================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
Tax-Free
Bond
Fund
SEMI-ANNUAL REPORT
June 30, 1996
<PAGE>
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TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
ANNE C. HODSDON
CHARLES L. LADNER*
LEO E. LINBECK*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & 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:
Since late 1994, prospectus simplification has been a major topic in the
mutual fund industry. At that time, Securities and Exchange Commission Chairman
Arthur Levitt called on fund companies to make their prospectuses more
user-friendly. He noted that prospectuses are often overloaded with technical
detail and are hard for most investors to understand. Many industry observers
agreed, and rightly so.
So it is my pleasure to let you know that John Hancock Funds has introduced
the first in a series of new prospectuses. Covering the John Hancock growth
funds, the new prospectus made its debut on July 1 after being under development
for a year. It is simplified, using shorter, clearer language with a streamlined
design, and consolidated, incorporating several funds with similar investment
objectives into one document. We are excited about our new prospectus because we
believe it is a bold but sensible step forward. And while it is easier to read,
it still complies with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page spread
highlighting each fund's goals and investment strategy, the types of securities
it buys, its portfolio management and risk factors, all in plainer language.
Fund expenses and financial highlights are now found here, too, as is a new bar
chart that shows year-to-year volatility for each fund. Other features include a
better presentation of fund services, a new glossary of investment risks and a
discussion about how funds are organized, including a diagram showing the
connection of the various players that provide services to your Hancock fund(s).
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
In the coming months, we will introduce similar prospectuses for our growth
and income, income, tax-free income, international/global and money market
funds. We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in the end, we
did it for you, our shareholders.
Sincerely,
/S/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
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BY THOMAS C. GOGGINS, PORTFOLIO MANAGER
John Hancock
Tax-Free Bond Fund
Inflationary fears cause bond market to stumble in first
half of 1996; munis outperform Treasuries
In the spring, shareholders of John Hancock Tax-Exempt Income Fund approved the
merger of their fund with John Hancock Tax-Free Bond Fund. The merger was
effective May 3, 1996.
After enjoying impressive returns in 1995, bonds faltered in the first half of
1996 at the hands of increasing inflation worries. With enough evidence of a
healthier-than-expected economy, bond prices fell and yields went higher.
Inflation, of course, is the bogeyman for bond holders since it can eat away at
the value of their bond holdings.
Despite the pressure on the bond market, municipals performed well compared
to Treasuries. Having spent most of 1995 lagging the returns of Treasuries
because of worries over various flat-tax proposals, municipals entered 1996 with
cheap prices relative to Treasuries. As those flat-tax fears waned and investors
recognized the value in municipals, they began to outperform Treasuries. In
addition, positive supply/demand factors helped the municipal market. The total
outstanding supply of municipals shrunk while demand rose as municipal yields
topped the 6% level.
A look at performance
The specter of inflation hovering over the bond market affected all municipal
bond funds. For the six months ended June 30, 1996, the Fund's Class A and Class
B shares posted total returns of -1.27% and -1.63%, respectively, at net asset
value. For the same six-month period, the average general municipal bond fund
returned
"... bonds
faltered in
the first half
of 1996..."
[A 2 1/4" x 3" photo of the Fund management team at bottom right. Caption reads:
"Thomas C. Goggins (seated) and Fund management team members Frank Lucibella and
Dianne Sales-Singer".]
<PAGE>
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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) Transportation 22%; 2) Electric Utilities 17%; 3) Health
17%; 4) Pollution Control 15%; 5) Industrial Revenue 8%. Footnote below reads:
"As a percentage of net assets on June 30, 1996."]
- --------------------------------------------------------------------------------
"...we sought
to provide
the Fund
with a higher
and more
stable level
of income."
- -1.38%, according to Lipper Analytical Services.(1) Please see pages six
and seven for longer-term Fund performance information.
Strategy
Beginning in February when the bond market reacted negatively to the news that
the economy had created 700,000 new jobs (a fact that investors feared would
ignite inflation), the bond market became much more volatile than it had been
last year. As a result of this volatility, we became more cautious. We did this
by shortening the Fund's duration. Duration measures how sensitive a bond's
price (and therefore the Fund's share price) is to changes in interest rates.
The longer the duration the more sensitive; the shorter, the less sensitive. As
interest rates rose, the Fund's lessened interest-rate sensitivity -- or shorter
duration -- made it less susceptible to rising interest rates and declining bond
prices.
[Table with heading "Scorecard" at bottom 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 "California Bonds"
followed by an up arrow and the phrase: "Improving state economy." The second
listing is "Airline bonds" followed by a flat arrow and the phrase "Cost
cutting, increased capacity." The third listing is "Long-term bonds" followed by
a down arrow and the phrase "High interest-rate sensitivity hurts returns." A
footnote below reads: "See "Schedule of Investments." Investment holdings are
subject to change."]
Boosting and stabilizing income
The total return of a bond fund is made up of two components: the income it
receives from its holdings and the price appreciation -- or depreciation -- of
those holdings. As a way to offset declining bond prices, we sought to provide
the Fund with a higher and more stable level of income.
One way we boosted income was to buy higher-quality securities. That may
sound counter-intuitive since generally speaking, lower-quality bonds offer
higher yields than higher-quality bonds. However, the demand for municipals was
fairly strong over the past six months, and credit spreads (or the difference in
yields between low- and high-quality bonds) remained quite narrow, or small.
That meant that investors were getting very little additional yield for buying
lower-quality bonds. Because yields were rising during the period, we were able
to sell some of our older, lower-rated bonds at a time when current yields on
AAA-rated and insured bonds exceeded the yields offered by those older bonds. In
effect, the exchange of lower-quality for higher-quality bonds allowed us to
increase the Fund's distribution yields -- the amounts of income paid to
shareholders -- and improve its overall credit quality. That type of opportunity
is pretty rare.
To further boost income, we selectively added some lower-quality
industrial development bonds which are issued by a municipality on behalf of a
private entity. For example, we bought a bond from Maury County, Tennessee for
General Motor's Saturn plant. However, with the market so volatile, we avoided
putting too much emphasis on any one lower-rated security.
4
<PAGE>
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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, 1996." The chart is
scaled in increments of 1% from bottom to top, with 0% at the top and -2% at the
bottom. Within the chart there are three solid bars. The first represents the
- -1.27% total return for John Hancock Tax-Free Bond Fund: Class A. The second
represents the -1.63% total return for John Hancock Tax-Free Bond Fund: Class B.
