<PAGE> 1
John Hancock Funds
- --------------------------------------------------------------------------------
TAX-FREE
BOND
FUND
ANNUAL REPORT
December 31, 1995
<PAGE> 2
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
CHARLES L. LADNER*
LEO E. LINBECK*
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
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
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders -- technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place -- slow economic growth, muted inflation and decent corporate earnings --
it would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John Hancock
Funds, we never stop working to find ways to sustain and improve the quality of
information and the level of assistance we provide you. Our commitment to this
task is no less than John Hancock's loyalty was to his fledgling country when he
is said to have uttered, "if it does the public good, burn Boston." We won't go
that far, of course, but we share our namesake's dedication to putting the
public before all else.
In our case, that public is you, our shareholders. We take very seriously
the role you have entrusted to us, that of helping you achieve your financial
goals. Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY THOMAS C. GOGGINS
FOR THE PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK
TAX-FREE BOND FUND
"SOFT LANDING" HELPED BOOST MUNICIPAL PRICES IN 1995
Slowing economic growth and easing inflationary pressures provided the backdrop
for an unexpectedly strong bond market rally in 1995. The year got off to an
impressive start as more investors came to accept that the Federal Reserve Board
could actually engineer a "soft landing" -- in which economic growth is slow but
steady and inflation remains low. The first quarter was particularly strong for
municipal bonds, which outpaced Treasury, mortgage and corporate bonds alike.
[A 2 1/4" x 3" photo of Thomas C. Goggins at bottom right. Caption reads:
"Thomas C. Goggins".]
However, various tax-reform proposals grabbed the headlines in the second
quarter and stymied the rise of municipals. At issue was the notion that some
proposals, particularly the flat-tax proposal, could eliminate any need for
investors to own tax-exempt securities. But by the fall, municipals started to
regain some steam. Two interest-rate cuts in the last two quarters of the year,
coupled with rising demand for municipals from some institutional investors,
ignited another round of strength. By the end of 1995, municipals had turned in
their best performance since 1986.
A LOOK AT PERFORMANCE
John Hancock Tax-Free Bond Fund performed well, not only in absolute terms, but
also compared to its competitors. For the year ended December 31, 1995, the
Fund's Class A and Class B shares posted total returns of 20.20% and 19.41%,
respectively, at net asset value. Those returns outpaced the average general
municipal bond fund's return of 16.84% for the same period, according to Lipper
Analytical Services.(1)
There were several factors contributing to the Fund's better-than-average
performance. First was duration, which measures how sensitive
[CAPTION]
"BY THE END OF 1995, MUNICIPALS HAD TURNED IN THEIR
BEST PERFORMANCE SINCE 1986."
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) Transportation 21%; 2) Electric Utilities 18%; 3) Health
18%; 4) General Obligation Bonds 11%; 5) Pollution Control 10%. Footnote below
reads: "As a percentage of net assets on December 31, 1995."]
the Fund's share price is to changes in interest rates. In the first quarter of
the year, the Fund's duration was relatively long, which benefited its
performance when interest rates were falling. In the second quarter we reduced
our duration by replacing some longer-term bonds with shorter-term bonds. We did
that because there wasn't much difference in yield between short- and long-term
bonds. In other words, we did not give up a great amount of yield to own the
less volatile, shorter-term bonds. That strategy also paid off because the
second quarter was a particularly volatile period for municipal bonds. By the
fall, however, we felt that interest rates could resume their decline, so we
made the Fund more interest-rate sensitive by lengthening our duration again.
Having a longer duration during the second half of the year also helped our
performance.
Our continued focus on non-callable bonds was also an advantage for the
Fund. Non-callable bonds are so-called because they can't be redeemed by their
issuer before their scheduled maturity dates. They tended to benefit more fully
from the bond market rally than callable bonds. A bond with a call will trade
under the assumption that the issuer will call the bond -- or pay it off -- on
the call provision date, which is the first date it can be redeemed by its
issuer. As the call date approaches, callable bonds are less likely to
participate fully in a rally. Non-callable bonds also offer another advantage:
they provide a predictable and steady stream of income. If interest rates
decline further, our non-callable bonds can't be redeemed early, so we won't be
forced to put the proceeds from calls back to work in the market at lower
interest rates.
