<PAGE> 1
JOHN HANCOCK FUNDS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
TAX-FREE
BOND FUND
SEMI-ANNUAL REPORT
June 30, 1995
<PAGE> 2
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Thomas C. Goggins
Senior Vice President
James K. Ho
Senior Vice President
Andrew F. St. Pierre
Senior Vice President
B.J. Willingham
Senior Vice President
Frank Lucibella
Vice President
John A. Morin
Vice President
Susan S. Newton
Vice President and Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Educating shareholders has always been one of the most important
responsibilities of a mutual fund company. But that challenge has taken on new
significance in the past several years. Looking at the most recent statistics,
you can see why. According to the Investment Company Institute, the mutual fund
industry now manages more than $2.3 trillion for investors. More than half of
that money has come into mutual funds in just the last four years. Today, there
are more than 95 million mutual fund shareholder accounts. That's up from 12
million in 1980. These are people, like you, who are investing in mutual funds
to save for a home, to send their children to college or to build a nest egg for
a comfortable retirement. This explosive growth, coupled with the growing
complexity of the financial landscape, has made all of us in the mutual fund
industry work harder to inform our shareholders.
At John Hancock Funds, we strive to educate you about all aspects of your
fund: the performance, the strategies and the holdings. We want you to fully
understand what you own. We want you to have realistic expectations of the
potential rewards as well as the potential risks of your investment. These
shareholder reports -- which we send you twice a year -- are the best way to
give you the most in-depth and up-to-date information.
In the message that follows, the portfolio manager gives a candid commentary
on the market environment; the factors that affected performance; the fund's
current investment strategies; and the outlook for the months ahead. The ensuing
financial statements provide a comprehensive look at the fund's statistics and
holdings. We've included explanations of what each financial statement shows and
how it is used.
We hope you find these shareholder reports a useful tool in evaluating your
investments. Of course, if you have any questions or need more information, feel
free to call one of our customer service representatives on our toll-free line
at 1-800-225-5291, from 8:00 a.m. to 8:00 p.m. eastern time, Monday through
Friday.
Sincerely,
/s/ Edward J. Boudreau, Jr.
---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
2
<PAGE> 3
BY THOMAS C. GOGGINS, SENIOR VICE PRESIDENT, FOR THE
PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK
TAX-FREE BOND FUND
MUNICIPAL BONDS TURN CORNER IN 1995;
SECOND HALF SHOULD REMAIN POSITIVE
Thomas C. Goggins is a member of the portfolio management team of John Hancock
Tax-Free Bond Fund. Mr. Goggins heads up Hancock's team of municipal bond
portfolio managers and analysts. He is also portfolio manager of John Hancock
Tax-Exempt Income Fund.
Municipal bonds reversed course during the first half of 1995 and enjoyed one of
their strongest periods of the decade. After being battered by higher interest
rates and weak demand during most of 1994, municipals turned the corner in
January. At that time, the economy appeared to be slowing and inflation was low.
As a result, investors became less worried that the Federal Reserve Board would
continue its 1994 policy of raising short-term interest rates. In addition,
demand for municipal bonds started to strengthen, bucking up against limited
supply. All in all, municipals were the top performing fixed-income category
during the first quarter.
In the second quarter, however, municipals hit a few bumps. One was talk of a
flat tax in April, which, if enacted, would eliminate the tax-free advantage
municipals now enjoy. In our view, however, it's unlikely that a flat tax will
ever be enacted and the market appears to have overreacted. Later in the
quarter, voters in Orange County, California failed to pass a tax bill intended
to help pay for the county's 1994 investment losses. These events cast a slight
"MUNICIPAL BONDS REVERSED COURSE DURING THE FIRST HALF OF 1995..."
[A 2 1/4" x 3" photo of Thomas C. Goggins at bottom right. Caption reads:
"Thomas C. Goggins, Senior Vice President."]
3
<PAGE> 4
JOHN HANCOCK FUNDS - TAX-FREE BOND FUND
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) Health Care 27%; 2) Electric Utilities 18% 3)
Transportation 13%; 4) Pollution Control 9%; 5) General Obligation Bonds 7%.
Footnote below reads: "As a percentage of net assets on June 30, 1995."]
pall over the municipal market, but not enough to eliminate its earlier gains.
A LOOK AT PERFORMANCE
For the six months ended June 30, 1995, John Hancock Tax-Free Bond Fund's Class
A and Class B shares posted returns of 10.16% and 9.85%, respectively, at net
asset value. Those returns outpaced the average general municipal bond fund's
return of 9.01% for the same period, according to Lipper Analytical Services.1
The primary reason for the Fund's outperformance was its relatively long
duration, particularly in the first quarter of the year. Duration measures a
fund's price volatility for a given change in interest rates. The longer a
fund's duration, the more sensitive its share price is to rising or falling
interest rates. When interest rates fell, the Fund's performance benefited.
Toward the end of the second quarter, however, the difference in yield
between long- and short-term bonds narrowed -- which is known as a flattening
yield curve. As a result, there was little incentive for investors to take on
the added interest-rate risk of longer-term bonds. So we started to lock in
profits by selling longer-term bonds and buying shorter-term bonds. The net
effect was a shorter duration for the Fund. Going forward, we will actively
manage duration, shortening and lengthening as market conditions warrant.
