rehab Proj .............................. 7.000 02-01-15 AA 2,500 2,651,500 6.60
Orange, County of,
Cert of Part Recovery Ref Ser A ...................... 5.800 07-01-16 AAA 2,000 2,047,540 5.67
Cert of Part Civic Ctr Exp Proj ...................... 6.700 08-01-18 AAA 1,000 1,069,370 6.27
Ser A of 1990 Spec Tax of Community Facil Dist 87-3
Mission Viego ....................................... 7.800 08-15-15 AA 350 370,352 7.37
Ser A of 1992 Spec Tax of Community Facil Dist 88-1
Aliso Viego ......................................... 7.350 08-15-18 AAA 1,000 1,109,620 6.62
Pasadena, City of,
Cert of Part Ref Old Pasadena Pkg Facil Proj ......... 6.250 01-01-18 A+ 1,205 1,300,316 5.79
Pittsburg Redevelopment Agency,
Spec Tax of Community Facil Dist 90-1 California Ave . 7.400 08-15-20 BBB 3,040 3,291,165 6.84
Poway, City of,
Community Facil Dist No 88-1 Spec Tax Ref
Pkwy Business Ctr ................................... 6.750 08-15-15 BB 1,000 1,054,620 6.40
Rancho Mirage, City of, Joint Powers Financing Auth,
Cert of Part Eisenhower Memorial Hosp ................ 7.000 03-01-22 A2 4,500 4,893,255 6.44
Civic Center Rev Ref Ser 1991A Preref ................ 7.500 04-01-17 BBB 195 209,180 6.99
Civic Center Rev Ref Ser 1991A Unref Bal ............. 7.500 04-01-17 BBB 55 57,824 7.13
Redondo Beach Public Financing Auth,
Rev South Bay Center Redevel Proj .................... 7.000 07-01-16 BBB+ 950 1,015,978 6.55
Richmond Joint Powers Financing Auth,
Rev Ser A ............................................ 7.700 10-01-10 BBB- 1,645 1,745,148 7.26
Richmond, County of,
Imp Bd Act of 1915 Ref Reassessment District No 855 .. 6.600 09-02-19 BBB- 3,000 3,093,840 6.40
Riverside County Asset Leasing Corp,
Leasehold Rev 1993 Ser A Riverside County Hosp Proj .. 6.500 06-01-12 A 1,000 1,099,360 5.91
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
Sacramento City Financing Auth,
Rev Convention Ctr Hotel Ser 1999A ................... 6.250% 01-01-30 BB+ $3,000 $2,880,960 6.51%
Sacramento Power Auth,
Cogeneration Proj Rev Light & Pwr Imp ................. 6.000 07-01-22 BBB- 12,000 12,039,600 5.98
Sacramento Unified School District,
Spec Tax of Community Facil Dist 1 Ser B .............. 7.300 09-01-13 Baa 760 847,354 6.55
Saddleback Valley Unified School District,
Spec Tax of Community Facil Dist 89-3 Ser A ........... 7.750 09-01-16 AA 3,200 3,264,000 7.60
San Bernardino, County of,
Cert of Part Ref Medical Ctr Fin Proj ................. 5.500 08-01-17 AAA 5,000 5,028,100 5.47
Cert of Part Ref Medical Ctr Fin Proj ................. 5.500 08-01-17 A- 3,750 3,678,675 5.61
Cert of Part Ref Medical Ctr Fin Proj Ser A ........... 5.500 08-01-15 AAA 5,875 6,295,826 5.13
Cert of Part Ser B Cap Facil Proj ..................... 6.875 08-01-24 AAA 350 413,557 5.82
San Diego County Regional Transportation Commission,
Sales Tax Rev 1991 Ser A .............................. 7.000 04-01-06 AA- 90 95,574 6.59
San Diego County Water Auth,
Water Rev Cert of Part Reg RITES ...................... 7.484# 04-23-08 AAA 1,000 1,120,000 6.68
Water Rev Cert of Part Reg RITES ...................... 7.484# 04-22-09 AAA 400 446,000 6.71
San Diego, County of,
Cert of Part Inmate Reception Ctr & Cooling Plant Fin . 6.750 08-01-19 AAA 3,000 3,378,270 5.99
San Diego Redevelopment Agency,
Tax Alloc Cap Apprec Ser 1999B ........................ Zero 09-01-17 BB 1,600 486,896 6.72
Tax Alloc Cap Apprec Ser 1999B ........................ Zero 09-01-18 BB 1,700 471,070 6.87
Tax Alloc City Heights Proj Ser 1999A ................. 5.800 09-01-28 BB 1,395 1,270,636 6.37
San Diego Unified School District,
GO Cap Apprec Ser 1999A ............................... Zero 07-01-21 AAA 2,500 715,500 5.81
San Francisco Bay Area Rapid Transit District,
Sales Tax Rev Ref ..................................... 5.000 07-01-28 AAA 3,000 2,704,230 5.55