Finally, we focused on buying discount bonds, which sell below par (face)
value. During periods when interest rates are declining, discount bonds tend to
appreciate more than par bonds, and more than premium bonds, which trade above
par value.
FOCUS ON SECTORS
Transportation bonds made up the Fund's largest sector concentration at about
21% of net assets at the end of 1995. During the period we added several
industrial development bonds in the airline sector, which our team of analysts
identified as having good prospects for appreciation. Dallas/Fort Worth issued
bonds to construct additional gates for American Airlines at the airport.
Indianapolis issued bonds for a United Airlines maintenance facility. These
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Category"' the header for the right column is "Trend...and what's
driving it." The first listing is "Dallas/Fort Worth/American Airlines" followed
by an up arrow and the phrase "Improving profitability for airline". The second
listing is "Indianapolis/United Airlines" followed by an up arrow and the phrase
"Better earnings for UAL". The third listing is "Housing bonds" followed by a
flat arrow and the phrase "Rising risk of prepayments". Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."]
[CAPTION]
"...FOCUS ON NON-CALLABLE BONDS WAS ALSO AN ADVANTAGE FOR THE FUND."
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 year ended December 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 25% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
20.20% total return for John Hancock Tax-Free Bond Fund: Class A. The second
represents the 19.41% total return for John Hancock Tax-Free Bond Fund: Class B.
The third represents the 16.84% 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."]
were two of the Fund's largest holdings and best performers for the year.
Housing bonds, which posted weak gains during 1995, were the municipal
market's laggards. These bonds were held back by the perception that mortgages
underlying these housing bonds would be refinanced as interest rates fall.
However, we've maintained a core holding in high-quality, high-yielding housing
bonds that we think are less vulnerable to early payment.
The Fund's Trustees recently voted to give the Fund the flexibility to
invest as much as one-third of its assets in high-yielding bonds that carry
below investment-grade ratings. We plan to be selective in adding these bonds,
buying them only when we think that they offer enough reward to justify the risk
taken.
OUTLOOK
Political haggling over various tax-reform proposals could continue to draw
headlines in 1996. If that is the case, the municipal bond market could
experience further volatility in the months to come. We think it's unlikely that
any significant tax reform will be enacted within the next two years. And we're
not convinced that the flat tax is viable. So in our view, the market has
overreacted. We believe that the tax-reform scare has actually created an
opportunity. At the end of 1995, municipals were priced attractively compared to
Treasuries. In fact, there was only one other time in recent history that
municipals were this cheap relative to Treasuries. In our experience, it is in
times like these that municipals offer good value for investors seeking
after-tax income.
It may be difficult for municipals to achieve the same exceptional gains
they made in 1995. However, there are several reasons why we're optimistic about
1996. We believe economic growth will continue to slow, inflation will remain
subdued and, as a result, interest rates could continue to fall. Since bond
prices generally move in the opposite direction of interest rates, that could be
good news for bonds. What's more, the supply of new municipals issued should
remain relatively weak. And if demand stays constant or improves, that too could
be a positive.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is lower.
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
[CAPTION]
"...THE TAX-REFORM SCARE HAS ACTUALLY CREATED AN OPPORTUNITY."
5
<PAGE> 6
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 dividends and capital gains,
assuming reinvestment of these distributions and the change in the price of the
Fund's average net assets. Performance figures included the maximum applicable
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.
Note: 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 DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A 14.79% 52.69% 62.00%(1)
Tax-Free Bond Fund: Class B 14.42% N/A 32.24%(2)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A(3) 14.79% 8.84% 8.39%(1)
Tax-Free Bond Fund: Class B(3) 14.42% N/A 7.24%(2)
</TABLE>
YIELDS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
-----
<S> <C>
Tax-Free Bond Fund: Class A 5.11%
Tax-Free Bond Fund: Class B 4.61%
</TABLE>
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 14.67%, 8.62%, and 8.06%,
respectively. The average annualized total returns for the one-year period
and since inception for Class B shares would have been 14.30% and 7.07%,
respectively.
