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John Hancock Funds
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Tax-Free
Bond
Fund
ANNUAL REPORT
August 31, 1996
<PAGE>
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
INDEPENDENT AUDITORS
Ernst & Young llp
200 Clarendon Street
Boston, Massachusetts 02116-5072
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.
[A 1 1/4" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
So it is my pleasure to let you know that after being under development for
a year, John Hancock Funds has introduced new simplified and c onsolidated
prospectuses. The prospectuses feature shorter, clearer language w ith a
streamlined design, and they incorporate several funds with similar investment
objectives into one document. They cover our income, growth, growth and income,
tax-free income, international/global and money market funds. We are gratified
at the favorable reviews that our new prospectuses have received from
shareholders, financial advisers, industry analysts and the press. We believe
they are a bold but sensible step forward. And while they are easier to read,
they still comply 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).
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, PROTFOLIO MANAGER
John Hancock
Tax-Free Bond Fund
Fears of inflation loom over bond market in 1996;
munis outperform U.S. Treasuries
Recently, the Fund's fiscal year end changed from December to August. What
follows is a discussion of the Fund's performance for the 12 months ended August
31, 1996.
Municipals experienced their share of ups and downs over the past 12 months,
although they ended up in relatively good form compared to their taxable bond
counterparts. Generally speaking, nearly all bonds turned in impressive
performances in the final four months of 1995, lifted by falling interest rates.
Municipals, while performing well, lagged Treasuries as flat-tax proposals
gained support among some of the leading Presidential candidates.
In 1996, all bonds suffered a slide at the hand of increasing inflation
worries. Fears that the economy was growing at a healthier-than-expected rate
proved to be enough to ignite inflationary fears and warrant bond investors to
send yields higher. Bondholders, of course, dislike inflation because it can eat
away at the value of their holdings.
Despite this year's pressure on bond prices, municipals performed well
compared to Treasuries. As a result of worry over tax reform last year,
municipals entered 1996 with cheap prices relative to Treasuries. As investors
recognized the value in municipals early this year, munis began to outperform
Treasuries. But that wasn't the only factor that supported municipals. By mid
year, the total amount of municipal bonds issued had slowed dramatically, while
the number of bonds maturing and being called -- or paid off early by their
issuers --
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"Municipals experienced their share of ups and downs..."
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[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".]
3
<PAGE>
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John Hancock Funds - Tax-Free Bond Fund
[Chart entitled "Top Five Bond Sectors" at top left hand column. The chart lists
five sectors; Transportation 22%; Electric 18%; Health 17%; Pollution Control
15%; Industrial Revenue 10%. A footnote below states "As a percentage of net
assets on August 31, 1996".]
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" we adopted a more conservative stance..."
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had risen. Meanwhile, the demand for municipals has been on the rise
as many institutional and individual investors have come back to the municipal
market.
A look at performance
Despite the recent disappointing performance of bond markets, John Hancock
Tax-Free Bond Fund turned in a solid performance for the year. For the 12 months
ended August 31, 1996, the Fund's Class A and Class B shares posted total
returns of 6.82% and 6.02%, respectively, at net asset value. That compared
favorably to the average general municipal bond fund's 4.68% return, according
to Lipper Analytical Services.1 Please see pages six and seven for longer-term
performance information.
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers". The first listing is California
securities followed by an up arrow and the phrase "Improving state economy". The
second listing is Airline bonds followed by an up arrow and the phrase "Cost
cutting, increased capacity = improved profits". The third listing is Long term
bonds followed by a down arrow and the phrase "High interest rate sensitivity
hurts returns in 1996." A footnote below states "See 'Schedule of Investments'.
Investment holdings are subject to change."]
Strategy
There were several factors contributing to the Fund's better-than-average
performance. First was duration, which 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. In the
fall of 1995, we felt that interest rates would decline, so we made the Fund
more interest-rate sensitive by lengthening duration. As interest rates fell,
the Fund's heightened interest rate sensitivity helped it to benefit from the
bond market's rally.
But we switched course in the early months of 1996, when the bond market
reacted negatively to the news that the economy was strong. After that, the bond
market became much more volatile than it had been last year. As a result of this
volatility, we adopted a more conservative stance by shortening the Fund's
duration. 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.
Boosting income
To offset declining bond prices, we sought to provide the Fund with a higher and
more stable level of income. To do that, we bought some higher-quality
securities. That may sound contradictory, because in order to compensate
investors for the fact that they carry higher credit risks, lower-quality bonds
tend to offer much higher yields than higher-quality bonds. But because the
demand for municipals was fairly strong over the past six months, credit spreads
(or the difference in yields between low- and high-quality bonds) remained quite
narrow, or small. Simply put, investors were getting rewarded with very little
additional yield
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 year ended August 31, 1996." The chart is
scaled in increments of 4%, with 8% at the top and 0% at the bottom. Within the
chart are three solid bars. The first represents the 6.82% total return for John
Hancock Tax-Free Bond Fund: Class A. The second represents the 6.02% total
return for John Hancock Tax-Free Bond Fund: Class B. The third represents the
4.68% total return for 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 two pages for
historical performance information."]
for buying more risky, lower-quality bonds. And 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. Essentially, the exchange between lower-quality
and higher-quality bonds allowed us to increase the Fund's distribution yields
and improve its overall credit quality. That type of opportunity is pretty rare.
However, there were times when we found lower quality bonds that we felt
offered enough additional yield over higher-quality bonds to warrant their added
credit risk. Many of those opportunities were industrial development bonds that
are issued by a municipality on behalf of a private entity, in many cases for
the purposes of pollution control. We added to our existing holdings in Maury
County (TN) Industrial Development Corporation, which were issued for pollution
control programs at General Motors' Saturn plant. Some of the Fund's best
performers were non-rated bonds issued on the behalf of airlines, including
Dallas/Fort Worth International Airport Facility Improvement bonds -- issued for
the construction of additional gates for American Airlines -- and Kenton County,
Kentucky Airport Bonds issued to help expand Delta's terminal at that airport.
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The Fund found opportunities in industrial development bonds.
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What's ahead
We believe that the Federal Reserve Board will likely raise interest rates in
the last quarter of this year. If that happens, higher interest rates this year
should be enough to slow the economy's growth to a slow but steady pace by 1997.