San Francisco State Building Auth,
Lease Rev Ref 1993 Ser A Dept of Gen Serv ............. 5.000 10-01-13 A+ 2,145 2,075,416 5.17
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj .................. 8.500 12-01-26 BB 2,000 2,222,580 7.65
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec ........................ Zero 01-01-03 AAA 5,000 4,331,850 4.35
Toll Rd Rev Ref Conv Cap Apprec Ser A ................. Zero 01-15-21 BBB- 5,000 3,081,200 6.15
Toll Rd Rev Sr Lien Cap Apprec ........................ Zero 01-01-14 AAA 5,000 2,290,950 5.52
Toll Rd Rev Sr Lien Cap Apprec ........................ Zero 01-01-22 AAA 6,500 1,824,680 5.77
San Mateo County Joint Powers Financing Auth,
Lease Rev Ref Cap Proj Prog ........................... 5.000 07-01-21 AAA 1,815 1,680,781 5.40
Santa Ana Financing Auth,
Lease Rev Ser A Police Admin & Holding Facil .......... 6.250 07-01-19 AAA 1,790 1,957,562 5.72
Lease Rev Ser A Police Admin & Holding Facil .......... 6.250 07-01-24 AAA 10,000 10,936,400 5.71
Rev Ref Ser B South Harbor Blvd ....................... 5.125 09-01-19 AAA 2,500 2,361,075 5.43
Rev Ref Ser D Mainplace Proj .......................... 5.600 09-01-19 BBB- 1,000 925,300 6.05
Santa Barbara, County of,
1990 Cert of Part ..................................... 7.500 02-01-11 AAA 250 256,565 7.31
1991 Cert of Part ..................................... 6.400 02-01-11 A+ 250 263,103 6.08
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
Santa Clara County Finance Auth,
Lease Rev Ser 2000B Mult Facil Projs** ................ 5.500% 05-15-17 AAA $6,000 $5,889,360 5.60%
Santa Clarita Community Facilities,
Spec Tax of Community Facil Dist 92-1 Ser A ........... 7.450 11-15-10 BBB 3,600 3,792,348 7.07
Santa Rosa, City of,
Imp Board Act of 1915 Ref Fountaingrove Parkway Ser A . 5.700 09-02-19 BB+ 1,000 958,590 5.95
Southern California Home Financing Auth,
Single Family Mtg Rev GNMA & FNMA Mtg Backed Ser A .... 6.750 09-01-22 AAA 655 674,643 6.55
Single Family Mtg Rev GNMA &
FNMA Mtg Backed Ser B ................................. 7.750 03-01-24 AAA 30 30,988 7.50
Southern California Public Power Auth,
Rev Ref Southern Transmission Proj .................... Zero 07-01-13 AAA 4,400 2,085,644 5.47
Stanislaus Waste to Energy Financing Agency,
Solid Waste Rev Ref Ogden Martin Sys Inc Proj ......... 7.625 01-01-10 A- 880 903,170 7.43
Suisun Redevelopment Agency,
Tax Alloc Suisun City Redevel Agency .................. 7.250 10-01-20 AAA 405 420,503 6.98
Torrance Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj .......... 7.125 09-01-21 BBB 500 539,390 6.60
University of California,
Cert of Part Ref UCLA Central Chiller/Congeneration Proj 5.400 11-01-11 Aa3 1,000 1,001,480 5.39
Upland Housing Auth,
Rev Iss A ............................................. 7.500 07-01-03 BBB 190 195,417 7.29
Rev Iss A ............................................. 7.850 07-01-20 BBB 1,280 1,314,650 7.64
Vallejo Sanitation and Flood Control District,
Cert of Part .......................................... 5.000 07-01-19 AAA 2,500 2,330,025 5.36
Victor Valley Unified School District,
Cert of Part .......................................... 7.875 11-01-12 AA 1,255 1,338,181 7.39
West Covina Redevelopment Agency,
Ref Community Facil Dist Spec Tax Fashion Plaza Proj .. 6.000 09-01-22 A 3,000 3,091,140 5.82
-----------
382,682,982
-----------
Puerto Rico (5.16%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the
Commonwealth of Puerto Rico .......................... 8.270# 07-01-11 AAA 7,500 8,653,125 7.17
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref 1996 Ser Z ............................ 6.250 07-01-14 AAA 3,250 3,574,675 5.68
Puerto Rico Ports Auth,
Spec Facil Rev 1996 Ser A American Airlines Inc Proj .. 6.250 06-01-26 BBB- 2,000 2,045,580 6.11
Puerto Rico, Commonwealth of,