The third represents the -1.38% 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(1). See
following page for historical performance information."]
- --------------------------------------------------------------------------------
Instead, we broadly diversified among a number of bonds to ensure that the Fund
wasn't susceptible to negative credit developments for any one security.
To help make the Fund's distribution income more stable, we worked to
improve its call protection. Call protection refers to the length of time during
which a security cannot be redeemed by its issuer. When a bond is called, it is
redeemed by its issuer before maturity. The bondholder is often forced to
reinvest the proceeds at prevailing interest rates which are often much lower.
We wanted to avoid that so we concentrated on adding more non-callable bonds
which can't be redeemed by their issuer before maturity - and bonds with good
call protection, or those with a reasonably long period of time before they
could be redeemed. What's more, non-callable bonds have shown good performance
characteristics. When interest rates are rising, they typically do n't perform
any worse than callable bonds; yet when interest rates are falling, they tend to
do better than callable bonds. This helps make non-callable bonds quite
valuable.
"...for now,
we intend
to remain
cautious..."
What's ahead
In our view, the Federal Reserve Board is likely to raise interest rates in the
second half of this year. If this happens it should be enough to slow the
economy's growth to a slow but steady pace by 1997. At that point, we think
conditions could once again be favorable and we could see lower interest rates.
But for now, we intend to remain cautious by keeping the Fund's duration
fairly short. We will, however, remain flexible and actively manage our duration
so we can be responsive to changes in the economic outlook. Further market
volatility could provide the opportunity to add higher-yielding securities and
those with good structure (call protection and other characteristics) at
attractive prices.
From a fundamental standpoint, the outlook for municipals is quite
positive. There aren't enough new bonds being issued to replace those being
called away or maturing. And from a historical perspective, municipals still
offer an attractive value relative to Treasuries. Those factors could bode well
for the municipal market.
- ----------
(1) Figures from Lipper Analytical Services include invested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
5
<PAGE>
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- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Free Bond Fund. Total return is a
performance measure that equals the sum of all income and capital gain
distributions, assuming reinvestment of these distributions and the change in
the price of the Fund's net asset value per share. Performance figures included
the maximum applic able sales charge of 4.50% 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.
A portion of the Fund's income may be subject to taxes. Some investors may be
subject to the Alternative Minimum Tax. Capital gains are taxable.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A(1) 2.92% 42.09% 59.92%
John Hancock Tax-Free Bond Fund: Class B(2) 1.94% N/A 31.01%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A(1,3) 2.92% 7.28% 7.51%
John Hancock Tax-Free Bond Fund: Class B(2,3) 1.94% N/A 6.19%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of June 30, 1996
SEC 30-DAY
YIELD
-----
John Hancock Tax-Free Bond Fund: Class A 5.47%
John Hancock Tax-Free Bond Fund: Class B 4.99%
Notes to Performance
(1) Class A shares started on January 5, 1990.
(2) Class B shares started on December 31, 1991.
(3) The Adviser has agreed to limit the Fund's expenses, including the
management fee (but not including the 12b-1 fee), to 0.70% of the Fund's
average daily net assets. Without the limitation of expenses, the average
annualized total returns for the one-year and five-year periods and since
inception for Class A shares would have been 2.72%, 7.09%, and 7.20%,
respectively. The average annualized total returns for the one-year period
and since inception for Class B shares would have been 1.74% and 6.02%,
respectively.
6
<PAGE>
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- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Free Bond Fund would be worth on June 30, 1996, assuming you had been
invested and have reinvested all distributions for the entire time periods
presented. 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.
[Line chart with the heading 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 Tax-Free Bond Fund on January 5, 1990, before sales charge, and is equal
to $16,744 as of June 30, 1996. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $16,300 as of June 30,
1996. The third line represents the Tax-Free Bond Fund after sales charge and is
equal to $15,992 as of June 30, 1996.]
[Line chart with the heading 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 $13,548 as of June 30, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the Tax-Free Bond Fund on
December 31, 1991, before contingent deferred sales charge, and is equal to
$13,301 as of June 30, 1996. The third line represents the Tax-Free Bond Fund
after contingent deferred sales charge and is equal to $13,101 as of June 30,
1996.]
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement of Assets and Liabilities
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $633,152,241) ............................... $ 659,724,715
Options (cost - $363,901) ................................. 842,188
-------------
660,566,903
Receivable for investments sold ............................ 11,184,869
Receivable for shares sold ................................. 76,883
Interest receivable ........................................ 14,414,845
Receivable from John Hancock Advisers, Inc. -
Note B .................................................... 421,202
Miscellaneous assets ....................................... 54,277
-------------
Total Assets ................................. 686,718,979
----------------------------------------------------------------
Liabilities:
Temporary overdraft of cash ................................ 4,215,975
Payable for investments purchased .......................... 29,751,854
Payable for shares repurchased ............................. 538,433
Dividend payable ........................................... 103,970
Payable for variation margin ............................... 1,012,500
Payable to John Hancock Advisers, Inc. and
affiliates - Note B ....................................... 319,420
Accounts payable and accrued expenses ...................... 286,859
-------------
Total Liabilities ............................ 36,229,011
----------------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 638,629,747
Accumulated net realized loss on investments
and financial futures contracts ........................... (12,821,223)
Net unrealized appreciation of investments
and financial futures contracts ........................... 24,735,701
Distributions in excess of net investment income ........... (54,257)
-------------