6
<PAGE> 7
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 December 31, 1995, assuming you have been
invested since the day each class of shares started and reinvested all
distributions. 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.
[Tax Free Bond Fund
Class A shares
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 $16,961 as of December 31, 1995. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $16,374 as of December 31,
1995. The third line represents the Tax Free Bond Fund after sales charge and is
equal to $16,200 as of December 31, 1995.
Tax Free Bond Fund
Class B shares
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 $13,609 as of December 31, 1995. 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
$13,524 as of December 31, 1995. The third line represents the Tax Free Bond
Fund after contingent deferred sales charge and is equal to $13,224 as of
December 31, 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 DECEMBER 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds
(cost - $190,204,887)....................................... $205,442,483
------------
Receivable for investments sold................................ 12,238,500
Receivable for shares sold..................................... 7,615
Interest receivable............................................ 3,387,852
Receivable from John Hancock Advisers, Inc. -
Note B........................................................ 27,926
Miscellaneous assets........................................... 27,437
------------
Total Assets................................. 221,131,813
------------------------------------------------------------
LIABILITIES:
Temporary overdraft of cash.................................... 3,533,358
Payable for investments purchased.............................. 21,760,596
Payable for shares repurchased................................. 8,787
Dividend payable............................................... 25,227
Payable for variation margin................................... 23,438
Payable to John Hancock Advisers, Inc.
and affiliates - Note B....................................... 108,251
Accounts payable and accrued expenses.......................... 51,085
------------
Total Liabilities............................ 25,510,742
------------------------------------------------------------
NET ASSETS:
Capital paid-in................................................ 195,035,479
Accumulated net realized loss on investments
and financial futures contracts............................... (14,389,504)
Net unrealized appreciation of investments
and financial futures contracts............................... 14,975,096
------------
Net Assets................................... $195,621,071
============================================================
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 - $118,797,313/11,137,117.............................. $ 10.67
================================================================================
Class B - $76,823,758/7,202,812................................ $ 10.67
================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($10.67 x 104.71%)................................... $ 11.17
================================================================================
<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
Year ended December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................ $12,440,385
-----------
Expenses:
Investment management fee - Note B............................. 1,048,120
Distribution/service fee - Note B
Class A...................................................... 175,342
Class B...................................................... 663,054
Transfer agent fee............................................. 209,850
Registration and filing fees................................... 63,679
Custodian fee.................................................. 48,214
Auditing fee................................................... 47,989
Printing....................................................... 46,995
Legal fees..................................................... 30,747
Trustees' fees................................................. 29,411
Miscellaneous.................................................. 26,802
Advisory board fee............................................. 19,730
Less Management Fee Reduction - Note B (208,207)
-----------
Total Expenses................................ 2,201,726
Less Expense Reduction
by John Hancock Advisers,
Inc. - Note B................................. (24,419)
------------------------------------------------------------
Net Expenses.................................. 2,177,307
------------------------------------------------------------
Net Investment Income......................... 10,263,078
------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FINANCIAL FUTURES CONTRACTS
Net realized loss on investments sold........................... (4,728,195)
Net realized loss on financial futures contracts................ (2,308,339)
Change in net unrealized appreciation/depreciation
of investments................................................. 31,679,568
Change in net unrealized appreciation/depreciation
on financial futures contracts................................. (262,500)
-----------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts................... 24,380,534
------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations..................... $34,643,612
============================================================
</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>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................................... $ 10,263,078 $ 11,284,980
Net realized loss on investments sold and financial futures contracts............................... (7,036,534) (7,349,795)