FOCUS ON SECTORS
At 27% of the Fund's assets, health-care bonds made up our largest sector
concentration. While the health-care industry has recently been faced with a
number of competitive and cost pressures, we continue to maintain holdings in
many of its bonds, mainly because of their attractive yields. Using careful
analysis and research, we're looking for hospitals with strong participation
from health maintenance organizations and low cost structures. We think that
these factors are key to picking the hospitals that will be winners in a more
competitive environment.
More recently, we've found opportunities in electric utility bonds. Many
investors shunned the bonds last year due to worries about less regulation and
increased competition. We purchased many of these bonds after they had fallen to
quite attractive levels. In our view, true competition is lot farther off than
the municipal market has taken into account. Central Maine Power and North
Carolina Eastern Municipal Power Agency were two additions to this sector.
[Table with heading "Municipal Snapshot" at top of left hand column. The header
for the left hand column is "Category"; the header for the right hand column is
"Trend...and what's driving it." The first listing is "Long Maturity Bonds"
followed by an up arrow and the phrase: "Falling interest rates in first
quarter. The second listing is "Health-Care Bonds" followed by a down arrow and
the phrase "Competition and cost pressure." The third listing is "Technical
Conditions" followed by an up arrow and the phrase "Decreased bond supply;
constant demand." A footnote below reads: "See "Schedule of Investments."
Investment holdings are subject to change."]
"...WE'VE FOUND OPPORTUNITIES IN ELECTRIC UTILITY BONDS..."
4
<PAGE> 5
JOHN HANCOCK FUNDS - TAX-FREE BOND FUND
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the six months ended June 30, 1995." The chart is
scaled in increments of 4% from bottom to top, with 12% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
10.16% total return for John Hancock Tax-Free Bond Fund: Class A. The second
represents the 9.85% total return for John Hancock Tax-Free Bond Fund: Class B.
The third represents the 9.01% total return of the average general municipal
bond fund. A footnote below states: "Total returns for John Hancock Tax-Free
Bond Fund are at net asset value with all distributions reinvested. The average
general municipal bond fund is tracked by Lipper Analytical Services. See
following page for historical performance information."]
OUTLOOK
Continued debate about various tax reform proposals could add volatility to the
municipal market in the months to come. But as we mentioned earlier, we don't
believe that the flat tax proposal -- the one which would most negatively impact
municipal bonds -- is likely to be enacted.
Looking forward, we remain optimistic about the municipal bond market. One
reason is the long-term trend toward a diminished supply of municipal bonds.
That's because municipalities aren't planning as many capital projects as voters
become more reluctant to pay for them with higher taxes. What's more, many of
the municipalities that could refinance their borrowings of the high-flying `80s
at lower rates have already done so. Let's take a look at the numbers. In 1993,
municipal bond supply stood at $292 billion. By 1994, supply had fallen off by
about half the previous year's level and it's expected to be about $120 billion
by the end of 1995. Decreasing supply and constant demand should be a positive
for the municipal bond market. In addition, municipal bonds continue to offer a
relatively attractive after-tax yield, which may attract new investors.
In our view, the U.S. economy is growing slowly but steadily. It's not in any
real danger of overheating or dipping into a recession. Therefore, we believe
that inflation will stay low and interest rates will stabilize. Against that
backdrop, most of municipal bond performance will probably come from income
rather than big price gains. So we'll continue to look for opportunities to
improve and enhance the Fund's yield.
--------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
A portion of The Fund's income may be subject to taxes. Some investors may be
subject to the Alterntive Minimum Tax. Capital gains are taxable.
"Decreasing supply and constant demand should be a positive..."
5
<PAGE> 6
--------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
--------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for John Hancock Tax-Free Bond Fund. Total return is a performance
measure that equals the sum of all income and capital gains dividends, assuming
reinvestment of these distributions, and the change in the price of the fund's
shares, expressed as a percentage of the fund's share. Performance figures
include the maximum applicable sales charge of 4.5% for Class A shares. The
effect of the maximum contingent deferred sales charge for Class B shares
(maximum 5% and declining to 0% over six years) is included in Class B
performance. Remember that all figures represent past performance and are no
guarantee of how the Fund will perform in the future. Also, keep in mind that
the total return and share price of the Fund's investments will fluctuate. As a
result, your Fund's shares may be worth more or less than their original cost
depending on when you sell them.
Note: Participant-directed defined-contribution plans with at least 100 eligible
employees at inception of the Fund account may purchase Class A shares without
an initial sales charge as of March 15, 1995. If those shares are redeemed,
however, during the year following the calendar year end during which they were
purchased, a contingent deferred sales charge will be assessed.