GO Pub Imp Ser 1996 ................................... 6.500 07-01-15 A 6,000 6,675,540 5.84
----------
20,948,920
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $382,617,022) (99.37%) 403,631,902
------- -----------
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - California Tax-Free Income Fund
PAR VALUE
INTEREST (000s MRKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.99%)
Investment in a joint repurchase agreement transaction with
Barclay's Inc. - Dated 08-31-99, due 09-01-99
(Secured by U.S. Treasury Bonds, 5.250% thru 9.125%,
due 02-15-00 thru 11-15-28 and U.S. Treasury Notes,
4.500% thru 7.750%, due 09-30-00 thru 02-15-05) - Note A 5.440% $4,003 $4,003,000
------- -----------
TOTAL SHORT-TERM INVESTMENTS (0.99%) 4,003,000
------- -----------
TOTAL INVESTMENTS (100.36%) 407,634,902
------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.36%) (1,459,414)
------- -----------
TOTAL NET ASSETS (100.00%) $406,175,488
======== ============
* 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 $8,534,995 or 2.10% of the
Fund's net asset value, have been purchased on a when-issued basis. 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 its when-issued commitments. Accordingly, the
market value of $2,728,976 of Sacramento Power Authority, 6.000%, 07-01-22, and
the market value of $6,201,994 of California Statewide Community Development
Authority, 6.500%, 08-01-22, have been segregated to cover the when-issued
commitments.
+ The yield is not calculated in accordance with guidelines established by the
U.S. Securities & Exchange Commission and is unaudited. Zero coupon yields are
at yield to maturity.
# Represents rate in effect on August 31, 1999.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<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, 1999 assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ---------------
General Obligation.................................... 3.31%
Revenue Bonds - Authority ............................ 4.00
Revenue Bonds - Correctional Facility ................ 4.96
Revenue Bonds - Education ............................ 10.20
Revenue Bonds - Electric Power ....................... 4.65
Revenue Bonds - Excise Tax ........................... 0.67
Revenue Bonds - Facility ............................. 2.18
Revenue Bonds - Harbor/Channel ....................... 0.69
Revenue Bonds - Health ............................... 18.58
Revenue Bonds - Housing .............................. 3.57
Revenue Bonds - Improvement .......................... 0.98
Revenue Bonds - Industrial Development ............... 0.81
Revenue Bonds - Lease ................................ 1.96
Revenue Bonds - Multi-Family ......................... 0.46
Revenue Bonds - Non Profit ........................... 0.55
Revenue Bonds - Other ................................ 17.45
Revenue Bonds - Parking Garage/Authority ............. 0.32
Revenue Bonds - Pollution Control .................... 2.14
Revenue Bonds - Tax .................................. 1.49
Revenue Bonds - Transportation ....................... 10.15
Revenue Bonds - Various Purpose ...................... 0.31
Revenue Bonds - Water & Sewer ........................ 9.94
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS 99.37%
==========
SEE NOTES TO FINANCIAL STATEMENTS.
22
<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, Class B and Class C shares. The Fund issued
Class C shares for the first time on April 1, 1999. 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $8,347,379 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent such carryforwards are used by the
Fund, no capital gains distribution will be made. The carryforwards expire as
follows: August 31, 2002 - $111,795, August 31, 2003 - $5,169,717, August 31,
2004 - $2,378,578, August 31, 2005 - $7,774 and August 31, 2006 - $679,515.