Net Assets ................................... $ 650,489,968
================================================================
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 - $569,366,932/55,582,256 .......................... $ 10.24
==============================================================================
Class B - $81,123,036/7,918,992 ............................ $ 10.24
==============================================================================
Maximum Offering Price Per Share*
Class A - ($10.24 x 104.71%) ............................... $ 10.72
==============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
The Statement of 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, 1996. You'll also
find the net asset value and maximum offering price per share as of that date.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................. $ 10,757,125
------------
Expenses:
Investment management fee - Note B ....................... 890,936
Distribution/service fee - Note B
Class A ................................................. 188,540
Class B ................................................. 343,030
Transfer agent fee ....................................... 386,481
Custodian fee ............................................ 89,793
Auditing fee ............................................. 28,864
Printing ................................................. 25,684
Trustees' fees ........................................... 17,376
Advisory board fee ....................................... 12,473
Registration and filing fees ............................. 11,132
Legal fees ............................................... 4,848
Miscellaneous ............................................ 541
Less Management Fee Reduction - Note B ................... (319,925)
------------
Total Expenses .............................. 1,679,773
Less Expense Reduction
by John Hancock Advisers,
Inc. - Note B ............................... (11,818)
----------------------------------------------------------------
Net Expenses ................................ 1,667,955
----------------------------------------------------------------
Net Investment Income ....................... 9,089,170
----------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts
Net realized loss on investments sold ..................... (797,256)
Net realized gain on financial futures contracts .......... 2,365,537
Change in net unrealized appreciation/depreciation
of investments ........................................... (2,381,167)
Change in net unrealized appreciation/depreciation
on financial futures contracts ........................... (2,801,094)
------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ................. (3,613,980)
----------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................... $ 5,475,190
================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement Of Changes In Net Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
------------ ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .................................... $ 10,263,078 $ 9,089,170
Net realized gain (loss) on investments sold and financial
futures contracts ...................................... (7,036,534) 1,568,281
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts ............ 31,417,068 (5,182,261)
------------- -------------
Net Increase in Net Assets Resulting from Operations . 34,643,612 5,475,190
------------- -------------
Distributions to Shareholders:
Dividends from net investment income:
Class A - ($0.5699 and $0.2933 per share, respectively) (6,647,931) (7,259,808)
Class B - ($0.4927 and $0.2548 per share, respectively) (3,620,138) (1,883,619)
------------- -------------
Total Distributions to Shareholders .................. (10,268,069) (9,143,427)
------------- -------------
From Fund Share Transactions -- Net* ....................... (13,536,114) 458,537,134
------------- -------------
Net Assets:
Beginning of period ...................................... 184,781,642 195,621,071
------------- -------------
End of period (including distributions in excess of net
investment income of none and $54,257, respectively) ... $ 195,621,071 $ 650,489,968
============= =============
* Analysis of Fund Share Transactions:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ................................. 990,678 $ 10,001,197 2,370,215 $ 24,285,597
Shares issued in reorganization - Note D .... -- -- 45,353,943 460,732,563
Shares issued to shareholders in reinvestment
of distributions ........................... 365,927 3,709,354 485,583 4,985,686
----------- ------------ ------------ -------------
1,356,605 13,710,551 48,209,741 490,003,846
Less shares repurchased ..................... (2,422,945) (24,445,738) (3,764,602) (38,681,267)
----------- ------------ ------------ -------------
Net increase (decrease) ..................... (1,066,340) $(10,735,187) 44,445,139 $ 451,322,579
=========== ============ ============ =============
CLASS B
Shares sold ................................. 722,057 $ 7,261,875 462,752 $ 4,770,820
Shares issued in reorganization - Note D .... -- -- 903,108 9,174,769
Shares issued to shareholders in reinvestment
of distributions .......................... 202,597 2,054,192 103,884 1,076,077
----------- ------------ ------------ -------------
924,654 9,316,067 1,469,744 15,021,666
Less shares repurchased ..................... (1,207,168) (12,116,994) (753,564) (7,807,111)
----------- ------------ ------------ -------------
Net increase (decrease) ..................... (282,514) $ (2,800,927) 716,180 $ 7,214,555
=========== ============ ============ =============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
redeemed during the last two periods, along with the corresponding dollar
values.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------------------------- JUNE 30, 1996
1991 1992 1993 1994(1) 1995 (UNAUDITED)
-------- -------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........... $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67
-------- -------- --------- --------- --------- ---------
Net Investment Income .......................... 0.69 0.67 0.62 0.58 0.57(2) 0.31(2)
Net Realized and Unrealized Gain (Loss) on
Investments .................................. 0.72 0.42 0.93 (1.58) 1.28 (0.45)
-------- -------- --------- --------- --------- ---------
Total from Investment Operations ............. 1.41 1.09 1.55 (1.00) 1.85 (0.14)
-------- -------- --------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ........... (0.68) (0.68) (0.62) (0.57) (0.57) (0.29)
Distributions from Net Realized Gains on
Investments Sold ............................. (0.39) (0.18) (0.44) -- -- --
-------- -------- --------- --------- --------- ---------
Total Distributions .......................... (1.07) (0.86) (1.06) (0.57) (0.57) (0.29)
-------- -------- --------- --------- --------- ---------
Net Asset Value, End of Period ................. $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67 $ 10.24
======== ======== ========= ========= ========= =========
Total Investment Return at Net Asset Value (3) . 14.78% 10.97% 15.15% (9.28%) 20.20% (1.27%)(4)
Total Adjusted Investment Return at Net Asset