Change in net unrealized appreciation/depreciation of investments and financial futures contracts... 31,417,068 (25,666,689)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations.................................... 34,643,612 (21,731,504)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A - ($0.5699 and $0.5730 per share, respectively)............................................ (6,647,931) (7,588,474)
Class B - ($0.4927 and $0.4973 per share, respectively)............................................ (3,620,138) (3,611,510)
------------ ------------
Total Distributions to Shareholders.............................................................. (10,268,069) (11,199,984)
------------ ------------
FROM FUND SHARE TRANSACTIONS-- NET*................................................................... (13,536,114) 24,808,198
------------ ------------
NET ASSETS:
Beginning of period................................................................................. 184,781,642 192,904,932
------------ ------------
End of period (including undistributed net investment income of $83,180 and $84,996, respectively).. $195,621,071 $184,781,642
============ ============
</TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold...................................................... 990,678 $ 10,001,197 2,973,332 $ 31,232,536
Shares issued to shareholders in reinvestment of distributions... 365,927 3,709,354 430,837 4,303,072
---------- ------------ ---------- ------------
1,356,605 13,710,551 3,404,169 35,535,608
Less shares repurchased.......................................... (2,422,945) (24,445,738) (3,655,146) (36,242,204)
---------- ------------ ---------- ------------
Net decrease..................................................... (1,066,340) $(10,735,187) (250,977) $ (706,596)
========== ============ ========== ============
CLASS B
Shares sold...................................................... 722,057 $ 7,261,875 3,736,809 $ 39,155,237
Shares issued to shareholders in reinvestment of distributions... 202,597 2,054,192 212,691 2,116,235
---------- ------------ ---------- ------------
924,654 9,316,067 3,949,500 41,271,472
Less shares repurchased.......................................... (1,207,168) (12,116,994) (1,608,678) (15,756,678)
---------- ------------ ---------- ------------
Net increase (decrease).......................................... (282,514) $ (2,800,927) 2,340,822 $ 25,514,794
========== ============ ========== ============
</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> 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994(c) 1993 1992 1991
-------- -------- -------- ------- -------
<S> <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
-------- -------- -------- ------- -------
Net Investment Income.............................................. 0.57(b) 0.58 0.62 0.67 0.69
Net Realized and Unrealized Gain (Loss) on Investments............. 1.28 (1.58) 0.93 0.42 0.72
-------- -------- -------- ------- -------
Total from Investment Operations.................................. 1.85 (1.00) 1.55 1.09 1.41
-------- -------- -------- ------- -------
Less Distributions:
Dividends from Net Investment Income............................... (0.57) (0.57) (0.62) (0.68) (0.68)
Distributions from Net Realized Gains on Investments Sold.......... -- -- (0.44) (0.18) (0.39)
-------- -------- -------- ------- -------
Total Distributions............................................... (0.57) (0.57) (1.06) (0.86) (1.07)
-------- -------- -------- ------- -------
Net Asset Value, End of Period..................................... $ 10.67 $ 9.39 $ 10.96 $ 10.47 $ 10.24
======== ======== ======== ======= =======
Total Investment Return at Net Asset Value (d)..................... 20.20% (9.28%) 15.15% 10.97% 14.78%
Total Adjusted Investment Return at Net Asset Value (a)............ 20.08% (9.39%) 14.98% 10.67% 14.40%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).......................... $118,797 $114,539 $136,521 $99,523 $73,393
Ratio of Expenses to Average Net Assets............................ 0.85% 0.85% 0.78% 0.66% 0.60%
Ratio of Adjusted Expenses to Average Net Assets (a)............... 0.97% 0.96% 0.95% 0.96% 0.98%
Ratio of Net Investment Income to Average Net Assets............... 5.67% 5.72% 5.57% 6.46% 6.86%
Ratio of Adjusted Net Investment Income to Average Net Assets (a).. 5.55% 5.61% 5.40% 6.16% 6.48%
Portfolio Turnover Rate............................................ 113% 107% 116% 79% 123%
</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>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994(c) 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........................................................ 0.50(b) 0.50 0.54 0.59(b)
Net Realized and Unrealized Gain (Loss) on Investments....................... 1.28 (1.58) 0.93 0.42
------- ------- ------- -------
Total from Investment Operations............................................ 1.78 (1.08) 1.47 1.01
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income......................................... (0.49) (0.50) (0.54) (0.60)
Distributions from Net Realized Gains on Investments Sold.................... -- -- (0.44) (0.18)
------- ------- ------- -------
Total Distributions......................................................... (0.49) (0.50) (0.98) (0.78)
------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 10.67 $ 9.38 $ 10.96 $ 10.47
======= ======= ======= =======
Total Investment Return at Net Asset Value (d)............................... 19.41% (10.05%) 14.30% 10.15%
Total Adjusted Investment Return at Net Asset Value (a)...................... 19.29% (10.16%) 14.13% 9.85%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).................................... $76,824 $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......................... 4.90% 4.97% 4.66% 5.57%
Ratio of Adjusted Net Investment Income to Average Net Assets (a)............ 4.78% 4.86% 4.49% 5.27%
Portfolio Turnover Rate...................................................... 113% 107% 116% 79%
</TABLE>
(a) On an unreimbursed basis.