In that case, our view is that interest rates could fall once again.
But until there are more definitive signs about the direction of the
economy, inflation and interest rates, we intend to remain cautious by keeping
the Fund's duration fairly short, but at the same time remaining flexible enough
so that we can be responsive to changes in the economic outlook. From a
fundamental standpoint, we see reasons to be optimistic. The supply of
municipals continues to diminish while demand remains relatively healthy. And
from a historical perspective, municipals still offer an attracti ve value
relative to Treasuries.
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 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
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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 applicable sales charge of 4.5% for Class A shares. The effect of
the maximum contingent deferred sales charge for Class B shares (maximum 5% and
declining to 0% over six years) is included in Class B performance. Remember
that all figures represent past performance and are no guarantee of how the Fund
will perform in the future. Also, keep in mind that the total return and share
price of the Fund's investments will fluctuate. As a result, your Fund's shares
may be worth more or less than their original cost, depending on when you sell
them.
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CUMULATIVE TOTAL RETURNS
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For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A 2.92% 42.09%(1) 59.92%
John Hancock Tax-Free Bond Fund: Class B 1.94% 31.01%(2) N/A
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended June 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A(3) 2.92% 7.28%(1) 7.51%
John Hancock Tax-Free Bond Fund: Class B(3) 1.94% 6.19%(2) N/A
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YIELDS
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As of August 31, 1996
SEC 30-DAY
YIELD
-----
John Hancock Tax-Free Bond Fund: Class A 5.19%
John Hancock Tax-Free Bond Fund: Class B 4.67%
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 2.80%, 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 1.82% and 6.02%,
respectively.
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.
6
<PAGE>
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Free Bond Fund would be worth on August 31, 1996, assuming you invested on
the day shares started and have reinvested all distributions. For comparison,
we've shown the same $10,000 investment in the Lehman Brothers Municipal Bond
Index N 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 $16,957 as of August 31, 1996. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $16,444 as of August 31,
1996. The third line represents the Tax-Free Bond Fund after sales charge and is
equal to $16,197 as of August 31, 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 $13,668 as of August 31, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the Tax-Free Bond Fund on
December 31, 1991, and is equal to $13,454 as of August 31, 1996. The third line
represents the value of the Tax-Free Bond Fund after sales charge and is equal
to $13,254 as of August 31, 1996.]
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement of Assets and Liabilities
August 31, 1996
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Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $632,920,605)............. $659,170,485
Options (cost - $713,531).................................... 49,219
------------
659,219,704
Cash........................................................... 840,649
Receivable for investments sold................................ 3,045,000
Receivable for shares sold..................................... 1,841,364
Interest receivable............................................ 11,562,956
Receivable for variation margin................................ 758,968
Receivable from John Hancock Advisers, Inc. - Note B........... 61,901
Miscellaneous assets........................................... 54,277
------------
Total Assets................................. 677,384,819
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Liabilities:
Payable for investments purchased.............................. 34,541,421
Payable for shares repurchased................................. 198,336
Dividend payable............................................... 97,087
Payable to John Hancock Advisers, Inc. and affiliates - Note B. 421,767
Accounts payable and accrued expenses.......................... 85,748
------------
Total Liabilities............................ 35,344,359
-----------------------------------------------------------
Net Assets:
Capital paid-in................................................ 628,477,973
Accumulated net realized loss on investments and financial
futures contracts............................................ ( 14,252,207)
Net unrealized appreciation of investments and financial
futures contracts............................................ 27,743,852
Undistributed net investment income............................ 70,842
------------
Net Assets................................... $642,040,460
===========================================================
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 - $560,863,360 / 54,614,449............................ $ 10.27
=============================================================================
Class B - $81,177,100 / 7,903,470.............................. $ 10.27
=============================================================================
Maximum Offering Price Per Share*
Class A - ($10.27 x 104.71%)................................... $ 10.75
=============================================================================
* 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 August 31, 1996. You'll also
find the net asset value and maximum offering price per share as of that date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement of Operations
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<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996, TO
1995 AUGUST 31, 1996(1)
---- ------------------
<S> <C> <C>
Interest.................................................... $12,440,385 $18,149,462
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Expenses:
Investment management fee - Note B........................ 1,048,120 1,489,530
Distribution/service fee - Note B
Class A................................................. 175,342 334,521
Class B................................................. 663,054 469,507
Transfer agent fee - Note B............................... 209,850 479,692
Registration and filing fees.............................. 63,679 60,982
Custodian fee............................................. 48,214 84,894
Auditing fee.............................................. 47,989 39,855
Printing.................................................. 46,995 44,832
Legal fees................................................ 30,747 15,945
Trustees' fees............................................ 29,411 23,356
Miscellaneous............................................. 26,802 788
Advisory board fee........................................ 19,730 13,762
Financial services fee - Note B........................... --- 20,551
Less Management Fee Reduction - Note B.................... ( 208,207) ( 347,931)
----------- ----------
Total Expenses................................. 2,201,726 2,730,284
Less Expense Reduction by John Hancock
Advisers, Inc. - Note B........................ ( 24,419) ---
--------------------------------------------------------------------------------------
Net Expenses................................... 2,177,307 2,730,284
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Net Investment Income.......................... 10,263,078 15,419,178
--------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts
Net realized loss on investments sold....................... ( 4,728,195) ( 720,310)