Value (3,5)................................... 14.40% 10.67% 14.98% (9.39%) 20.08% (1.37%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ...... $ 73,393 $ 99,523 $ 136,521 $ 114,539 $ 118,797 $ 569,367
Ratio of Expenses to Average Net Assets ........ 0.60% 0.66% 0.78% 0.85% 0.85% 0.85%(7)
Ratio of Adjusted Expenses to Average Net
Assets (6) ................................... 0.98% 0.96% 0.95% 0.96% 0.97% 1.05%(7)
Ratio of Net Investment Income to Average
Net Assets ................................... 6.86% 6.46% 5.57% 5.72% 5.67% 5.81%(7)
Ratio of Adjusted Net Investment Income to
Average Net Assets (6) ....................... 6.48% 6.16% 5.40% 5.61% 5.55% 5.61%(7)
Portfolio Turnover Rate ........................ 123% 79% 116% 107% 113% 80%
Fee Reduction Per Share ........................ $ 0.04 $ 0.03 $ 0.02 $ 0.01 $ 0.01(2) $ 0.01(2)
</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>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------------- JUNE 30, 1996
1992 1993 1994(1) 1995 (UNAUDITED)
-------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $ 10.24 $ 10.47 $ 10.96 $ 9.38 $ 10.67
-------- -------- --------- --------- --------
Net Investment Income .................................... 0.59(2) 0.54 0.50 0.50(2) 0.25(2)
Net Realized and Unrealized Gain (Loss) on Investments ... 0.42 0.93 (1.58) 1.28 (0.43)
-------- -------- --------- --------- --------
Total from Investment Operations ....................... 1.01 1.47 (1.08) 1.78 (0.18)
-------- -------- --------- --------- --------
Less Distributions:
Dividends from Net Investment Income ..................... (0.60) (0.54) (0.50) (0.49) (0.25)
Distributions from Net Realized Gains on Investments Sold (0.18) (0.44) -- -- --
-------- -------- --------- --------- --------
Total Distributions .................................... (0.78) (0.98) (0.50) (0.49) (0.25)
-------- -------- --------- --------- --------
Net Asset Value, End of Period ........................... $ 10.47 $ 10.96 $ 9.38 $ 10.67 $ 10.24
======== ======== ========= ========= ========
Total Investment Return at Net Asset Value (3) ........... 10.15% 14.30% (10.05%) 19.41% (1.63%)(4)
Total Adjusted Investment Return at Net Asset Value (3,5) 9.85% 14.13% (10.16%) 19.29% (1.73%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ................ $ 18,272 $ 56,384 $ 70,243 $ 76,824 $ 81,123
Ratio of Expenses to Average Net Assets .................. 1.43% 1.53% 1.60% 1.60% 1.60%(7)
Ratio of Adjusted Expenses to Average Net Assets (6) ..... 1.73% 1.70% 1.71% 1.72% 1.80%(7)
Ratio of Net Investment Income to Average Net Assets ..... 5.57% 4.66% 4.97% 4.90% 4.94%(7)
Ratio of Adjusted Net Investment Income to Average Net
Assets (6) 5.27% 4.49% 4.86% 4.78% 4.74%(7)
Portfolio Turnover Rate .................................. 79% 116% 107% 113% 80%
Fee Reduction per Share .................................. $ 0.03(2) $ 0.02 $ 0.01 $ 0.01(2) $ 0.01(2)
</TABLE>
(1) On December 22, 1994 John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Schedule of Investments
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Tax-Free Bond Fund on June 30, 1996. It has two main categories: Tax-Exempt
Long-Term Bonds and options. The tax-exempt long-term bonds are broken down by
state. Under each state is a list of the securities owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY 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 (0.84%)
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj 1995 .... 6.950% 01-01-20 BBB- $ 5,250 $ 5,462,310 6.68%
-----------
Alaska (0.16%)
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser ................................... 7.750 12-01-14 A+ 1,000 1,028,020 7.54
-----------
Arizona (3.13%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj ................. 8.200 06-01-21 BBB 2,150 2,310,906 7.63
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public Service Co Palo Verde Proj 6.375 08-15-23 BB 8,550 7,988,949 6.82
Salt River Project Agricultural Improvement and Power District,
Salt River Proj Elec Sys Rev Ref Ser 1993C .................. 5.250 01-01-19 AA 3,000 2,741,340 5.75
Scottsdale Industrial Development Auth,
Hosp Rev Ref Ser 1997A Scottsdale Memorial Hosps* ........... 6.000 09-01-12 AAA 4,000 3,897,520 6.16
Hosp Rev Ref Ser 1997A Scottsdale Memorial Hosps* ........... 6.125 09-01-17 AAA 3,520 3,432,493 6.28
-----------
20,371,208
-----------
California (14.21%)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc ........... 5.875 05-01-20 A 4,000 3,805,440 6.18
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj .............................. 6.350 10-01-07 AAA 4,090 4,379,286 5.93
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice Gen Proj Ser 1993 .......... 6.200 07-01-20 BBB- 5,000 4,914,200 6.31
Fontana, County of,
Spec Tax of Community Facil Dist No. 90-3 Empire Center ..... 8.400 04-01-15 B** 470 417,713 9.45
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A ................. Zero 01-01-19 BBB- 36,600 8,195,838 6.76
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A ................. Zero 01-01-20 BBB- 10,000 2,090,500 6.86
Toll Rd Rev Fixed Rate Current Int Ser 1995A ................ 6.000 01-01-16 BBB- 21,500 20,945,945 6.16
Long Beach Aquarium of the Pacific,
Rev 1995 Ser A Aquarium of the Pacific Proj ................. 6.125 07-01-23 BBB 7,500 6,938,550 6.62
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant Proj 8.000 06-01-10 A 1,000 1,088,430 7.35
Madera, County of,
Cert of Part Valley Children's Hosp Proj .................... 6.500 03-15-15 AAA 13,185 14,339,742 5.98
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
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>
California (continued)
Orange, County of,
Cert of Part 1996 Ser A ..................................... 5.875% 07-01-19 AAA $ 5,000 $ 4,916,400 5.97%
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A ............ 7.750 09-01-16 BBB 2,000 2,123,760 7.30
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj ............... 5.500 08-01-17 A- 9,130 8,352,946 6.01
Cert of Part Ser 1994 Medical Center Fin Proj ............... 5.500 08-01-22 A- 2,500 2,271,975 6.05
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec .............................. Zero 01-01-10 BBB** 6,250 2,342,000 8.75
Toll Rd Rev Sr Lien Cap Apprec .............................. Zero 01-01-17 BBB** 4,900 1,273,363 6.68
Toll Rd Rev Sr Lien Cap Apprec .............................. Zero 01-01-19 BBB** 5,510 1,250,109 6.73
Toll Rd Rev Sr Lien Cap Apprec .............................. Zero 01-01-20 BBB** 2,000 423,840 7.00
San Jose Financing Auth,
Rev Ser B Community Facil Proj .............................. 5.625 11-15-18 A+ 2,500 2,350,075 5.98
-----------
92,420,112
-----------
Colorado (3.17%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 ............................... 6.950 08-31-20 Baa** 9,000 9,366,660 6.68
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref ............................ 7.250 11-15-25 AAA 1,980 2,250,725 6.38
Airport Sys Rev Ser 1992A Unref Bal ......................... 7.250 11-15-25 BBB 5,020 5,575,212 6.53
Airport Sys Rev Ser 1994A ................................... 7.500 11-15-23 BBB 3,100 3,410,031 6.82
-----------
20,602,628