(b) On average month end shares outstanding.
(c) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(d) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
SCHEDULE OF INVESTMENTS
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY TAX-FREE BOND FUND ON DECEMBER 31, 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
ARIZONA (1.19%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj............. 8.200% 06/01/21 BBB $ 2,150 $ 2,328,794 7.57%
-----------
CALIFORNIA (9.20%)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc....... 5.875 05/01/20 A *4,000 4,009,600 5.86
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj.......................... 6.350 10/01/07 AAA *2,000 2,187,680 5.81
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center.. 8.400 04/01/15 B*** 500 478,750 8.77
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/24 BBB- *675 114,696 6.43
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/27 BBB- *1,000 140,540 6.43
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/28 BBB- *7,915 1,044,147 6.43
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.000 01/01/16 BBB- *2,000 2,007,520 5.98
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.500 01/01/32 BBB- *1,950 2,030,906 6.24
Sacramento Municipal Utility District,
Elec Rev Ref Ser A...................................... 6.250 08/15/10 AAA *1,280 1,431,066 5.59
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A........ 7.750 09/01/16 BBB*** 2,000 2,086,280 7.43
San Jose Financing Auth,
Rev Ser B Community Facil Proj.......................... 5.625 11/15/18 A+ *2,500 2,463,450 5.71
-----------
17,994,635
-----------
COLORADO (5.67%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470........................... 6.950 08/31/20 BAA*** *5,000 5,416,750 6.42
Denver, City and County of,
Airport Sys Rev Ser 1992A............................... 7.250 11/15/25 BBB 2,000 2,204,960 6.58
Airport Sys Rev Ser 1994A............................... 7.500 11/15/23 BBB 3,100 3,464,467 6.71
-----------
11,086,177
-----------
FLORIDA (7.83%)
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A.................................... 5.250 10/01/28 AA 9,000 8,765,910 5.39
Orange County Health Facilities Auth,
Rev Adventist Hlth Sys Hosp............................. 5.250 11/15/20 AAA *5,000 4,904,400 5.35
</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)
Tampa Sports Auth,
Sales Tax Rev Tampa Bay Arena Proj...................... 5.750% 10/01/25 AAA $*1,500 $ 1,643,430 5.25%
-----------
15,313,740
-----------
GEORGIA (10.57%)
Georgia Municipal Electric Auth,
Pwr Rev Ser C........................................... 5.700 01/01/19 AAA 5,000 5,291,550 5.39
Pwr Rev Ser EE.......................................... 7.250 01/01/24 AAA 2,000 2,579,880 5.62
Pwr Rev Ser Z........................................... 5.500 01/01/20 AAA 5,840 6,021,741 5.33
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj. 6.800 01/01/12 A+ 1,000 1,165,240 5.84
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj......................... 7.000 01/01/23 BBB+ 5,470 5,616,760 6.82
-----------
20,675,171
-----------
ILLINOIS (3.25%)
Chicago, City of,
Skyway Toll Bridge Rev Ref Ser 1994..................... 6.750 01/01/17 BBB- 2,000 2,099,340 6.43
Illinois Development Finance Auth,
Rev Ref Ser A Columbus Cuneo Cabrini Proj............... 8.500 02/01/15 BBB+ 2,150 2,518,639 7.26
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg........................ 6.750 12/01/08 A-*** 1,640 1,739,663 6.36
-----------
6,357,642