<TABLE>
--------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
--------------------------------------------------------------------------------
FOR THE PERIOD ENDED JUNE 30, 1995
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS(1) FUND(1)
---- -------- -------
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A(2) 1.95% 43.87% 48.46%
Tax-Free Bond Fund: Class B(2) 0.94% N/A 24.38%
</TABLE>
<TABLE>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
FOR THE PERIOD ENDED JUNE 30, 1995
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS(1) FUND(1)
---- -------- -------
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A(2) 1.95% 7.55% 7.47%
Tax-Free Bond Fund: Class B(2) 0.94% N/A 5.69%
</TABLE>
<TABLE>
--------------------------------------------------------------------------------
YIELDS
--------------------------------------------------------------------------------
AS OF JUNE 30, 1995
<CAPTION>
SEC 30-DAY
YIELD
----------
<S> <C>
Tax-Free Bond Fund: Class A 5.90%
Tax-Free Bond Fund: Class B 5.41%
<FN>
NOTES TO PERFORMANCE
(1) Class A shares started on January 5, 1990. Class B shares started on
December 31, 1991.
(2) Performance is affected by a 12b-1 plan.
</TABLE>
6
<PAGE> 7
WHAT HAPPENED TO A $10,000 INVESTMENT . . .
The charts on the right show how much a $10,000 investment in John Hancock
Tax-Free Bond Fund would be worth on June 30, 1995, assuming you have been
invested since the day each class of shares started or for the most recent ten
years and have reinvested all distributions. For comparison, we've shown the
same $10,000 investment in the Lehman Brothers Municipal Bond Index -- an
unmanaged index that mirrors the investment objectives and characteristics of
the Fund.
John Hancock Tax-Free Bond Fund
Class A shares
[Line chart with the heading John Hancock Tax-Free Bond Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the John Hancock Tax-Free Bond Fund on January 5, 1990, before sales charge,
and is equal to $15,544 as of June 30, 1995. The second line represents the
value of the Lehman Brothers Municipal Bond Index and is equal to $15,285 as of
June 30, 1995. The third line represents the John Hancock Tax-Free Bond Fund
after sales charge and is equal to $14,846 as of June 30, 1995.]
John Hancock Tax-Free Bond Fund
Class B shares
[Line chart with the heading John Hancock Tax-Free Bond Fund: Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $12,704 as of June 30, 1995. The second line represents the
value of the hypothetical $10,000 investment made in the John Hancock Tax-Free
Bond Fund on December 29, 1991, before contingent deferred sales charge, and is
equal to $12,438 as of June 30, 1995. The third line represents the John Hancock
Tax-Free Bond Fund after contingent deferred sales charge and is equal to
$12,138 as of June 30, 1995.]
7
<PAGE> 8
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond 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 JUNE 30, 1995. YOU'LL ALSO
FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds
(cost - $182,202,869) ................................................. $ 184,073,476
-------------
Segregated assets for financial futures contracts ......................... 360,000
Receivable for investments sold ........................................... 10,077,215
Receivable for shares sold ................................................ 111,632
Interest receivable ....................................................... 3,408,718
Receivable from John Hancock Advisers, Inc. - Note B ...................... 51,481
Miscellaneous assets ...................................................... 60,206
-------------
Total Assets ........................................... 198,142,728
------------------------------------------------------------------------
LIABILITIES:
Temporary overdraft of cash ............................................... 2,343,906
Payable for investments purchased ......................................... 5,278,455
Payable for shares repurchased ............................................ 209,015
Dividend payable .......................................................... 28,718
Payable for variation margin .............................................. 71,287
Payable to John Hancock Advisers, Inc. ....................................
and affiliates - Note B ................................................. 91,441
Accounts payable and accrued expenses ..................................... 8,946
-------------
Total Liabilities ...................................... 8,031,768
------------------------------------------------------------------------
NET ASSETS:
Capital paid-in ........................................................... 200,733,478
Accumulated net realized loss on investments
and financial futures contracts ......................................... (12,483,853)
Net unrealized appreciation of investments
and financial futures contracts ......................................... 1,825,607
Undistributed net investment income ....................................... 35,728
-------------
Net Assets ............................................. $ 190,110,960
========================================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial interest outstanding -
unlimited number of shares authorized with $0.01 per share par value,
respectively)
Class A - $116,423,598/11,580,285 ......................................... $ 10.05
===========================================================================================
Class B - $73,687,362/7,328,960 ........................................... $ 10.05
===========================================================================================
Maximum Offering Price Per Share*
Class A - ($10.05 x 104.71%) .............................................. $ 10.52
===========================================================================================
<FN>
* 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.
</TABLE>
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.