Net realized gain (loss) on financial futures contracts..... ( 2,308,339) 871,018
Change in net unrealized appreciation/depreciation of
investments............................................... 31,679,568 ( 3,846,360)
Change in net unrealized appreciation/depreciation on
financial futures contracts............................... ( 262,500) 1,672,250
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Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts.... 24,380,534 ( 2,023,402)
--------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations..................................... $34,643,612 $13,395,776
======================================================================================
</TABLE>
(1) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
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.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 TO
1994 1995 AUGUST 31, 1996(1)
---- ---- ------------------
<S> <C> <C> <C>
From Operations:
Net investment income................................................ $ 11,284,980 $ 10,263,078 $ 15,419,178
Net realized gain (loss) on investments sold and financial
futures contracts.................................................. ( 7,349,795) ( 7,036,534) 150,708
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts........................................ ( 25,666,689) 31,417,068 ( 2,174,110)
------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations.... ( 21,731,504) 34,643,612 13,395,776
------------ ------------ ------------
Distributions to Shareholders:
Dividends from net investment income:
Class A - ($0.5730, $0.5699 and $0.3940 per share, respectively)... ( 7,588,474) ( 6,647,931) ( 12,785,885)
Class B - ($0.4973, $0.4927 and $0.3421 per share, respectively)... ( 3,611,510) ( 3,620,138) ( 2,575,862)
------------ ------------ ------------
Total Distributions to Shareholders.............................. ( 11,199,984) ( 10,268,069) ( 15,361,747)
------------ ------------ ------------
From Fund Share Transactions - Net*.................................... 24,808,198 ( 13,536,114) 448,385,360
------------ ------------ ------------
Net Assets:
Beginning of period.................................................. 192,904,932 184,781,642 195,621,071
------------ ------------ ------------
End of period (including undistributed net investment income of
$84,996, none and $57,431, respectively)........................... $184,781,642 $195,621,071 $642,040,460
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
* Analysis of Fund Share Transactions: YEAR ENDED DECEMBER 31, PERIOD FROM
JANUARY 1, 1996 TO
1994 1995 AUGUST 31, 1996(1)
------------------- ------------------ --------------------
CLASS A SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Shares sold..................................... 2,973,332 $31,232,536 990,678 $10,001,197 5,071,402 $ 52,156,414
Shares issued in reorganization - Note D........ --- --- --- --- 45,353,943 460,732,563
Shares issued to shareholders in reinvestment
of distributions.............................. 430,837 4,303,072 365,927 3,709,354 891,259 9,157,732
--------- ----------- --------- ----------- ---------- ------------
3,404,169 35,535,608 1,356,605 13,710,551 51,316,604 522,046,709
Less shares repurchased......................... (3,655,146) ( 36,242,204) (2,422,945) ( 24,445,738) ( 7,839,272) ( 80,702,212)
--------- ----------- --------- ----------- ---------- ------------
Net increase (decrease)......................... ( 250,977) ($ 706,596) (1,066,340) ($10,735,187) 43,477,332 $441,344,497
========= =========== ========= =========== ========== ============
CLASS B
Shares sold..................................... 3,736,809 $39,155,237 722,057 $ 7,261,875 801,687 $ 8,269,693
Shares issued in reorganization - Note D........ --- --- --- --- 903,108 9,174,769
Shares issued to shareholders in reinvestment
of distributions.............................. 212,691 2,116,235 202,597 2,054,192 143,061 1,478,978
--------- ----------- --------- ----------- ---------- ------------
3,949,500 41,271,472 924,654 9,316,067 1,847,856 18,923,440
Less shares repurchased......................... (1,608,678) ( 15,756,678) (1,207,168) ( 12,116,994) ( 1,147,198) ( 11,882,577)
--------- ----------- --------- ----------- ---------- ------------
Net increase (decrease)......................... 2,340,822 $25,514,794 ( 282,514) ($ 2,800,927) 700,658 $ 7,040,863
========= =========== ========= =========== ========== ============
</TABLE>
(1) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
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.
10
<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>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 TO
1991 1992 1993 1994(1) 1995 AUGUST 31, 1996(8)
---- ---- ---- ------- ---- ------------------
<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) 0.40
Net Realized and Unrealized Gain (Loss) on Investments..... 0.72 0.42 0.93 ( 1.58) 1.28 ( 0.41)
------- ------- -------- -------- -------- --------
Total from Investment Operations......................... 1.41 1.09 1.55 ( 1.00) 1.85 ( 0.01)
------- ------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income....................... ( 0.68) ( 0.68) ( 0.62) ( 0.57) ( 0.57) ( 0.39)
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) ( 0.39)
------- ------- -------- -------- -------- --------
Net Asset Value, End of Period............................. $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67 $ 10.27
======= ======= ======== ======== ======== ========
Total Investment Return at Net Asset Value (3)............. 14.78% 10.97% 15.15% ( 9.28%) 20.20% ( 0.01%)(4)
Total Adjusted Investment Return at Net Asset Value (3,5).. 14.40% 10.67% 14.98% ( 9.39%) 20.08% ( 0.09%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted).................. $73,393 $99,523 $136,521 $114,539 $118,797 $560,863
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% 0.98%(7)
Ratio of Net Investment Income to Average Net Assets....... 6.86% 6.46% 5.57% 5.72% 5.67% 5.75%(7)
Ratio of Adjusted Net Investment Income to Average
Net Assets (6)........................................... 6.48% 6.16% 5.40% 5.61% 5.55% 5.62%(7)
Portfolio Turnover Rate.................................... 123% 79% 116% 107% 113% 116%(9)
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.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 TO
1992 1993 1994(1) 1995 AUGUST 31, 1996(8)
---- ---- ------- ---- ------------------
<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) 0.34
Net Realized and Unrealized Gain (Loss) on Investments.............. 0.42 0.93 ( 1.58) 1.28 ( 0.40)
------- ------- ------- ------- -------
Total from Investment Operations.................................. 1.01 1.47 ( 1.08) 1.78 ( 0.06)
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income................................ ( 0.60) ( 0.54) ( 0.50) ( 0.49) ( 0.34)
Distributions from Net Realized Gains on Investments Sold ( 0.18) ( 0.44) -- -- --
------- ------- ------- ------- -------
Total Distributions............................................... ( 0.78) ( 0.98) ( 0.50) ( 0.49) ( 0.34)
------- ------- ------- ------- -------
Net Asset Value, End of Period...................................... $ 10.47 $ 10.96 $ 9.38 $ 10.67 $ 10.27
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (3)...................... 10.15% 14.30% ( 10.05%) 19.41% ( 0.51%)(4)
Total Adjusted Investment Return at Net Asset Value (3,5)........... 9.85% 14.13% ( 10.16%) 19.29% ( 0.59%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted)........................... $18,272 $56,384 $70,243 $76,824 $81,177
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% 1.73%(7)
Ratio of Net Investment Income to Average Net Assets................ 5.57% 4.66% 4.97% 4.90% 4.91%(7)
Ratio of Adjusted Net Investment Income to Average Net Assets (6)... 5.27% 4.49% 4.86% 4.78% 4.78%(7)
Portfolio Turnover Rate............................................. 79% 116% 107% 113% 116%(9)
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.