-----------
INDIANA (3.66%)
Indianapolis Airport Auth,
Spec Facil Rev Ser A United Airlines Proj............... 6.500 11/15/31 BB *7,000 7,156,310 6.36
-----------
LOUISIANA (1.06%)
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 2,076,020 6.74
-----------
MICHIGAN (2.68%)
Michigan State Hospital Finance Auth,
Rev Ref 1990 Ser A Bay Medical Center Hosp.............. 8.250 07/01/12 BAA1*** 2,250 2,449,192 7.58
Williamston Community School District,
GO Ser 1996**........................................... 5.500 05/01/25 AAA *2,725 2,803,807 5.35
-----------
5,252,999
-----------
MISSISSIPPI (4.84%)
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc........... 7.300 05/01/25 BBB- *4,000 4,186,800 6.97
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj.... 7.000 04/01/22 BAA3*** 5,000 5,291,800 6.61
-----------
9,478,600
-----------
</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>
NEVADA (5.19%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj........ 6.500% 12/01/33 BBB- $ 10,000 $10,160,000 6.40%
-----------
NEW HAMPSHIRE (2.05%)
New Hampshire Higher Educational and Health Facilities Auth,
Hosp Rev Wentworth Douglass Hosp........................... 5.375 01/01/15 AAA 1,300 1,325,675 5.27
New Hampshire Industrial Development Auth,
Rev Ref Poll Control Central Maine Pwr..................... 7.375 05/01/14 BB *2,500 2,680,325 6.88
-----------
4,006,000
-----------
NEW JERSEY (2.97%)
New Jersey Economic Development Auth,
Rev Poll Control General Motors Corp Proj.................. 5.350 04/01/09 A- *1,500 1,488,630 5.39
Rev Ref Ser J Holt Hauling Proj............................ 8.500 11/01/23 BBB*** *2,500 2,574,775 8.25
New Jersey Turnpike Auth,
Ser 1991 C................................................. 6.500 01/01/16 AAA *1,500 1,748,955 5.57
-----------
5,812,360
-----------
NEW YORK (6.98%)
New York State Dormitory Auth,
City Univ Sys Cons Rev Ser 1995A........................... 5.625 07/01/16 BBB *2,000 2,013,340 5.59
New York, City of,
GO Fiscal 1996 Ser F**..................................... 5.750 02/01/19 BBB+ *6,000 5,842,680 5.90
GO Fiscal 1996 Ser G**..................................... 5.750 02/01/20 BBB+ *5,950 5,790,956 5.91
-----------
13,646,976
-----------
NORTH CAROLINA (1.05%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1993B.................................. 6.000 01/01/22 A- 2,000 2,064,300 5.81
-----------
OHIO (0.75%)
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan................. 8.875 08/01/08 BBB-*** 1,420 1,461,720 8.62
-----------
OKLAHOMA (1.31%)
Tulsa Municipal Airport Auth,
Rev American Airlines Proj................................. 6.250 06/01/20 BB+ *2,500 2,556,175 6.11
-----------
OREGON (2.56%)
Oregon Health Sciences University,
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/14 AAA *1,750 656,372 5.37
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/15 AAA *2,220 786,546 5.39
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/16 AAA *10,700 3,558,820 5.44
-----------
5,001,738
-----------
PENNSYLVANIA (10.56%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj.......... 6.700 12/01/20 BB+ 5,000 5,201,200 6.44
</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>
PENNSYLVANIA (CONTINUED)
Beaver County Industrial Development Auth,
Poll Control Rev Ref Ser A Ohio Edison Proj................ 7.750% 09/01/24 BB+ $*1,400 $ 1,499,162 7.24%
Keystone Oaks School District,
Variable Rate Ser D........................................ 7.318# 09/01/16 AAA *2,950 3,071,687 7.03