-----------
Delaware (0.74%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj ................ 6.750 05-01-19 AAA 4,500 4,824,225 6.30
-----------
Florida (4.04%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P. South Proj 7.950 12-01-08 A 4,445 4,907,413 7.20
Florida, State of,
Sunshine Skyway Rev Ser of 1984 ............................. 10.250 06-01-10 AAA 1,250 1,348,150 9.50
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co ............................ 8.500 12-01-14 BBB-** 1,000 1,091,120 7.79
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport ....................... 6.000 10-01-17 AAA 5,880 6,080,449 5.80
Hillsborough, County of,
Ref Util Rev Ser 1991A ...................................... 7.000 08-01-14 BBB+ 1,245 1,333,706 6.53
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A ........................................ 5.250 10-01-28 AA 9,000 8,041,230 5.88
Nassau, County of,
Poll Control Rev Ref ITT Rayonier Inc Proj .................. 6.200 07-01-15 BBB 1,000 980,540 6.32
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D ................................ 6.750 10-01-17 AA- 2,200 2,499,992 5.94
-----------
26,282,600
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
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>
Georgia (3.67%)
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB .......................................... 5.700% 01-01-19 A $ 1,000 $ 964,400 5.91%
Pwr Rev Ser C ............................................... 5.700 01-01-19 AAA 5,000 4,912,900 5.80
Pwr Rev Ser EE .............................................. 7.250 01-01-24 AAA 2,000 2,393,120 6.06
Pwr Rev Ser M ............................................... 8.375 01-01-20 A 1,000 1,040,000 8.05
Pwr Rev Ser Z ............................................... 5.500 01-01-20 AAA 5,840 5,609,437 5.73
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj ..... 6.800 01-01-12 A+ 1,000 1,074,770 6.33
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1 ............................. 6.500 01-01-17 AAA 3,500 3,827,110 5.94
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj ............................. 7.000 01-01-23 BBB+ 4,000 4,040,720 6.93
-----------
23,862,457
-----------
Illinois (3.89%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A ..... 7.500 01-01-16 A+ 2,000 2,115,020 7.09
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev Ser 1992 6.750 01-01-12 AAA 3,000 3,162,150 6.40
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A American
Airlines Proj ............................................... 7.875 11-01-25 BB+ 3,000 3,213,300 7.35
Skyway Toll Bridge Rev Ref Ser 1994 ......................... 6.750 01-01-17 BBB- 2,000 2,036,460 6.63
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj ............ 5.850 01-15-14 BBB 3,000 2,791,590 6.29
Rev Ref Ser A Columbus Cuneo Cabrini Proj ................... 8.500 02-01-15 BBB+ 2,150 2,444,163 7.48
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg ............................ 6.750 12-01-08 A-** 1,640 1,683,132 6.58
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj ........... 7.000 01-01-07 A- 1,500 1,586,820 6.62
Metropolitan Pier and Exposition Auth,
Hosp Facil Rev Ser 1996A McCormick Place Convention Complex . 7.000 07-01-26 BBB- 5,000 5,326,100 6.57
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners ........ 9.250 10-15-14 B-** 1,000 967,500 9.56
-----------
25,326,235
-----------
Indiana (0.31%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj ............ 7.500 06-01-26 B** 2,000 2,012,180 7.45
-----------
Kansas (0.35%)
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984 ........................................ 10.500 12-01-08 AAA 2,000 2,281,540 9.20
-----------
Kentucky (0.97%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A ................ 6.750 02-01-02 BB 2,000 2,078,100 6.50
Rev Spec Facil Delta Airlines Proj Ser 1992A ................ 7.500 02-01-12 BB 2,000 2,128,260 7.05
Rev Spec Facil Delta Airlines Proj Ser 1992A ................ 7.125 02-01-21 BB 2,000 2,071,620 6.88
-----------
6,277,980
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
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>
Louisiana (1.96%)
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States Util Co Proj ...... 6.750% 10-01-12 BB+ $ 2,975 $ 2,983,389 6.73%
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj ................ 6.500 05-15-22 AAA 3,405 3,518,999 6.29
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj ..... 7.500 06-01-21 BBB 4,000 4,213,120 7.12
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 2,011,580 6.96
-----------
12,727,088
-----------
Maryland (0.27%)
Maryland State Energy Financing Administration,
Solid Waste Disp Rev Ltd Oblig Recycling Hagerstown Proj .... 9.000 10-15-16 BB** 1,900 1,757,595 9.73
-----------
Massachusetts (5.60%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B .................................... 7.875 03-01-21 AAA 2,000 2,297,560 6.86
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D ........................ 6.750 07-01-24 A+ 2,450 2,543,933 6.50
Rev Lowell Gen Hosp Iss Ser A ............................... 8.400 06-01-11 Baa1** 1,100 1,197,031 7.72
Rev New England Deaconess Hosp Iss Ser D .................... 6.625 04-01-12 A 3,500 3,620,540 6.40
Rev New England Deaconess Hosp Iss Ser D .................... 6.875 04-01-22 A 7,960 8,325,762 6.57
Rev New England Medical Center Hosp Iss Ser E ............... 7.875 07-01-11 A- 1,950 2,119,357 7.25
Rev Worcester Polytechnic Institute Ser E ................... 6.750 09-01-11 A+ 2,000 2,155,620 6.26
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A .................................. 6.900 11-15-24 AAA 2,700 2,805,948 6.64
Single Family Hsg Ser 8 ..................................... 7.700 06-01-17 A+ 1,500 1,585,080 7.29
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the
Commonwealth of Mass ...................................... 6.750 07-01-17 BBB+ 4,405 4,730,662 6.29
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B .................................. 6.000 08-01-14 A+ 2,000 2,027,060 5.92
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj .. 7.000 04-01-22 A- 2,750 3,029,400 6.35
-----------
36,437,953
-----------
Michigan (2.06%)
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj ......... 8.250 07-01-12 Baa1** 2,250 2,406,195 7.71
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group ......... 8.100 10-01-13 BBB 4,250 4,611,887 7.46
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines Facil 6.750 12-01-15 BB+** 6,355 6,388,682 6.71
-----------
13,406,764
-----------
Mississippi (1.78%)
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc ............... 7.300 05-01-25 BBB- 4,000 4,117,240 7.09
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A .......................... 9.250 03-01-12 AAA 120 129,478 8.57
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
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 (continued)
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Medical Foundation Proj ...................... 8.750% 01-01-16 Baa** $ 2,000 $ 2,185,360 8.01%
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj ........ 7.000 04-01-22 Baa3** 5,000 5,145,150 6.80