(8) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(9) Portfolio turnover excludes merger activity.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Schedule of Investments
August 31, 1996
- --------------------------------------------------------------------------------
The SCHEDULE OF INVESTMENTS is a complete list of all securities owned by
Tax-Free Bond Fund on August 31, 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 (0.85%)
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj 1995........ 6.950% 01/01/20 BBB- $5,250 $ 5,469,292 26.67%
-----------
Alaska (0.16%)
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser....................................... 7.750 12/01/14 A+ 1,000 1,008,010 7.69
-----------
Arizona (3.23%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj..................... 8.200 06/01/21 BBB 2,150 2,304,112 7.65
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 8,293,158 6.57
Salt River Proj Agricultural Improvement and Power District,
Salt River Proj Elec Sys Rev Ref Ser 1993C...................... 5.250 01/01/19 AA 3,000 2,755,950 5.71
Scottsdale Industrial Development Auth,
Hosp Rev Ref Ser 1997A Scottsdale Memorial Hosps*............... 6.000 09/01/12 AAA 4,000 3,957,360 6.06
Hosp Rev Ref Ser 1997A Scottsdale Memorial Hosps*................. 6.125 09/01/17 AAA 3,520 3,453,226 6.24
-----------
20,763,806
-----------
California (12.83%)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc............... 5.875 05/01/20 A 4,000 3,825,000 6.14
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993.............. 6.200 07/01/20 BBB- 5,000 4,914,000 6.31
Encinitas Union School District,
GO San Diego County Election of 1996 Ser 1996................... Zero 08/01/15 AAA 1,250 400,300 6.11
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center.......... 8.400 04/01/15 B** 470 408,900 9.66
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A..................... Zero 01/01/19 BBB- 36,600 8,113,122 6.86
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A....................... Zero 01/01/20 BBB- 10,000 2,067,400 6.86
Toll Rd Rev Fixed Rate Current Int Ser 1995A.................... 6.000 01/01/16 BBB- 21,500 20,782,545 6.21
Long Beach Aquarium of the Pacific,
Rev 1995 Ser A Aquarium of the Pacific Proj..................... 6.125 07/01/23 BBB 6,500 5,998,785 6.64
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant Proj.... 8.000 06/01/10 A 1,000 1,081,810 7.40
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
California (continued)
Madera, County of,
Cert of Part Valley Children's Hosp Proj........................ 6.500% 03/15/15 AAA $13,185 $14,334,732 5.98%
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A................ 7.750 09/01/16 BBB** 2,000 2,121,560 7.31
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj................... 5.500 08/01/17 A- 9,130 8,406,082 5.97
Cert of Part Ser 1994 Medical Center Fin Proj................... 5.500 08/01/22 A- 2,500 2,287,575 6.01
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec.................................. Zero 01/01/10 BBB** 6,250 2,341,188 8.75
Toll Rd Rev Sr Lien Cap Apprec.................................. Zero 01/01/19 BBB** 5,510 1,237,326 6.80
Toll Rd Rev Sr Lien Cap Apprec.................................. Zero 01/01/17 BBB** 4,900 1,262,779 6.78
Toll Rd Rev Sr Lien Cap Apprec.................................. Zero 01/01/20 BBB** 2,000 419,120 7.00
San Jose Financing Auth,
Rev Ser B Community Facil Proj.................................. 5.625 11/15/18 A+ 2,500 2,362,125 5.95
-----------
82,364,349
-----------
Colorado (3.21%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470................................... 6.950 08/31/20 Baa** 9,000 9,410,310 6.65
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref................................ 7.250 11/15/25 AAA 1,980 2,252,171 6.37
Airport Sys Rev Ser 1992A Unref Bal............................. 7.250 11/15/25 BBB 5,020 5,567,481 6.54
Airport Sys Rev Ser 1994A....................................... 7.500 11/15/23 BBB 3,100 3,380,767 6.88
-----------
20,610,729
-----------
Delaware (0.76%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj.................... 6.750 05/01/19 AAA 4,500 4,896,270 6.20
-----------
Florida (4.09%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P. South Proj.. 7.950 12/01/08 A 4,445 4,894,790 7.22
Florida, State of,
Sunshine Skyway Rev Ser of 1984................................. 10.250 06/01/10 AAA 1,250 1,332,625 9.61
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co................................ 8.500 12/01/14 BBB-** 1,000 1,089,880 7.80
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport........................... 6.000 10/01/17 AAA 5,880 6,057,929 5.82
Hillsborough, County of,
Ref Util Rev Ser 1991A.......................................... 7.000 08/01/14 BBB+ 1,245 1,332,387 6.54
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A............................................ 5.250 10/01/28 AA 9,000 8,113,860 5.82
Nassau, County of,
Poll Control Rev Ref ITT Rayonier Inc Proj...................... 6.200 07/01/15 BBB 1,000 983,220 6.31
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D.................................... 6.750 10/01/17 AA- 2,200 2,481,226 5.98
-----------
26,285,917
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
Georgia (3.73%)
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB.............................................. 5.700% 01/01/19 A $ 1,000 $ 963,260 5.92%
Pwr Rev Ser C................................................... 5.700 01/01/19 AAA 5,000 4,925,100 5.79
Pwr Rev Ser EE.................................................. 7.250 01/01/24 AAA 2,000 2,404,420 6.03
Pwr Rev Ser M................................................... 8.375 01/01/20 A 1,000 1,032,670 8.11
Pwr Rev Ser Z................................................... 5.500 01/01/20 AAA 5,840 5,631,454 5.70
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj......... 6.800 01/01/12 A+ 1,000 1,103,790 6.16
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1................................. 6.500 01/01/17 AAA 3,500 3,807,615 5.97
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj................................. 7.000 01/01/23 BBB+ 4,000 4,086,200 6.85
-----------
23,954,509
-----------
Illinois (3.22%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A......... 7.500 01/01/16 A+ 2,000 2,186,340 6.86
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev Ser 1992... 6.750 01/01/12 AAA 3,000 3,180,870 6.37
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A American
Airlines Proj................................................. 7.875 11/01/25 BB+ 3,000 3,210,780 7.36
Skyway Toll Bridge Rev Ref Ser 1994............................. 6.750 01/01/17 BBB- 2,000 2,037,160 6.63