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj...... 8.625 07/01/21 BB*** 2,700 2,848,203 8.18
Hosp Rev 1992 Ser A Childrens Seashore House Proj.......... 7.000 08/15/12 A- 1,250 1,351,437 6.47
Philadelphia, City of,
Wtr & Swr Rev 16th Ser..................................... 7.500 08/01/10 AAA 3,000 3,524,490 6.38
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj......... 7.600 07/15/20 BBB-*** 3,000 3,157,650 7.22
-----------
20,653,829
-----------
PUERTO RICO (5.59%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico............................................... 6.000# 07/01/11 AAA *200 220,474 5.44
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico............................................... 8.220# 07/01/11 AAA *5,500 6,620,625 6.83
Puerto Rico, Commonwealth of,
GO Pub Imp Ref Inverse Floater Ser 1992A................... 7.534# 07/01/08 AAA *2,700 3,000,375 6.78
University of Puerto Rico,
Univ Rev Ser M............................................. 5.250 06/01/25 AAA *1,100 1,088,560 5.31
-----------
10,930,034
-----------
SOUTH CAROLINA (3.28%)
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys............................ 5.375 01/01/25 AAA *6,305 6,421,706 5.28
-----------
TEXAS (9.19%)
Dallas-Fort Worth International Airport Facility
Improvement Corp, Rev American Airlines Inc................ 7.250 11/01/30 BB+ 10,250 11,083,735 6.70
Ector County Hospital District,
Hosp Rev 1992.............................................. 7.300 04/15/12 A- 4,000 4,393,800 6.65
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj...................... 7.750 03/01/12 B 1,410 1,456,192 7.50
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp
Proj....................................................... 6.625 02/01/24 BBB+ 1,000 1,046,800 6.33
-----------
17,980,527
-----------
UTAH (0.54%)
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon
Development Corp.......................................... 9.000 07/01/12 BBB-*** 1,000 1,068,190 8.43
-----------
VIRGINIA (2.52%)
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil..................................... 7.550 01/01/19 BB*** 4,500 4,923,810 6.90
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 16
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>
WASHINGTON (0.53%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj... 9.125% 01/01/26 BB-*** $ *1,000 $ 1,035,030 8.82%
------------
TOTAL TAX EXEMPT LONG-TERM BONDS
(Cost $190,204,887) (105.02%) $205,442,483
========= ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities other than short-term investments, newly added to the portfolio,
during the period ended December 31, 1995.
** These securities having an aggregate value of $19,439,181 or 9.94% 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
$5,082,809 of Savannah Hospital Auth, Rev Ref & Imp Candler Hosp Proj,
7.000%, 01-01-20, $1,136,036 of El Paso International Airport, Rev Ref Spec
Facil Marriot Corp Proj, 7.750%, 03-01-12, $1,904,958 of Georgia Municipal
Electric Auth, Pwr Rev Ser C, 5.700%, 01-01-19, $8,751,300 of Jacksonville
Electric Auth, Elec Sys Rev 3-A, 5.250%, 10-01-28, and $3,773,899 of
Georgia Municipal Electric Auth, Pwr Rev Ser Z, 5.500%, 01-01-20, has 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.
**** Credit ratings are unaudited.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities Exchange Commission and is unaudited. Zero coupon
yields are at yield to maturity.
# Represents rate in effect on December 31, 1995.
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.