-----------
11,577,228
-----------
Nebraska (0.20%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B ..................................... 6.200 02-01-17 AA 1,200 1,288,788 5.77
-----------
Nevada (1.93%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj ......... 6.500 12-01-33 BBB- 10,000 9,532,000 6.82
North Las Vegas, City of,
Local Imp Spec Improvement District No. 707* ................ 7.100 06-01-16 BB+** 3,000 3,000,000 7.10
-----------
12,532,000
-----------
New Jersey (2.26%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj ............. 9.875 01-01-21 BB+** 1,100 1,099,978 9.88
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens ........................ 8.500 11-01-16 BB+** 3,630 3,610,543 8.55
Rev Poll Control General Motors Corp Proj ................... 5.350 04-01-09 A- 1,500 1,448,760 5.54
Rev Ref Ind'l Development Newark Airport Marriott Hotel Proj 7.000 10-01-14 BB** 4,000 3,986,760 7.02
Rev Ref Ser J Holt Hauling Proj ............................. 8.500 11-01-23 BBB** 2,500 2,501,850 8.49
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 ....................................... 10.375 01-01-03 AAA 1,740 2,082,797 8.67
-----------
14,730,688
-----------
New York (11.80%)
Islip Community Development Agency
Dev Rev NY Institute of Technology Proj ..................... 7.500 03-01-26 BB-** 2,500 2,504,225 7.49
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1 ...................... 8.500 07-01-17 AAA 1,000 1,067,150 7.97
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj ........ 7.950 01-01-28 BB** 3,250 3,348,767 7.72
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp ................................. 6.875 04-01-19 A 8,700 9,573,132 6.25
New York State Dormitory Auth,
City Univ Ref Iss 1988B ..................................... 8.125 07-01-08 BBB 1,000 1,088,160 7.47
Cornell Univ Rev Ser 1990A .................................. 7.375 07-01-30 AA 1,000 1,109,420 6.65
State Univ Ed Facil Rev Iss Ser 1990B ....................... 7.500 05-15-11 BBB+ 500 576,845 6.50
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj ...... 7.150 06-01-20 BB+ 6,000 5,902,380 7.27
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj ... 7.500 01-01-26 A+ 2,000 2,142,040 7.00
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A ........ 7.500 06-15-12 A 3,770 4,147,264 6.82
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
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>
New York (continued)
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A ...................... 8.000% 05-01-11 AAA $ 2,000 $ 2,435,700 6.57%
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B ................... 7.875 08-15-08 BBB+ 500 558,575 7.05
Mental Hlth Serv Facil Imp Rev 1990 Ser B ................... 7.875 08-15-20 BBB+ 460 514,068 7.05
Mental Hlth Serv Facil Imp Rev 1991 Ser A ................... 7.750 08-15-11 BBB+ 540 602,122 6.95
Mental Hlth Serv Facil Imp Rev 1991 Ser A ................... 7.750 08-15-11 AAA 1,460 1,670,094 6.78
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2 .................................. 7.950 10-01-15 AA** 1,135 1,193,294 7.56
New York State Power Auth,
Gen Purpose Ser V ........................................... 7.875 01-01-13 AAA 2,400 2,585,664 7.31
Gen Purpose Ser V ........................................... 8.000 01-01-17 AA 1,850 1,995,040 7.42
New York, City of,
GO Fiscal 1991 Ser D ........................................ 8.000 08-01-04 BBB+ 250 277,782 7.20
GO Fiscal 1991 Ser F ........................................ 8.200 11-15-03 BBB+ 1,250 1,406,175 7.29
GO Fiscal 1992 Ser A ........................................ 7.750 08-15-12 BBB+ 2,000 2,209,040 7.02
GO Fiscal 1992 Ser D ........................................ 7.700 02-01-09 BBB+ 1,000 1,109,050 6.94
GO Fiscal 1992 Ser H ........................................ 7.000 02-01-08 BBB+ 2,000 2,135,860 6.55
GO Fiscal 1995 Ser B ........................................ 7.000 08-15-16 BBB+ 3,000 3,138,150 6.69
GO Fiscal 1996 Ser A* ....................................... 6.250 08-01-09 BBB 3,150 3,124,800 6.30
GO Fiscal 1996 Ser A* ....................................... 6.250 08-01-10 BBB+ 2,000 1,974,100 6.33
GO Rev Ref Ad Valorem Property Tax Ser D .................... 5.750 08-15-13 BBB+ 3,170 2,941,665 6.20
Port Auth of New York and New Jersey,
Spec Proj Ser 4 5th Installment KIAC Partners Proj .......... 6.750 10-01-19 BBB** 9,350 9,303,063 6.78
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L ....................................... 8.125 01-01-12 A+ 1,750 1,877,698 7.57
Gen Purpose Rev Ser R ....................................... 7.375 01-01-16 AAA 1,600 1,764,992 6.69
Spec Oblig Ref Ser 1991B .................................... 6.875 01-01-15 A- 2,300 2,504,079 6.31
-----------
76,780,394
-----------
North Carolina (3.36%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A ................................... 5.750 01-01-19 BBB+ 4,000 3,665,880 6.27
Pwr Sys Rev Ref Ser 1993B ................................... 6.000 01-01-22 BBB+ 2,000 1,909,700 6.28
Pwr Sys Rev Ref Ser 1993C ................................... 5.000 01-01-21 BBB+ 5,000 4,193,850 5.96
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 ................................... 5.750 01-01-15 AAA 7,410 7,335,085 5.81
Catawba Elec Rev Ser 1993 ................................... 5.000 01-01-15 AAA 5,220 4,744,354 5.50
-----------
21,848,869
-----------
Ohio (4.08%)
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A .................................. 7.000 11-15-24 AAA 6,200 6,847,404 6.34
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United
Methodist Hosp Proj ....................................... 7.600 05-15-20 AAA 1,000 1,117,570 6.80
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
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>
Ohio (continued)
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj .................... 8.625% 02-01-22 BBB- $ 3,600 $ 3,899,844 7.96%
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj ......................... 6.250 12-01-20 Baa2** 4,500 4,459,140 6.31
Rev Coll Ser A Cleveland Elec Illum Proj .................... 7.000 09-01-09 BB 1,975 1,914,091 7.22
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1989A Ohio Edison Co Proj .... 7.625 07-01-23 BB+ 2,500 2,621,300 7.27
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co Proj .. 7.700 08-01-25 BB 2,800 2,837,576 7.60
Ohio, State of,
Solid Waste Rev Republic Engineered Steels Inc .............. 9.000 06-01-21 B** 1,500 1,514,970 8.91
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan .................. 8.875 08-01-08 BBB-** 1,305 1,325,358 8.74
-----------
26,537,253
-----------
Oklahoma (0.62%)
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 ............................ 7.875 01-01-21 A+ 1,745 1,913,986 7.18
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc .......................... 7.375 12-01-20 BB+ 2,000 2,103,640 7.01
-----------
4,017,626
-----------
Oregon (0.76%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj ...................... 7.125 01-01-21 BB-** 4,800 4,912,944 6.96
-----------
Pennsylvania (7.83%)