<TABLE>
STATEMENT OF OPERATIONS
Six months ended June 30, 1995 (Unaudited)
----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest ......................................... $ 6,342,660
------------
Expenses:
Investment management fee - Note B ............. 522,646
Distribution/service fee - Note B
Class A ....................................... 87,675
Class B ....................................... 329,191
Transfer agent fee ............................. 111,371
Custodian fee .................................. 18,545
Registration and filing fees ................... 31,578
Auditing fee ................................... 24,417
Printing ....................................... 21,607
Trustees' fees ................................. 12,777
Miscellaneous .................................. 16,360
Legal fees ..................................... 14,497
Advisory board fee ............................. 8,628
------------
Total Expenses ................ 1,199,292
--------------------------------------------------
Less expenses reimbursable
by John Hancock Advisers,
Inc. - Note B ................. (109,422)
------------
Net Expenses .................. 1,089,870
--------------------------------------------------
Net Investment Income ......... 5,252,790
--------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FINANCIAL FUTURES CONTRACTS
Net realized loss on investments sold ............ (3,635,985)
Net realized loss on financial futures contracts . (1,558,862)
Change in net unrealized appreciation/depreciation
of investments ................................. 18,312,579
Change in net unrealized appreciation/depreciation
on financial futures contracts ................. (45,000)
------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ... 13,072,732
--------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ..... $ 18,325,522
==================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 9
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31,
(UNAUDITED) 1994
---------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income ................................................. $ 5,252,790 $ 11,284,980
Net realized loss on investments sold and financial futures contracts.. (5,194,847) (7,349,795)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts .......................................... 18,267,579 (25,666,689)
------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations ..... 18,325,522 (21,731,504)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A - ($0.2892 and $0.5730 per share, respectively) ............. (3,440,962) (7,588,474)
Class B - ($0.2501 and $0.4973 per share, respectively) ............. (1,861,096) (3,611,510)
------------- -------------
Total Distributions to Shareholders ................................ (5,302,058) (11,199,984)
------------- -------------
FROM FUND SHARE TRANSACTIONS-- NET* .................................... (7,694,146) 24,808,198
------------- -------------
NET ASSETS:
Beginning of period ................................................... 184,781,642 192,904,932
------------- -------------
End of period (including undistributed net investment income of $35,728
and $84,996, respectively) ........................................... $ 190,110,960 $ 184,781,642
============= =============
</TABLE>
<TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1995
(UNAUDITED) YEAR ENDED DECEMBER 31, 1994
------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold................................................... 526,772 $ 5,271,674 2,973,332 $ 31,232,536
Shares issued to shareholders in reinvestment of
distributions................................................ 191,095 1,912,095 430,837 4,303,072
---------- ------------ ---------- ------------
717,867 7,183,769 3,404,169 35,535,608
Less shares repurchased....................................... (1,341,039) (13,342,016) (3,655,146) (36,242,204)
---------- ------------ ---------- ------------
Net decrease.................................................. (623,172) $ (6,158,247) (250,977) $ (706,596)
========== ============ ========== ============
CLASS B
Shares sold................................................... 405,420 $ 4,022,520 3,736,809 $ 39,155,237
Shares issued to shareholders in reinvestment of
distributions................................................ 104,621 1,046,617 212,691 2,116,235
---------- ------------ ---------- ------------
510,041 5,069,137 3,949,500 41,271,472
Less shares repurchased....................................... (666,407) (6,605,036) (1,608,678) (15,756,678)
---------- ------------ ---------- ------------
Net increase (decrease)....................................... (156,366) $ (1,535,899) 2,340,822 $ 25,514,794
========== ============ ========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios, and supplemental data are as
follows:
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIOD
JANUARY 5,
1990
SIX MONTHS (COMMENCEMENT
ENDED OF OPERATIONS)
JUNE 30, YEAR ENDED DECEMBER 31, TO
1995 ------------------------------------------- DECEMBER 31,
(UNAUDITED) 1994(e) 1993 1992 1991 1990
------------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ................. $ 9.39 $ 10.96 $ 10.47 $ 10.24 $ 9.90 $ 10.00(b)
-------- -------- -------- ------- ------- -------
Net Investment Income ................................ 0.29 0.58 0.62 0.67 0.69 0.71
Net Realized and Unrealized Gain (Loss) on
Investments.......................................... 0.66 (1.58) 0.93 0.42 0.72 (0.13)
-------- -------- -------- ------- ------- -------
Total from Investment Operations ................... 0.95 (1.00) 1.55 1.09 1.41 0.58
-------- -------- -------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ................. (0.29) (0.57) (0.62) (0.68) (0.68) (0.68)
Distributions from Net Realized Gains on
Investments Sold .................................... -- -- (0.44) (0.18) (0.39) --
-------- -------- -------- ------- ------- -------
Total Distributions ................................ (0.29) (0.57) (1.06) (0.86) (1.07) (0.68)
-------- -------- -------- ------- ------- -------
Net Asset Value, End of Period ....................... $ 10.05 $ 9.39 $ 10.96 $ 10.47 $ 10.24 $ 9.90
======== ======== ======== ======= ======= =======
Total Investment Return at Net Asset Value ........... 10.16%(c) (9.28%) 15.15% 10.97% 14.78% 6.04%(c)
Total Adjusted Investment Return at Net Asset
Value (a) .......................................... 10.04%(c) (9.39%) 14.98% 10.67% 14.40% 5.18%(c)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ............ $116,424 $114,539 $136,521 $99,523 $73,393 $45,437
Ratio of Expenses to Average Net Assets .............. 0.85%* 0.85% 0.78% 0.66% 0.60% 0.40%*
Ratio of Adjusted Expenses to Average Net Assets (a).. 0.97%* 0.96% 0.95% 0.96% 0.98% 1.26%*
Ratio of Net Investment Income to Average Net Assets.. 5.82%* 5.72% 5.57% 6.46% 6.86% 7.17%*
Ratio of Adjusted Net Investment Income
to Average Net Assets (a) .......................... 5.70%* 5.61% 5.40% 6.16% 6.48% 6.31%*
Portfolio Turnover Rate .............................. 41% 107% 116% 79% 123% 64%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: NET INVESTMENT INCOME, GAINS (LOSSES),
DIVIDENDS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET
ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD.
ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE
FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 11
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1995 -------------------------------
(UNAUDITED) 1994(e) 1993 1992
------------- ------- ------- -------
<S> <C> <C> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period.......................................... $ 9.38 $ 10.96 $ 10.47 $ 10.24
------- ------- ------- -------
Net Investment Income......................................................... 0.25 0.50 0.54 0.59(d)
Net Realized and Unrealized Gain (Loss) on Investments........................ 0.67 (1.58) 0.93 0.42
------- ------- ------- -------
Total from Investment Operations............................................ 0.92 (1.08) 1.47 1.01
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income.......................................... (0.25) (0.50) (0.54) (0.60)
Distributions from Net Realized Gains on Investments Sold..................... -- -- (0.44) (0.18)
------- ------- ------- -------
Total Distributions......................................................... (0.25) (0.50) (0.98) (0.78)
------- ------- ------- -------
Net Asset Value, End of Period................................................ $ 10.05 $ 9.38 $ 10.96 $ 10.47
======= ======= ======= =======
Total Investment Return at Net Asset Value.................................... 9.85%(c) (10.05%) 14.30% 10.15%
Total Adjusted Investment Return at Net Asset Value (a)....................... 9.73%(c) (10.16%) 14.13% 9.85%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)..................................... $73,687 $70,243 $56,384 $18,272
Ratio of Expenses to Average Net Assets....................................... 1.60%* 1.60% 1.53% 1.43%
Ratio of Adjusted Expenses to Average Net Assets (a).......................... 1.72%* 1.71% 1.70% 1.73%
Ratio of Net Investment Income to Average Net Assets.......................... 5.06%* 4.97% 4.66% 5.57%
Ratio of Adjusted Net Investment Income to Average Net Assets (a)............. 4.94%* 4.86% 4.49% 5.27%
Portfolio Turnover Rate....................................................... 41% 107% 116% 79%
<FN>
* On an annualized basis.
(a) On an unreimbursed basis.
(b) Initial price to commence operations.
(c) Not annualized.
(d) On average month end shares outstanding.
(e) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
SCHEDULE OF INVESTMENTS
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
TAX-FREE BOND FUND ON JUNE 30, 1995. IT HAS ONE MAIN CATEGORY: TAX-EXEMPT
LONG-TERM BONDS. THE TAX-EXEMPT LONG-TERM BONDS ARE BROKEN DOWN BY STATE. UNDER
EACH STATE IS A LIST OF THE SECURITIES OWNED BY THE FUND.
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
-------------------------- -------- -------- ------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA (0.51%)
Moundville Industrial Development Board,
Ind'l Rev Ref Ser LI Lawter Inc Proj.................... 6.750% 12/01/11 NR $ 1,000 $ 963,480 7.01%
-----------
ARIZONA (1.20%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj............. 8.200 06/01/21 BBB 2,150 2,276,742 7.74
-----------
CALIFORNIA (12.34%)
California Statewide Community Development Auth,
Rev Ref Cert of Part Triad Healthcare Hosp.............. 6.500 08/01/22 A 2,750 2,694,890 6.63
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc....... 5.875 05/01/20 A *4,000 3,712,000 6.33
Rev Cert of Part Sutter Hlth Oblig Group**.............. 5.500 08/15/22 AAA *2,000 1,811,720 6.07
Duarte, City of,
Cert of Part City of Hope National Medical Center....... 6.250 04/01/23 BAA1*** 4,060 3,693,463 6.87
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center.. 8.400 04/01/15 NR 500 500,000 8.40
Foothill/Eastern Transportation Corridor Agency,
Calif Toll Rd Rev Cap Apprec Sr Lien Ser A.............. Zero 01/01/20 BBB- *16,000 2,827,520 -
Metropolitan Water District,
Southern Calif Waterworks Rev Ser A**................... 5.500 07/01/25 AAA *1,000 925,740 5.94
Modesto, County of,
Cert of Part Ser B Golf Course Ref Proj................. 5.000 11/01/23 AAA *1,065 909,116 5.86
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A........ 7.750 09/01/16 NR 2,000 2,019,100 7.68
San Bernardino, County of,
Cert of Part Medical Center Fin Proj.................... 5.500 08/01/17 A- 5,000 4,364,900 6.30
-----------
23,458,449
-----------
COLORADO (2.83%)
Denver, City and County of,
Airport Sys Rev Ser 1992A............................... 7.250 11/15/25 BB 2,000 2,108,160 6.88
Airport Sys Rev Ser 1994A............................... 7.500 11/15/23 BB 3,100 3,277,196 7.09
-----------
5,385,356
-----------
FLORIDA (10.08%)
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A.................................... 5.250 10/01/28 AA 9,000 7,961,310 5.93
Lee, County of,
Trans Facil Ser 1995.................................... 5.750 10/01/27 AAA *5,000 4,767,350 6.03
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 13
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
-------------------------- -------- -------- ------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA (CONTINUED)
Orange County Health Facilities Auth,
Rev Adventist Hlth Sys Hosp.............................. 5.250% 11/15/20 AAA $*5,000 $ 4,472,250 5.87%
Palm Beach, County of,