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj................ 5.850 01/15/14 BBB 3,000 2,799,930 6.27
Rev Ref Ser A Columbus Cuneo Cabrini Proj....................... 8.500 02/01/15 BBB+ 2,150 2,438,487 7.49
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg................................ 6.750 12/01/08 A-** 1,640 1,682,230 6.58
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj............... 7.000 01/01/07 A- 1,500 1,585,065 6.62
Metropolitan Pier and Exposition Auth,
Hosp Facil Rev Ser 1996A McCormick Place Convention Complex..... 7.000 07/01/26 BBB- 500 534,215 6.55
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners............ 9.250 10/15/14 BB-** 1,000 997,500 9.27
-----------
20,652,577
-----------
Indiana (0.31%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj................ 7.500 06/01/26 B** 2,000 2,012,220 7.45
-----------
Kansas (0.35%)
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984............................................ 10.500 12/01/08 AAA 2,000 2,261,440 9.29
-----------
Kentucky (0.98%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A.................... 6.750 02/01/02 BB 2,000 2,078,400 6.50
Rev Spec Facil Delta Airlines Proj Ser 1992A.................... 7.500 02/01/12 BB 2,000 2,128,360 7.05
Rev Spec Facil Delta Airlines Proj Ser 1992A.................... 7.125 02/01/21 BB 2,000 2,073,340 6.87
-----------
6,280,100
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
Louisiana (1.99%)
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States Util Co Proj.......... 6.750% 10/01/12 BB+ $ 2,975 $ 2,982,348 6.73%
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj.................... 6.500 05/15/22 AAA 3,405 3,596,531 6.15
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj......... 7.500 06/01/21 BBB 4,000 4,214,120 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 2,010,740 6.96
-----------
12,803,739
-----------
Maryland (0.24%)
Maryland State Energy Financing Administration,
Solid Waste Disp Rev Ltd Oblig Recycling Hagerstown Proj........ 9.000 10/15/16 BB** 1,900 1,546,923 11.05
-----------
Massachusetts (5.65%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B........................................ 7.875 03/01/21 AAA 2,000 2,289,740 6.88
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D............................ 6.750 07/01/24 A+ 2,450 2,543,198 6.50
Rev Lowell Gen Hosp Iss Ser A................................... 8.400 06/01/11 A-** 1,100 1,193,423 7.74
Rev New England Deaconess Hosp Iss Ser D........................ 6.625 04/01/12 A 3,500 3,618,615 6.41
Rev New England Deaconess Hosp Iss Ser D........................ 6.875 04/01/22 A 7,960 8,319,792 6.58
Rev New England Medical Center Hosp Iss Ser E................... 7.875 07/01/11 A- 1,950 2,105,181 7.29
Rev Worcester Polytechnic Institute Ser E....................... 6.750 09/01/11 A+ 2,000 2,154,160 6.27
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A...................................... 6.900 11/15/24 AAA 2,700 2,804,058 6.64
Single Family Hsg Ser 8......................................... 7.700 06/01/17 A+ 1,500 1,580,985 7.31
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 4,591,904 6.48
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B...................................... 6.000 08/01/14 A+ 2,000 2,029,740 5.91
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj...... 7.000 04/01/22 A- 2,750 3,024,285 6.37
-----------
36,255,081
-----------
Michigan (2.33%)
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1986A Detroit-Macomb Hosp Corp................. 7.300 06/01/01 BB+ 1,500 1,503,375 7.28
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj............. 8.250 07/01/12 Baa1** 2,250 2,399,557 7.74
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group............. 8.100 10/01/13 BBB 4,250 4,665,863 7.38
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines Inc...... 6.750 12/01/15 BB+** 6,355 6,388,936 6.71
-----------
14,957,731
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
Mississippi (1.80%)
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc................... 7.300% 05/01/25 BBB- $ 4,000 $ 4,119,120 7.09%
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A.............................. 9.250 03/01/12 AAA 115 123,635 8.60
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Memorial Foundation Proj......................... 8.750 01/01/16 Baa** 2,000 2,178,140 8.03
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj............ 7.000 04/01/22 Baa3** 5,000 5,152,550 6.79
-----------
11,573,445
-----------
Nebraska (0.20%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B......................................... 6.200 02/01/17 AA 1,200 1,279,296 5.82
-----------
Nevada (1.98%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj............. 6.500 12/01/33 BBB- 10,000 9,687,300 6.71
Las Vegas, City of,
Spec Imp District No. 707 Summerlin Area Local Imp Ser
07-01-96...................................................... 7.100 06/01/16 BB+** 3,000 3,009,270 7.08
-----------
12,696,570
-----------
New Hampshire (0.24%)
New Hampshire Business Finance Auth,
Poll Control & Solid Waste Ref Crown Paper Co Proj.............. 7.750 01/01/22 BB- 1,500 1,510,845 7.69
-----------
New Jersey (2.89%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj................. 9.875 01/01/21 BB+** 1,100 1,099,912 9.88
Jersey, City of
GO Ref Wtr Ser A*............................................... 5.375 10/01/11 AAA 1,500 1,458,405 5.50
GO Ref Wtr Ser A*............................................... 5.375 10/01/12 AAA 1,475 1,418,861 5.55
GO Ref Wtr Ser A*............................................... 5.375 10/01/13 AAA 1,000 962,640 5.60
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens............................ 8.500 11/01/16 BB+** 3,630 3,616,460 8.53
Rev Poll Control General Motors Corp Proj....................... 5.350 04/01/09 A- 1,500 1,452,555 5.52
Rev Ref Ind'l Development Newark Airport Marriott Hotel Proj.... 7.000 10/01/14 BB** 4,000 3,987,880 7.02
Rev Ref Ser J Holt Hauling Proj................................. 8.500 11/01/23 BBB** 2,500 2,502,175 8.49
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984........................................... 10.375 01/01/03 AAA 1,740 2,074,967 8.70
-----------
18,573,855
-----------
New York (11.27%)
Islip Community Development Agency,
Dev Rev NY Institute of Technology Proj......................... 7.500 03/01/26 BB-** 2,500 2,504,950 7.49
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1.......................... 8.500 07/01/17 AAA 1,000 1,057,500 8.04
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj............ 7.950 01/01/28 BB** 3,250 3,400,800 7.60
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