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt ....................... 7.000 06-01-22 BBB 1,500 1,513,470 6.94
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj ........... 6.700 12-01-20 BB+ 10,000 10,114,800 6.62
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A Toledo Edison Co
Beaver Valley Proj ........................................ 7.750 05-01-20 BB 2,200 2,246,574 7.59
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co Proj ... 7.375 04-01-21 BBB+ 6,095 6,456,616 6.96
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A ........................................... 6.700 09-01-14 BBB- 4,950 5,245,317 6.32
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj ................. 7.125 12-01-15 BBB- 7,000 7,348,670 6.79
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N .......................................... 6.500 12-01-13 AAA 2,840 2,960,132 6.24
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj ....... 8.625 07-01-21 BB** 2,700 2,789,181 8.35
Hosp Rev 1992 Ser A Childrens Sea Shore House Proj .......... 7.000 08-15-12 A- 1,250 1,320,338 6.63
Philadelphia Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia
Airport Hotel Proj ........................................ 7.750 12-01-17 B+** 3,250 3,379,935 7.45
Philadelphia, City of,
Wtr & Swr Rev 16th Ser ...................................... 7.500 08-01-10 AAA 3,000 3,414,840 6.59
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
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>
Pennsylvania (continued)
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj .......... 7.600% 07-15-20 BBB- $ 3,000 $ 3,075,990 7.41%
York County Solid Waste And Refuse Auth,
Adj Tender Ind'l Dev Rev Ser of 1985 Resource Recovery Proj . 8.200 12-01-14 AA- 1,000 1,064,650 7.70
-----------
50,930,513
-----------
Puerto Rico (5.98%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico ............................................... 6.000 07-01-11 AAA 200 209,080 5.74
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico ............................................... 8.220# 07-01-11 AAA 5,500 5,995,000 7.54
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Floater Ser 1992A ........................ 7.784# 07-01-08 AAA 2,700 2,821,500 7.45
GO Pub Imp Inverse Floater Ser 1996 ......................... 8.220# 07-01-11 A 14,000 15,260,000 7.54
Puerto Rico Highway and Transportation Auth,
Highway Rev Rites PA Rte 114 ................................ 8.705# 07-01-11 A 13,130 14,590,713 7.83
-----------
38,876,293
-----------
South Carolina (2.12%)
Florence, County of,
Ind Dev Rev Stone Container Proj ............................ 7.375 02-01-07 BB 5,000 5,086,450 7.25
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys ............................. 5.375 01-01-25 AAA 9,305 8,732,091 5.73
-----------
13,818,541
-----------
South Dakota (0.15%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss .......................... 7.625 11-01-13 AA- 925 1,009,490 6.99
-----------
Tennessee (2.06%)
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj .......................................... 6.500 09-01-24 A- 9,000 9,242,190 6.33
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp ................................ 6.750 09-01-12 BBB 4,000 4,144,680 6.51
-----------
13,386,870
-----------
Texas (5.39%)
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj ....... 8.250 05-01-15 A 2,000 2,139,420 7.71
Dallas-Fort Worth International Airport Facility Improvement,
Rev American Airlines Inc ................................... 7.250 11-01-30 BB+ 10,250 10,786,280 6.89
Rev Delta Air Lines Inc ..................................... 7.600 11-01-11 BB 3,000 3,200,670 7.12
Ector County Hospital District,
Hosp Rev 1992 ............................................... 7.300 04-15-12 A- 4,000 4,425,960 6.60
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj ....................... 7.750 03-01-12 B 1,410 1,385,353 7.89
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj ......... 8.250 02-15-08 AAA 1,000 1,118,550 7.38
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
================================================================================
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)
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp Proj.. 6.625% 02-01-24 BBB+ $ 1,000 $ 1,017,200 6.51%
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996* ...................... 5.000 01-01-10 AAA 7,000 6,352,710 5.51
Dallas North Thruway Rev Ref Ser 1996* ...................... 5.500 01-01-15 AAA 5,000 4,631,700 5.94
-----------
35,057,843
-----------
Utah (0.16%)
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon Development Corp 9.000 07-01-12 BBB-** 1,000 1,045,430 8.61
-----------
Virginia (0.71%)
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil ...................................... 7.550 01-01-19 BB** 4,500 4,639,770 7.32
-----------
Washington (4.18%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj .... 9.125 01-01-26 BB-** 11,000 10,458,910 9.60
Seattle, City of,
Municipal Light & Pwr Rev 1994 .............................. 6.625 07-01-16 AA 3,600 3,797,928 6.28
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A Unref Bal .............. 7.500 07-01-15 AA 1,455 1,568,635 6.96
Nuclear Proj No. 1 Ref Rev Ser 1989B ........................ 7.125 07-01-16 AA 1,500 1,663,335 6.43
Nuclear Proj No. 1 Ref Rev Ser 1991A ........................ 6.875 07-01-17 AA 1,250 1,309,637 6.56
Nuclear Proj No. 2 Ref Rev Ser 1990C ........................ 7.625 07-01-10 AAA 5,000 5,651,600 6.75
Nuclear Proj No. 3 Ref Rev Ser 1989B ........................ 7.250 07-01-15 AAA 2,500 2,749,875 6.59
-----------
27,199,920
-----------
Wisconsin (0.68%)
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A ................................ 7.400 07-01-20 AAA 4,000 4,453,360 6.65
-----------
TOTAL TAX EXEMPT LONG-TERM BONDS
(Cost $633,152,241) (101.42%) 659,724,715
======= ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
NUMBER
OF EXPIRATION MARKET
CONTRACTS DATE VALUE
--------- ---- -----
OPTIONS (0.13%)
U.S. Treasury Bond Option 114 USU6C 2,450 08-24-96 $ 842,188
---------
TOTAL OPTIONS
(Cost $363,901) (0.13%) 842,188
====== ============
TOTAL INVESTMENTS
(Cost $633,516,142) (101.55%) $660,566,903
====== ============
NOTES TO SCHEDULE OF INVESTMENTS
* These securities having an aggregate value of $26,413,323 or 4.06% of the
Fund's net asset value, have been purchased as forward commitments - that
is, the Fund has agreed on the 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 the current value at least equal to the
amount of its forward commitment. Accordingly, the market values of
$5,889,359. of Foothill/Eastern Transportation Corridor Agency, Toll Rd Rev
Fixed Rate Cap Apprec Ser 1995A, Zero%, 01-01-19, $3,237,990 of Long Beach
Aquarium of the Pacific, Rev 1995 Ser A Aquarium of the Pacific Proj,
6.125%, 07-01-23, $13,812,266 of Madera, County of, Cert of Part Valley
Children's Hosp Proj, 6.50%, 03-15-15, $4,161,760 of Mobile Industrial
Development Board, Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj
1995, 6.95%, 01-01-20, and $3,535,630 of Savannah Hospital Auth, Rev Ref &
Imp Candler Hosp Proj, 7.00%, 01-01-23 have been segregated to cover the
forward commitments.
** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
+ The yield is not calculated with guidelines established by the U.S.
Securities Exchange Commission. Zero coupon yields are at yield to
maturity.
# Represents the rate in effect on June 30, 1996.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
================================================================================
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 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 June 30, 1996
assigned to the various sector categories.
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
General Obligation............................ 6.94%
Revenue Bonds - Certificate of Participation.. 1.22
Revenue Bonds - Education..................... 1.34
Revenue Bonds - Electric Power................ 17.23
Revenue Bonds - Health........................ 16.62
Revenue Bonds - Housing....................... 2.57
Revenue Bonds - Industrial Development Bond... 8.09
Revenue Bonds - Other......................... 7.05
Revenue Bonds - Pollution Control Facilities.. 14.84
Revenue Bonds - Transportation................ 21.77
Revenue Bonds - Water & Sewer................. 3.75
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 101.42%
======
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
================================================================================
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
management investment company, registered under the Investment Company Act of
1940. The investment objective of the Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of capital by investing primarily in municipal bonds, notes and
commercial paper, the interest on which is exempt from federal income taxes.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution/service expenses under terms of
a distribution plan, have exclusive voting rights regarding such distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $12,505,428 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gains distribution will be made. The carryforwards expire as follows:
December 31, 2002 -- $7,349,795 and December 31, 2003 -- $5,155,633. Expired
capital loss carryforwards are reclassified to capital paid-in, in the year of
expiration.
DIVIDENDS, INTEREST AND DISTRIBUTIONS 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 principals. 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 calculated 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 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
23
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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 time of disposition.
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.
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. 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. Subsequent payments, known as
"variation margin", to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At June 30, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
SEP 1996 900 U.S TREASURY BONDS SHORT $2,315,938
==========
At June 30, 1996, the Fund has deposited in a segregated account $809,242
to cover margin requirements on open financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and 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 the stock
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and writing calls will tend to
decrease the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
24
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended June 30,
1996.
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.
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 $319,925 for
the period ended June 30, 1996.
The Fund has an agreement with its custodian bank under which $11,818 of
custodian fees have been reduced by balance credits applied during the period
ended June 30, 1996. If the Fund had not entered into this agreement, the assets
not invested, on which these balance credits were earned, could have produced
taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended June 30,
1996, net sales charges received with regard to sales of Class A shares amounted
to $241,984. Out of this amount, $25,504 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $74,804 was paid
as sales commissions to unrelated broker-dealers and $141,676 was paid as sales
commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., Inc. ("Sutro"), all of which are broker dealers. 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.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended June 30, 1996,
contingent deferred sales charges paid to JH Funds amounted to $120,127.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.25% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution/service costs. JH Funds has
temporarily agreed to limit the distribution and service fees pursuant to Class
A and Class B plans to 0.15% and 0.90% of the average daily net assets,
respectively. Up to a maximum 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 Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. The Fund pays Investor
25
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Services a fee based on the number of shareholder accounts and certain
out-of-pocket expenses.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon 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 makes
investments into other John Hancock funds, as applicable, to cover its liability
for the deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always equal and
are marked to market on a periodic basis to reflect any income earned by the
investment as well as any unrealized gains or losses. At June 30, 1996, the
Fund's investments to cover the deferred compensation liability had unrealized
appreciation of $878.
The Fund has an independent advisory board composed of certain retired
Directors who provide advice to the current Board of Directors in order to
facilitate a smooth management transition. 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, 1996, aggregated $151,979,840 and $157,776,038, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30, 1996.
The cost of investments owned at June 30, 1996 for federal income tax
purposes was $633,516,142. Gross unrealized appreciation and depreciation of
investments aggregated $31,453,549 and $4,402,788, respectively, resulting in
net unrealized appreciation of $27,050,761.
NOTE D --
REORGANIZATION
On May 2, 1996, the shareholders of John Hancock Tax-Exempt Income Fund (JHTEIF)
approved a plan of reorganization between JHTEIF and the Fund providing for the
transfer of substantially all of the assets and liabilities of JHTEIF to the
Fund in exchange solely for Class A and Class B shares of the Fund. The
acquisition was accounted for as a tax free exchange of 45,353,943 Class A
shares, and 903,108 Class B shares of the Fund for the net assets of JHTEIF,
which amounted to $460,732,563 and $9,174,769 for Class A and B shares,
respectively, including $14,942,866 of unrealized appreciation, after the close
of business on May 3, 1996.
26
<PAGE>
================================================================================
Additional Information
John Hancock Funds - Tax-Free Bond Fund
SHAREHOLDER MEETING
On June 26, 1996, a special meeting of John Hancock Tax-Free Bond Fund (the
"Fund") was held involving the election of trustees and certain other matters
concerning the Fund.
Specifically, shareholders first approved an Amended and Restated
Declaration of Trust for the Fund to provide the Trustees with greater
flexibility to manage the Fund and to take advantage of potential investment
opportunities. The shareholder votes tallied were 9,435,928 FOR, 312,033 AGAINST
and 757,872 ABSTAINING.
Next, the Class A shareholders approved an amendment to the Fund's Class A
distribution plan to increase the maximum distribution fees for Class A shares
from 0.15% to 0.25% annually of the Fund's average daily net assets attributable
to Class A shares, effective December 23, 1996. The Class A shareholder votes
tallied were 4,969,605 FOR, 995,108 AGAINST and 546,741 ABSTAINING.
Lastly, the following trustees were elected to serve until their respective
successors shall become duly elected and qualified, with the votes tabulated as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- --- --------
Edward J. Boudreau, Jr................. 11,999,128 307,890
James F. Carlin........................ 11,999,128 307,890
William H. Cunningham.................. 11,999,128 307,890
Charles F. Fretz....................... 11,999,128 307,890
Harold R. Hiser, Jr.................... 11,999,128 307,890
Anne C. Hodsdon........................ 11,991,247 315,771
Charles L. Ladner...................... 11,999,128 307,890
Leo E. Linbeck, Jr..................... 11,999,128 307,890
Patricia P. McCarter................... 11,999,128 307,890
Steven R. Pruchansky................... 11,999,128 307,890
Richard S. Scipione.................... 11,999,128 307,890
Norman H. Smith........................ 11,991,247 315,771
John P. Toolan......................... 11,999,128 307,890
27
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