16
<PAGE> 17
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PORTFOLIO CONCENTRATION
- --------------------------------------------------------------------------------
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>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation............................. 11.14%
Revenue Bonds - Certificate of Participation... 2.89
Revenue Bonds - Education...................... 8.96
Revenue Bonds - Electric Power................. 17.97
Revenue Bonds - Health......................... 17.91
Revenue Bonds - Housing........................ --
Revenue Bonds - Industrial Development Bond.... 5.95
Revenue Bonds - Other.......................... 1.78
Revenue Bonds - Pollution Control Facilities... 9.94
Revenue Bonds - Transportation................. 20.99
Revenue Bonds - Water & Sewer.................. 7.49
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 105.02%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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 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 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. 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
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 gain distributions will be made. The carryforwards expire as follows:
December 31, 2002 -- $7,349,795, December 31, 2003 -- $5,155,633. Expired
capital loss carryforwards are reclassified to capital paid-in, in the year of
expiration.
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
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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 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 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.
At December 31, 1995, open positions in financial futures contracts were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MARCH 1996 75 MUNI BOND INDEX SHORT ($262,500)
=========
</TABLE>
At December 31, 1995, the Fund has deposited in a segregated account $895,000
par value of Clark County, Nevada Industrial Development Revenue Bond, 6.50%,
12/01/33 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 $208,207 for
the period ended December 31, 1995. This reduction may be discontinued at any
time. Furthermore, $24,419 of custodian fees have been reduced by balance
credits applied during the period ended December 31, 1995.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended December
31, 1995, JH Funds received net sales charges
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
on sales of Class A shares of the Fund in the amount of $158,248. Out of this
amount, $14,871 was retained and used for printing prospectuses, advertising,
sales literature and other purposes, $68,756 was paid as sales commissions and
service fees to unrelated broker-dealers and $74,621 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"), 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 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 December 31,
1995, contingent deferred sales charges received by JH Funds amounted to
$222,466.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B 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. For the period May 15,
1995 through September 30, 1995, the Fund entered into a full service transfer
agent agreement with Investor Services whereby Class A and Class B shares paid
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses. Prior to May 15, 1995 The Shareholder Services Group was
the transfer agent. Effective October 1, 1995 transfer agent expense is a fund
expense.
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 makes 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 are recorded on the Fund's books as an other asset. The deferred
compensation liability is marked to market on a periodic basis and income earned
by the investment is 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. 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 December 31, 1995, aggregated $211,980,373 and $211,965,175, respectively.
There were no purchases or sales of long-term obligations of the U.S. government
and its agencies during the period ended December 31, 1995.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
The cost of investments owned at December 31, 1995 for Federal income tax
purposes was $190,204,887. Gross unrealized appreciation and depreciation of
investments aggregated $15,264,006 and $26,410, respectively, resulting in net
unrealized appreciation of $15,237,596.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1995, the Fund has reclassified $80,005 from
undistributed net investment income and $63,964 from accumulated net realized
loss on investments and financial futures contracts to capital paid-in. This
represents the cumulative amounts necessary to report these balances on a tax
basis, excluding certain temporary differences, as of December 31, 1995.
Additional adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the Fund, are
primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
PLAN OF REORGANIZATION
On November 28, 1995, the Board of Trustees of the Fund approved a plan of
reorganization between the Fund and the John Hancock Tax-Exempt Income Fund
("Income Fund") providing for the transfer of substantially all of the assets
and liabilities of the Income Fund to the Fund in exchange solely for Class A
and Class B shares of the Fund to be distributed to Income Fund's Class A and
Class B shareholders, respectively.
21
<PAGE> 22
John Hancock Funds - Tax-Free Bond Fund
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Tax-Free Bond Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the John Hancock Tax-Free Bond (the "Fund"), as
of December 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers, or other
appropriate auditing procedures when replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
John Hancock Tax-Free Bond Fund at December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
January 31, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1995.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 98.8% tax-exempt. Approximately 20% of the 1995 income
dividends are subject to the alternative minimum tax. None of the income was
derived from U.S. Treasury obligations, or qualify for the corporate dividends
received deductions.
22
<PAGE> 23
NOTES
John Hancock Funds - Tax-Free Bond Fund
23
<PAGE> 24
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
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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.
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