Solid Waste Ind'l Dev Ser 1994A Osceola Pwr Lp Proj...... 6.950 01/01/22 NR *2,000 1,958,540 7.10
-----------
19,159,450
-----------
GEORGIA (10.06%)
Georgia Municipal Electric Auth,
Pwr Rev Ser C............................................ 5.700 01/01/19 AAA 5,000 4,812,200 5.92
Pwr Rev Ser EE........................................... 7.250 01/01/24 AAA 2,000 2,342,460 6.19
Pwr Rev Ser Z............................................ 5.500 01/01/20 AAA 5,840 5,467,583 5.87
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj.. 6.800 01/01/12 A+ 1,000 1,077,610 6.31
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj.......................... 7.000 01/01/23 BBB+ 5,470 5,423,724 7.06
-----------
19,123,577
-----------
ILLINOIS (7.32%)
Chicago, City of,
Skyway Toll Bridge Rev Ref Ser 1994...................... 6.750 01/01/17 BBB- 2,000 2,004,440 6.74
Illinois Development Finance Auth,
Rev Ref Ser A Columbus Cuneo Cabrini Proj................ 8.500 02/01/15 BBB+ 2,150 2,309,358 7.91
Illinois Educational Facilities Auth,
Rev Columbia College..................................... 6.875 12/01/17 BBB 1,300 1,308,385 6.83
Rev Columbia College..................................... 6.125 12/01/18 BBB 3,065 2,767,818 6.78
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg......................... 6.750 12/01/08 NR 1,640 1,686,461 6.56
Rev Ref Lutheran Social Services......................... 6.125 08/15/20 NR 4,565 3,832,181 7.30
-----------
13,908,643
-----------
INDIANA (1.31%)
Indiana Development Finance Auth,
Poll Control Rev Ref Inland Steel Co Proj No. 12......... 6.850 12/01/12 BB- *2,500 2,490,625 6.88
-----------
LOUISIANA (1.05%)
West Feliciana, Parish of,
Variable Rate Demand Poll Control Rev Ser 1985C
Gulf States Util Co Proj................................ 7.000 11/01/15 BB+ 2,000 2,004,100 6.99
-----------
MASSACHUSETTS (3.38%)
Massachusetts, State of,
Ref 1995 Ser A........................................... 5.000 07/01/11 AAA *4,000 3,688,840 5.42
Ref 1995 Ser A........................................... 5.000 07/01/12 AAA *3,000 2,745,750 5.46
-----------
6,434,590
-----------
MICHIGAN (3.10%)
Michigan State Hospital Financing Auth,
Rev Ref 1990 Ser A Bay Medical Center Hosp............... 8.250 07/01/12 BAA1*** 2,250 2,394,990 7.75
Rev Rev 1993 Ser A Detroit Medical Center Oblig Group.... 6.500 08/15/18 A 3,500 3,504,760 6.49
-----------
5,899,750
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 14
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
-------------------------- -------- -------- ------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
MISSISSIPPI (2.69%)
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj....... 7.000% 04/01/22 BAA3*** $ 5,000 $ 5,109,100 6.85%
-----------
NEVADA (5.02%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj........ 6.500 12/01/33 BBB- 10,000 9,539,700 6.81
-----------
NEW HAMPSHIRE (1.99%)
New Hampshire Higher Educational and Health Facilities Auth,
Hosp Rev Wentworth Douglass Hosp........................... 5.375 01/01/15 AAA 1,300 1,197,495 5.84
New Hampshire Industrial Development Auth,
Rev Ref Poll Control Central Maine Pwr..................... 7.375 05/01/14 BB *7,500 2,593,875 7.11
-----------
3,791,370
-----------
NEW JERSEY (1.30%)
New Jersey Economic Development Auth,
Rev Ref Ser J Holt Hauling Proj............................ 8.500 11/01/23 NR *2,500 2,480,950 8.57
-----------
NORTH CAROLINA (0.98%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1993B.................................. 6.000 01/01/22 A- 2,000 1,855,400 6.47
-----------
OHIO (2.29%)
Lorain County Hospital,
Ref EMH Regional Medical Center............................ 5.375 11/01/21 AAA *3,000 2,734,620 5.90
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan................. 8.875 08/01/08 NR 1,420 1,612,108 8.40
-----------
4,346,728
-----------
PENNSYLVANIA (9.74%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj.......... 6.700 12/01/20 BB+ 5,000 5,014,900 6.68
Cumberland County Municipal Auth,
Rev 1st Mtg Carlisle Hosp & Hlth Proj...................... 6.800 11/15/14 BBB- 3,000 2,949,000 6.92
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj...... 8.625 07/01/21 NR 2,700 2,769,498 8.41
Hosp Rev 1992 Ser A Childrens Seashore House Proj.......... 7.000 08/15/12 A- 1,250 1,283,737 6.82
Philadelphia, City of,
Wtr & Swr Rev Sixteenth Ser................................ 7.500 08/01/10 BBB 3,000 3,461,010 6.50
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj......... 7.600 07/15/20 NR 3,000 3,040,050 7.50
-----------
18,518,195
-----------
SOUTH CAROLINA (2.38%)
Piedmont Municipal Power Agency,
Ref South Carolina Elec Sys................................ 5.375 01/01/25 AAA *5,000 4,525,550 5.94
-----------
TEXAS (10.81%)
Dallas-Fort Worth International Airport Facility Improvement
Corp, Rev American Airlines Inc............................ 7.250 11/01/30 BB+ 10,250 10,563,548 7.03
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 15
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
-------------------------- -------- -------- ------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
TEXAS (CONTINUED)
Ector County Hospital District,
Hosp Rev 1992........................................... 7.300% 04/15/12 BBB+ $ 4,000 $ 4,208,480 6.94%