New York (continued)
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp..................................... 6.875% 04/01/19 A $ 8,700 $ 9,528,762 6.28%
New York State Dormitory Auth,
City Univ Ref Iss 1988B......................................... 8.125 07/01/08 BBB 1,000 1,080,240 7.52
Cornell Univ Rev Ser 1990A...................................... 7.375 07/01/30 AA 1,000 1,107,680 6.66
State Univ Ed Facil Rev Iss Ser 1990B........................... 7.500 05/15/11 BBB+ 500 574,665 6.53
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 6,010,440 7.14
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj....... 7.500 01/01/26 A+ 2,000 2,149,200 6.98
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A............ 7.500 06/15/12 A 3,770 4,153,296 6.81
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A.......................... 8.000 05/01/11 AAA 2,000 2,452,920 6.52
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B....................... 7.875 08/15/08 BBB+ 500 557,915 7.06
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal............. 7.875 08/15/20 BBB+ 460 513,457 7.06
Mental Hlth Serv Facil Imp Rev 1991 Ser A Preref................ 7.750 08/15/11 AAA 1,460 1,666,897 6.79
Mental Hlth Serv Facil Imp Rev 1991 Ser A Unref Bal............. 7.750 08/15/11 BBB+ 540 601,825 6.95
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2...................................... 7.950 10/01/15 Aa** 1,135 1,184,225 7.62
New York State Power Auth,
Gen Purpose Ser V............................................... 7.875 01/01/13 AAA 2,400 2,564,040 7.37
Gen Purpose Ser V............................................... 8.000 01/01/17 AA 1,850 1,978,168 7.48
New York, City of,
GO Fiscal 1991 Ser D............................................ 8.000 08/01/04 A-** 250 277,532 7.21
GO Fiscal 1991 Ser F............................................ 8.200 11/15/03 A-** 1,250 1,404,750 7.30
GO Fiscal 1992 Ser A............................................ 7.750 08/15/12 A-** 2,000 2,205,760 7.03
GO Fiscal 1992 Ser D............................................ 7.700 02/01/09 BBB+ 1,000 1,107,560 6.95
GO Fiscal 1992 Ser H............................................ 7.000 02/01/08 BBB+ 2,000 2,135,020 6.56
GO Fiscal 1995 Ser B............................................ 7.000 08/15/16 BBB+ 3,000 3,140,400 6.69
GO Rev Ref Ad Valorem Property Tax Ser D........................ 5.750 08/15/13 BBB+ 3,170 2,927,749 6.23
Port Auth of New York and New Jersey,
Spec Proj Ser 4 KIAC Partners Proj.............................. 6.750 10/01/19 BBB** 10,000 9,952,900 6.78
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L........................................... 8.125 01/01/12 A+ 1,750 1,867,740 7.61
Gen Purpose Rev Ser R........................................... 7.375 01/01/16 AAA 1,600 1,763,088 6.69
Spec Oblig Ref Ser 1991B........................................ 6.875 01/01/15 A- 2,300 2,484,437 6.36
-----------
72,353,916
-----------
North Carolina (3.40%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A....................................... 5.750 01/01/19 BBB+ 4,000 3,719,680 6.18
Pwr Sys Rev Ref Ser 1993B....................................... 6.000 01/01/22 BBB+ 2,000 1,956,520 6.13
Pwr Sys Rev Ref Ser 1993C....................................... 5.000 01/01/21 BBB+ 5,000 4,201,300 5.95
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
North Carolina (continued)
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992....................................... 5.750% 01/01/15 AAA $ 7,410 $ 7,229,122 5.89%
Catawba Elec Rev Ser 1993....................................... 5.000 01/01/15 AAA 5,220 4,730,051 5.52
-----------
21,836,673
-----------
Ohio (3.79%)
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A...................................... 7.000 11/15/24 AAA 6,200 6,952,184 6.24
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United Methodist
Hosp Proj..................................................... 7.600 05/15/20 AAA 1,000 1,116,190 6.81
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj........................ 8.625 02/01/22 BBB-** 3,865 4,175,862 7.98
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj............................. 6.250 12/01/20 Baa2** 4,500 4,472,775 6.29
Rev Coll Ser A Cleveland Elec Illum Proj........................ 7.000 09/01/09 BB 1,945 1,900,498 7.16
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co Proj...... 7.700 08/01/25 BB 2,800 2,836,204 7.60
Ohio, State of,
Solid Waste Rev Republic Engineered Steels Inc Proj............. 9.000 06/01/21 B** 1,500 1,542,135 8.75
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan...................... 8.875 08/01/08 BBB-** 1,305 1,326,180 8.73
-----------
24,322,028
-----------
Oklahoma (0.63%)
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989................................ 7.875 01/01/21 A+ 1,745 1,907,547 7.20
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc.............................. 7.375 12/01/20 BB+ 2,000 2,103,840 7.01
-----------
4,011,387
-----------
Oregon (0.77%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj.......................... 7.125 01/01/21 BB-** 4,800 4,911,648 6.96
-----------
Pennsylvania (8.24%)
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt........................... 7.000 06/01/22 BBB 1,500 1,517,625 6.92
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj............... 6.700 12/01/20 BB+ 10,000 10,130,700 6.61
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 2,245,254 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 6,455,702 6.96
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A............................................... 6.700 09/01/14 BBB- 4,950 5,238,337 6.33
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj..................... 7.125 12/01/15 BBB- 7,000 7,357,490 6.78
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
Pennsylvania (continued)
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N.............................................. 6.500% 12/01/13 AAA $ 2,840 $ 2,959,422 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 2,783,187 8.37
Hosp Rev 1992 Ser A Childrens Seashore House Proj............... 7.000 08/15/12 A- 1,250 1,310,425 6.68
Philadelphia Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia Airport
Hotel Proj.................................................... 7.750 12/01/17 B+** 3,250 3,409,217 7.39
Philadelphia, City of,
Wtr & Swr Rev 16th Ser.......................................... 7.500 08/01/10 AAA 3,000 3,418,380 6.58
Schuylkill County Industrial Development Auth,
Res Recovery Rev Ref Schuylkill Energy Resource Inc............. 6.500 01/01/10 BBB-** 1,000 948,700 6.85
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj.............. 7.600 07/15/20 BBB-** 4,000 4,092,200 7.43