Additionally, net capital losses of $618,270 attributable to security
transactions occurring after October 31, 1998 are treated as arising on the
first day of the Fund's next taxable year (September 1, 1999).
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
23
<PAGE>
=======================NOTES TO FINANCIAL STATEMENTS============================
John Hancock Funds - California Tax-Free Income Fund
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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing. In
addition, a commitment fee based on the average daily unused portion of the line
of credit is allocated among the participating funds. The maximum loan balance
outstanding during the year amounted to $2,129,800. The annualized interest rate
charged during the period ranged from 5.1875% thru 5.2500%. At August 31, 1999,
there were no outstanding borrowings.
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, 1999, there were no open positions in financial futures
contracts.
OPTIONS The Fund may buy or sell options contracts. Listed options will be
valued at the last quoted sales price on the exchange on which they are
primarily traded. Over-the-counter options will be valued at the mean between
the last bid and asked prices. 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 Funds
exposure to the underlying instrument and buying puts and writing calls will
tend to decrease the Funds 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,
24
<PAGE>
=======================NOTES TO FINANCIAL STATEMENTS============================
John Hancock Funds - California Tax-Free Income Fund
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 year 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 option transactions for the year ended August 31,
1999.
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%, 1.50% and 1.60% of the average net assets attributable to
Class A, Class B and Class C, respectively. Accordingly, the reduction in the
Adviser's fee amounted to $234,216 for the year ended August 31, 1999. This
limitation may be discontinued any time.
The Fund has an agreement with its custodian bank under which $58,180
of custodian fees have been reduced by balance credits applied during the year
ended August 31, 1999. 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, 1999 , net sales charges received with regard to sales of Class A
shares amounted to $515,724. Out of this amount, $31,258 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$430,518 was paid as sales commissions to unrelated broker-dealers and $53,948
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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, 1999,
contingent deferred sales charges paid to JH Funds amounted to $168,814.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% 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 C shares. There were
no contingent deferred sales charges paid to JH Funds for the year ended August
31, 1999.
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, Class B and Class C 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 and Class C average daily net assets to reimburse JH Funds
for its distribution and service costs. JH Funds has temporarily agreed to limit
the
25
<PAGE>
=======================NOTES TO FINANCIAL STATEMENTS============================
John Hancock Funds - California Tax-Free Income Fund
distribution and service fees pursuant to the Class B plan to 0.90% of the
average daily net assets. Accordingly, the reduction in the distribution and
service fee amounted to $104,216 for the year ended August 31, 1999. This
limitation may be discontinued at any time. 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,
accounting and legal services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Stephen L. Brown, 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 yearly basis to reflect any income earned by the
investment as well as any unrealized gains or losses. The investment had no
impact on the operations of the Fund.
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, 1999 , aggregated $41,855,724 and $13,543,400, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1999.
The cost of investments owned at August 31, 1999 (including the joint
repurchase agreement) for federal income tax purposes was $386,620,022. Gross
unrealized appreciation and depreciation of investments aggregated $24,823,430
and $3,808,550 respectively, resulting in net unrealized appreciation of
$21,014,880.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1999, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $1,395, an
increase in undistributed net investment income of $74,693 and a decrease in
capital paid-in of $76,088. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of August
31, 1999. Additional adjustments may be needed in subsequent reporting years.
These reclassifications, which have no impact on the net asset value of the
Fund, are primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
26
<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, 1999, 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, 1999, 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, 1999,
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
- ----------------
Boston, Massachusetts
October 8, 1999
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,
1999.
None of the 1999 income dividends qualify for the corporate dividends
received deduction. Shareholders who are not subject to the alternative minimum
tax received income dividends which are 99.26% tax-exempt for federal and state
purposes. The percentage of income dividends from the Fund subject to the
alternative minimum tax is 5.79%.
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 1999 U.S. Treasury Department Form 1099-DIV
in January 2000. This will reflect the total of all distributions which are
taxable for calendar year 1999.
27
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[LOGO] JOHN HANCOCK FUNDS --------------------
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1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
INTERNET: www.jhfunds.com Permit No. 75
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This report is for the information of shareholders of the John Hancock
California Tax-Free Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
[LOGO] Printed on Recycled Paper 5300A 8/99
10/99