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj................... 7.750 03/01/12 B 1,410 1,420,801 7.69
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp
Proj.................................................... 6.625 02/01/24 BBB+ 1,000 1,008,890 6.57
Sam Rayburn Municipal Power Agency,
Rev Ref Ser A........................................... 6.250 10/01/17 BB 4,100 3,359,007 7.63
------------
20,560,726
------------
UTAH (0.91%)
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon
Development Corp....................................... 9.000 07/01/12 NR 1,000 1,047,960 8.59
Davis, County of,
Rev Ref Solid Waste Mgt & Recovery Spec Service
District................................................ 6.125 06/15/09 BBB+ 725 686,908 6.46
------------
1,734,868
------------
VIRGINIA (3.64%)
Norfolk, City of,
Wtr Rev 1993............................................ 5.375 11/01/23 AAA *2,500 2,281,800 5.89
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil.................................. 7.550 01/01/19 NR 4,500 4,632,390 7.33
------------
6,914,190
------------
WASHINGTON (0.74%)
Public Industrial Corp of Port Camas,
Washougal Washington Poll Control Rev Ref James River
Proj.................................................... 6.700 04/01/23 BBB- *1,450 1,412,387 6.88
------------
WISCONSIN (1.15%)
Wisconsin Health and Educational Facilities Auth,
Rev St Claire Hosp Proj................................. 7.000 02/15/22 NR 2,115 2,179,550 6.79
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $182,202,869) (96.82%) $184,073,476
====== ============
<FN>
NOTES TO THE SCHEDULE OF INVESTMENTS
* Securities, other than short term investments, newly added to the portfolio,
during the six months ended June 30, 1995.
** These securities, having an aggregate value of $2,737,460 or 1.44% of the
Fund's net asset value, have been purchased as forward commitments -- that
is, the Fund has agreed, on trade date, to take delivery of and make payment
for such securities on a delayed basis subsequent to the date of this
schedule. The purchase price and interest rate of such securities is fixed
at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian Bank
to segregate assets with a current value at least equal to the amount of its
forward commitment. Accordingly, the market value of $995,562 of Carbon,
County of, Solid Waste Disposal Rev Ref Ser A East Carbon Development Corp.,
9.000%, 07-01-12, and the market value of $2,104,240 of Ector County
Hospital District, Hosp Rev 1992, 7.300%, 04-15-12, has been segregated to
cover the forward commitments.
*** Credit ratings are rated by Moody's Investors Services or John Hancock
Advisers, Inc. where Standard and Poor's ratings are not available. NR not
rated.
+ The yield is not calculated with guidelines established by the U.S.
Securities Exchange Commission and is unaudited.
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage fo the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 16
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PORTFOLIO CONCENTRATION (Unaudited)
--------------------------------------------------------------------------------
THE TAX-FREE BOND FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE VARIOUS
STATES AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF THE FUND IS
CLOSELY TIED TO ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATES AND THE
FINANCIAL CONDITION OF THE STATES AND THEIR 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.
<TABLE>
THE TABLE BELOW SHOWS THE PERCENTAGES OF THE FUND'S INVESTMENTS AT JUNE 30, 1995
ASSIGNED TO THE VARIOUS SECTOR CATEGORIES.
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
------------------- ----------------------
<S> <C>
General Obligation.......................................................................... 7.31%
Revenue Bonds - Certificate of Participation................................................ 5.79
Revenue Bonds - Education................................................................... 4.05
Revenue Bonds - Electric Power.............................................................. 18.28
Revenue Bonds - Health Care................................................................. 26.51
Revenue Bonds - Industrial Development Bond................................................. 5.11
Revenue Bonds - Other....................................................................... 3.65
Revenue Bonds - Pollution Control Facilities................................................ 8.62
Revenue Bonds - Transportation.............................................................. 13.44
Revenue Bonds - Water & Sewer............................................................... 4.06
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 96.82%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Free Bond Fund (the "Fund") is a diversified open-end
investment management company registered under the Investment Company Act of
1940.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemption, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under the terms of a distribution
plan, have exclusive voting rights regarding such distribution plan. Class A
shares are subject to an initial sales charge of up to 4.50% and a 12b-1
distribution plan. Prior to May 15, 1995, the maximum sales charge was 4.75%.