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 1,060,840 7.73
-----------
52,927,479
-----------
Puerto Rico (6.02%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico................................................... 8.220# 07/01/11 AA 5,500 5,960,625 7.58
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico................................................... 6.000 07/01/11 AA 200 208,378 5.76
Puerto Rico Highway and Transportation Auth,
Highway Rev Ser Y Res Int Tax-Exempt Sec Rec' ts Ser
PA-114 (R).................................................... 7.811# 07/01/11 A 13,130 14,492,237 7.08
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Floater Ser 1992A............................ 7.887# 07/01/08 AAA 2,700 2,818,125 7.56
GO Pub Imp Inverse Rate Securities Ser 1996..................... 8.070# 07/01/11 AAA 14,000 15,172,500 7.45
-----------
38,651,865
-----------
South Carolina (2.17%)
Florence, County of,
Ind'l Dev Rev Stone Container Proj.............................. 7.375 02/01/07 BB 5,000 5,086,000 7.25
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys................................. 5.375 01/01/25 AAA 9,305 8,819,093 5.67
-----------
13,905,093
-----------
South Dakota (0.16%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss.............................. 7.625 11/01/13 AA- 925 1,004,439 7.02
-----------
Tennessee (2.09%)
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev Saturn
Corp Proj 6.500 09/01/24 A- 9,000 9,271,350 6.31
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp.................................... 6.750 09/01/12 BBB 4,000 4,149,120 6.51
-----------
13,420,470
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
Texas (6.59%)
Austin, City of,
Combined Util Sys Rev Ref Ser 1998*............................. 6.750% 11/15/10 AAA $ 3,125 $ 3,277,906 6.44%
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj........... 8.250 05/01/15 A 2,000 2,131,000 7.74
Dallas-Fort Worth International Airport Facility Improvement,
Rev American Airlines Inc....................................... 7.250 11/01/30 BB+ 10,250 10,794,378 6.88
Rev Delta Air Lines Inc......................................... 7.600 11/01/11 BB 3,000 3,200,220 7.12
Ector County Hospital District,
Hosp Rev 1992................................................... 7.300 04/15/12 A- 4,000 4,306,720 6.78
El Paso International Airport Auth,
Rev Ref Spec Facil Marriott Corp Proj........................... 7.750 03/01/12 B 1,410 1,373,509 7.96
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj............. 8.250 02/15/08 AAA 1,000 1,114,460 7.40
Texas State Department of Housing and Community Affairs,
Multi-Family Rev Hsng Sr Ser A Dallas-Fort Worth Proj........... 6.500 07/01/26 A 5,000 4,960,350 6.55
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996*.......................... 5.000 01/01/10 AAA 7,000 6,496,560 5.39
Dallas North Thruway Rev Ref Ser 1996*.......................... 5.500 01/01/15 AAA 5,000 4,666,300 5.89
-----------
42,321,403
-----------
Utah (0.89%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A East Carbon Development Corp 9.000 07/01/12 BBB-** 1,000 1,044,450 8.62
Intermountain Power Agency,
Pwr Supply Rev Ref Ser B*....................................... 5.750 07/01/19 AAA 5,000 4,672,150 6.15
-----------
5,716,600
-----------
Virginia (0.72%)
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil.......................................... 7.550 01/01/19 BB** 4,500 4,638,240 7.32
-----------
Washington (4.20%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj........ 9.125 01/01/26 BB-** 1,000 10,167,300 9.87
Seattle, City of,
Municipal Light & Pwr Rev 1994.................................. 6.625 07/01/16 AA 3,600 3,797,784 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 1,576,434 6.92
Nuclear Proj No. 1 Ref Rev Ser 1989B............................ 7.125 07/01/16 AA 1,500 1,680,915 6.36
Nuclear Proj No. 1 Ref Rev Ser 1991A............................ 6.875 07/01/17 AA 1,250 1,324,787 6.49
Nuclear Proj No. 2 Ref Rev Ser 1990C............................ 7.625 07/01/10 AAA 5,000 5,644,800 6.75
Nuclear Proj No. 3 Ref Rev Ser 1989B............................ 7.250 07/01/15 AAA 2,500 2,745,400 6.60
-----------
26,937,420
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY S&P (000's MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- -------
Wisconsin (0.69%)
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A.................................. 7.400% 07/01/20 AAA $ 4,000 $ 4,455,120 6.64%
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $632,920,605) (102.67%) 659,170,485
------- ------------
NUMBER
OF EXPIRATION
CONTRACTS DATE
--------- ----
OPTIONS (0.01%)
U.S. Treasury Bond Option 114 USV6C...................................... 3,150 09-21-96 49,219
------------
TOTAL OPTIONS
(Cost $713,531) ( 0.01%) 49,219
------- ------------
TOTAL INVESTMENTS (102.68%) $659,219,704
======= ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
(R) The security listed below is a direct placement security and is restricted
as to resale. The Fund has limited rights to registration under the
Securities Act of 1933 with respect to restricted securities (not including
Rule 144A securities). In certain circumstances the Fund may bear a portion
of the cost of such registrations; otherwise, such costs would be borne by
the issuer. See Note A of the Notes to Financial Statements for valuation
policy. Additional information on this restricted security is as follows:
<TABLE>
<CAPTION>
MARKET
VALUE AS A
PERCENTAGE
ACQUISITION ACQUISITION OF FUND'S MARKET
DATE COST NET ASSETS VALUE
---- ---- ---------- -----
<S> <C> <C> <C> <C>
Puerto Rico Highway and Transportation Auth, Highway Rev Ser Y
Res Int Tax-Exempt Sec Rec' ts Ser PA-114 7.811%, 07-01-11........ 04-02-96 14,928,022 2.26% 14,492,237
</TABLE>
* These securities having an aggregate value of $30,363,408 or 4.73% 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
$2,576,275 of Washington, County of, Poll Control Rev Ref Mississippi Pwr &
Light Co Proj, 7.00%, 04-01-22, $1,609,776 of Wabash, County of, Solid
Waste Disp Rev Jefferson Smurfit Corp Proj, 7.50%, 06-01-26, $13,807,440 of
Madera, County of, Cert of Part Valley Children's Hosp Proj, 6.50%,
03-15-15, $4,167,080 of Mobile Industrial Development Board, Solid Waste
Disp Rev Ref Mobile Energy Serv Co Proj 1995, 6.95%, 01-01-20, $5,189,982
of Delaware County Industrial Development Auth, Poll Control Rev Ref 1991
Ser A Philadelphia Elec Co Proj, 7.375%, 04-01-21, $3,812,488 of Cleveland
Public Power System, Elec Sys Rev 1st Mtg Ser A, 7.00%, 11-15-24 and
$3,575,425 of Savannah Hospital Auth, Rev Ref & Imp Candler Hosp Proj,
7.00%, 01-01-23 have been segregated to cover the forward committments.
** 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 and is unaudited. Zero coupon yields are at
yield to maturity.
# Represents the rate in effect on August 31, 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.
22
<PAGE>
================================================================================
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.
The table below shows the percentages of the Fund's investments at August 31,
1996 assigned to the various sector categories.
<TABLE>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation........................................................ 6.24%
Revenue Bonds - Certificate of Participation.............................. 0.47
Revenue Bonds - Education................................................. 1.42
Revenue Bonds - Electric Power............................................ 18.34
Revenue Bonds - Health.................................................... 16.50
Revenue Bonds - Housing................................................... 3.41
Revenue Bonds - Industrial Development Bond............................... 10.16
Revenue Bonds - Other..................................................... 5.53
Revenue Bonds - Pollution Control Facilities.............................. 15.27
Revenue Bonds - Transportation............................................ 22.03
Revenue Bonds - Water & Sewer............................................. 3.30
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 102.67%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
================================================================================
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
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 Int ernal 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.
On June 25, 1996 the Trustees voted to approve a change in the fiscal
period end from December 31 to August 31. This change is effective August 31,
1996.
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 $17,331,261 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gains distribution will be made. The carryforwards expire as follows:
August 31, 2001 N $6,439,972 and August 31, 2002 N $10,891,289. Expired capital
loss carryforwards are reclassified to capital paid-in, in the year of
expiration. Of the capital loss carryovers expiring in 2001 and 2002, $160,956
and $5,735,656, respectively, were acquired on 5/3/96 in the merger with John
Hancock Tax-Exempt Income Fund. Their availability may be limited in a given
year.
DISTRIBUTIONS, DIVIDENDS 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 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
24
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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 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 August 31, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
SEP 1996 784 U.S Treasury Bonds SHORT $2,107,250
DEC 1996 266 U.S Treasury Bonds SHORT 50,156
----------
$2,157,406
==========
At August 31, 1996, the Fund has deposited in a segregated account
$3,477,500 par value of Clark County, Nevada Industrial Development Revenue
Bond, 6.50%, 12/01/33 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
25
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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.
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 August 31,
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 0.85% of the Fund's average daily net
assets. Accordingly, the reduction in the Adviser's fee amounted to $347,931 for
the period ended August 31, 1996.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended August
31, 1996, net sales charges received with regard to sales of Class A shares
amounted to $364,353. Out of this amount, $39,275 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$120,280 was paid as sales commissions to unrelated broker-dealers and $204,798
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 August 31,
1996, contingent deferred sales charges paid to JH Funds amounted to $205,259.
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 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 and
service costs. JH Funds has 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 until December 23, 1996. Up to a maximum 0.25% 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
26
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
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 Services a fee based on the number of
shareholder accounts and certain out-of-pocket expenses.
On September 10, 1996, the Board of Trustees approved retroactively to July
1, 1996, an agreement with the Adviser to perform necessary tax and financial
management services for the Funds. The compensation for 1996 is estimated to be
at an annual rate of 0.01875% of the average net assets of each Fund.
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 a 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 August 31, 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 August 31, 1996, aggregated $225,233,231 and $235,023,838, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended August 31, 1996.
The cost of investments owned at August 31, 1996 for federal income tax
purposes was $633,754,426. Gross unrealized appreciation and depreciation of
investments aggregated $30,951,753 and $5,486,475, respectively, resulting in
net unrealized appreciation of $25,465,278.
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.
27
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
NOTE E -
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1996, the Fund has reclassified the accumulated
net realized gain of $13,411 to undistributed net investment income. This
represents the cumulative amount necessary to report these balances on a tax
basis, excluding certain temporary differences, as of August 31, 1996.
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 the treatment of net operating losses in the
computation of distributable income and capital gains under federal tax rules
versus generally accepted accounting principle.
28
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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 Fund (the
"Fund"), as of August 31, 1996, and the related statements of operations for the
period from January 1, 1996 to August 31, 1996, and for the year ended December
31, 1995, the statement of changes in net assets for the period from January 1,
1996 to August 31, 1996 and for each of the two years in the period ended
December 31, 1995, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996, 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 August 31, 1996, the results of its
operations for the period from January 1, 1996 to August 31, 1996, and for the
year ended December 31, 1995, the changes in its net assets for the period from
January 1, 1996 to August 31, 1996 and for each of the two years in the period
ended December 31, 1995, and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 9, 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 August 31,
1996.
For specific information on exemption provisions in your state, consult
your local state tax office or your tax adviser. Income dividends are 99.9%
tax-exempt. Approximately 19.3% of the 1996 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.
Shareholders will be mailed a 1996 U.S. Treasury Department Form 1099-DIV in
January 1997 representing their proportionate share.
29
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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.
Shareholders approved an Amended and Restated Declaration of Trust for the
Fund. The shareholder votes 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.
The shareholders elected the following trustees with the votes 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
30
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NOTES
John Hancock Funds - Tax-Free Bond Fund
31
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