Class B shares are subject to a contingent deferred sales charge and a separate
12b-1 distribution plan. Significant accounting policies of the Fund are as
follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has approximately $7,350,000
of capital loss carryforward available, to the extent provided by regulations,
to offset future net realized capital gains. If such carryforward is used by the
Fund, no capital gain distribution will be made. The carryforward expires
December 31, 2002.
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 as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees, if any, are calculated daily at the class level based
on the appropriate net assets of each class and the specific expense rate(s)
applicable of each class.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates and other market conditions. At the time the Fund
enters into a financial futures contract, it is
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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 of the board of
trade or U.S. commodities exchange. Subsequent payments, known as "variation
margin", to and from the broker are made on a daily basis as the market price of
the financial futures contract fluctuates. Daily variation margin adjustments,
arising from this "mark to market", are 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 contract 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
fluctuations imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures transactions.
<TABLE>
At June 30, 1995, open positions in financial futures contracts were as
follows:
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
---------- -------------- -------- ------------
<S> <C> <C> <C>
SEPTEMBER 1995 180 US TREASURY NOTES SHORT (45,000)
======
</TABLE>
At June 30, 1995, the Fund has deposited in a segregated account $360,000 to
cover margin requirements on open financial futures contracts.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the time of disposition.
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 at an annual
rate of 0.55% of the Fund's average daily net asset value.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the 12b-1 fee), to 0.70% of the Fund's average daily net
assets. Accordingly, the reduction in the Adviser's fee amounted to $109,422 for
the period ended June 30, 1995. The adviser reserves the right to terminate this
limitation in the future.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended June 30,
1995, JH Funds received net sales charges on sales of Class A shares of the Fund
in the amount of $76,264. Out of this amount, $8,188 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $65,719
was paid as sales commissions and service fees to unrelated broker-dealers and
$2,357 was paid as sales commissions and service fees to sales personnel of John
Hancock Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated
("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"). Distributors is a
wholly-owned
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
subsidiary of John Hancock Funds. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company, is the indirect sole shareholder of Distributors
and John Hancock Freedom Securities Corporation and its subsidiaries, which
include Tucker Anthony and Sutro, all of which are broker-dealers.
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 CDSC are paid to JH Funds and are used in whole or in part to defray its
expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended June 30, 1995,
contingent deferred sales charges received by Broker Services amounted to
$131,568.
In addition, to compensate JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses at an annual rate not to exceed
0.15% of Class A average daily net assets and 0.90% of Class B average daily net
assets to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.15% of these payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Board of Trustees approved a shareholder servicing agreement between the
Fund and John Hancock Investor Services Corporation ("Investor Services"), a
wholly-owned subsidiary of The Berkeley Financial Group, for the period between
December 22, 1994 and May 12, 1995, inclusive under which Investor Services
processed telephone transactions on behalf of the Fund. As of May 15, 1995, the
Fund entered into a full service transfer agent agreement with Investor
Services. Prior to this date The Shareholder Services Group was the transfer
agent. The Fund pays Investor Services a fee based on the number of shareholder
accounts and certain out-of-pocket expenses.
Messrs. Edward J. Boudreau, Jr. and 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. Effective with
the fees paid for 1995, the unaffiliated Trustees may elect to defer for tax
purposes their receipt of this compensation under the John Hancock Group of
Funds Deferred Compensation Plan. The Fund will make investments into other John
Hancock funds, as applicable, to cover its liability with regard to the deferred
compensation. Investments to cover the Fund's deferred compensation liability
will be recorded on the Fund's books as an other asset. The deferred
compensation liability will be marked to market on a periodic basis and income
earned by the investment will be recorded on the Fund's books.
The Fund has an independent advisory board composed of certain members of the
former Transamerica Board of Trustees who provide advice to the current Trustees
in order to facilitate a smooth management transition for which the Fund pays
the advisory board and its counsel a fee.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended June 30, 1995, aggregated $73,349,343 and $85,932,982, respectively. There
were no purchases or sales of long-term obligations of the U.S. government and
its agencies during the period ended June 30, 1995.
The cost of investments owned at June 30, 1995 for Federal income tax
purposes was $182,202,869. Gross unrealized appreciation and depreciation of
investments aggregated $4,731,695 and $2,861,088, respectively, resulting in net
unrealized appreciation of $1,870,607.
19
<PAGE> 20
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A GLOBAL INVESTMENT MANAGEMENT FIRM U.S. Postage
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603 PAID
Brockton, MA
Permit No. 582
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
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This report is for the information of shareholders of the John Hancock
Tax-Free Bond Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
JHD 5205A 6/95
