ANNUAL REPORT
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[GRAPHIC OMITTED]
High Yield
Tax-Free
Fund
AUGUST 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
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TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
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 and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The Taxpayer Relief Act of 1997 recently signed into law by President Clinton
includes new twists and important changes to Individual Retirement Account (IRA)
laws. The provisions will, among other things, allow more people to qualify for
annual tax-deductible IRA contributions and to save tax-free for college. They
also allow IRA investors to withdraw money penalty-free from all IRAs to buy a
first home or pay for college expenses.
For existing deductible IRAs, the law doubles income limits over the next
eight to 10 years for those eligible to deduct an annual IRA contribution of up
to $2,000. For individuals, the annual income cap will increase incrementally
from the current $25,000 to $50,000 by 2005. For couples, the limit would
increase from $40,000 today to $80,000 in 2007. The new law allows non-working
spouses to make IRA contributions even if their spouse is covered by a pension
plan at work, provided the couple's joint income is less than $150,000.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The law also creates two new IRA investment vehicles. One, called the "Roth
IRA" after its principal congressional sponsor, allows for non-deductible annual
contributions up to a $2,000 maximum. But income accumulates tax-free and if the
account has been open for five years, distributions are tax-free if they are
used after age 591/2 or upon death, disability or a first-time home purchase.
Withdrawals for higher-education expenses would not be subject to a 10% penalty.
Eligible investors must earn less than $95,000 per year individually or $150,000
per couple.
A second new IRA plan is called the "Education IRA" which allows non-
deductible contributions of up to $500 per year, per child under age 18.
Earnings in the account accumulate tax-free, and withdrawals are also not taxed
when applied toward undergraduate or graduate-level expenses. Eligible investors
are subject to the same income restrictions as the Roth IRA.
The law has also made some important changes in capital gains tax rates and
estate tax laws. But the devil is in the details, and so we recommend exploring
how you can benefit from the changes with your investment professional and tax
advisor. The Taxpayer Relief Act of 1997 gives investors new options toward
savings. It's a move we applaud.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Frank Lucibella, CFA, Portfolio Manager
John Hancock High Yield
Tax-Free Fund
High-yield municipals turn in strong performance
------------------------------------------------
Troubled by contradictory news on the job, retail spending and consumer price
fronts, bonds see-sawed during much of the first half of the Fund's fiscal year
beginning September 1, 1996. While many cheer strong economic reports, bond
investors fear them because they may be an indication that inflation is on the
rise. Inflation, of course, is the bugaboo of bond investing because it eats
away at the value of bonds' fixed-income payments. In March, the Federal Reserve
Board raised short-term interest rates one-quarter of a percentage point, in a
"pre-emptive" effort to stave off any future inflation. That action rattled bond
investors who pushed bond prices lower and bond yields higher in the spring.
It really wasn't until April when bond prices showed definitive signs of
sustained improvement. At that point, there was plenty for bond investors to
cheer about. Even though the U.S. unemployment rate hit a 23-year low, there
were no real signs that wages--often a major contributor to higher
inflation--were rising. Adding further fuel to the bond market's optimism was
Federal Reserve Board Chairman Alan Greenspan's July testimony to Congress. He
admitted puzzlement that despite the economy's strong growth and low
unemployment, no inflationary pressures were brewing, and he strongly hinted no
further interest-rate hikes were on the immediate horizon.
"High-yield municipals ...did particularly well in this environment."
High-yield municipals, which the Fund emphasizes, did particularly well in
this environment. The strong demand for, and low supply of, high-yielding bonds
helped them out-
[A 2 1/4" x 3 1/2" photo of the Fund management team. Caption reads: "Frank
Lucibella (seated) and members of the Fund management team: (l-r) Mike Roye, Tom
Goggins, Dianne Sales, Holly Morris".]
3
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John Hancock Funds - High Yield Tax-Free Fund
[Pie Chart entitled "Portfolio Diversification" at top left hand column. The
chart is divided into 10 sections. Going from top right clockwise: General
Obligation 5%; Certificate of participation 3%; Education 2%; Health 19%;
Housing 6%; Industrial Development 8%; Other 14%; Pollution Control 24%. A
footnote below states "As a percentage of net assets on August 31, 1997".]
"Among our best performers were general obligation bonds issued by New York City
and the District of Columbia."
perform their higher-quality, lower-yielding counterparts. The supply of insured
bonds rose during the past year, which resulted in a dramatic drop in the supply
of uninsured, high-yielding bonds. Investors seeking high levels of income
gravitated toward the lower-rated, high-yielding bonds which helped sustain
strong demand. Lower-rated bonds carry higher yields as compensation for the
risk that their issuers may be more likely than higher-rated issuers to default
on their debt. An insurer, on the other hand, guarantees the timely payment of
principal and interest regardless of the quality of the underlying bond.
A look at performance
For the year ended August 31, 1997, John Hancock High Yield Tax-Free Fund's
Class A and Class B shares posted total returns of 8.29% and 7.51%,
respectively, at net asset value. Those returns lagged the average high-yield
municipal bond fund's return of 9.68% for the same period, according to Lipper
Analytical Services, Inc. 1 Please see pages six and seven for longer-term
performance information. The Fund's lag can be attributed to the disappointing
performance of several paper recycling plants. Because the price of paper was
weak during the past year, the entire sector suffered.
[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 Paper
recycling projects followed by a down arrow and the phrase "Falling paper
prices". The second listing is New York City followed by an up arrow and the
phrase "Improving fiscal and economic situation". The third listing is Arapahoe
County followed by an up arrow and the phrase "Bonds were advance refunded". A
footnote below states "See 'Schedule of Investments.' Investment holdings are
subject to change".]
Among our best performers were general obligation bonds (GOs) issued by New York
City and the District of Columbia. GOs are municipal bonds backed by the full
faith and credit (which includes the taxing power) of a municipality, and are
repaid with general revenue, including taxes. As the economy improved in New
York City, tax revenues also improved, causing the bonds to rally. As for the
District of Columbia, President Clinton's proposal to revamp the district's
financial structure caused an improvement in the credit standing of its bonds.
Another performance boost came when our holdings in Bedford Park, Illinois and
Arapahoe County Capital Improvement were advance refunded. With advance
refunding, the bonds became backed by high-quality U.S. Treasury securities, and
after the refunding, they generally rose in value.
Strategy overview
Throughout the past year, we continued to look for opportunities to diversify
our holdings across a greater number of high-yielding bonds. Admittedly, this
wasn't always easy because the supply of high-yielding bonds has been relatively
low. Furthermore, the strong demand for many high-yield bonds has pushed prices
beyond what we
4
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John Hancock Funds - High Yield Tax-Free 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, 1997." The chart is
scaled in increments of 2%, with 10% at the top and 0% at the bottom. Within the
chart there are three solid bars. The first represents the 8.29% total return
for the John Hancock High Yield Tax-Free Fund: Class A. The second represents
the 7.51% total return for the John Hancock High Yield Tax-Free Fund: Class B.
the third represents the 9.68% total return for the average high-yield municipal
bond fund. A footnote below states "Total returns for John Hancock High Yield
Tax-Free fund are at net asset value with all distributions reinvested. The
average high-yield municipal bond fund is tracked by Lipper Analytical Services,
Inc. (1). See the following two pages for historical performance information."]
believe are reasonable from a risk/reward standpoint. With the help of our
research analysts, we focused on finding lower-rated bonds that we believe have
underlying financial strength and whose reward, or income, we believe justifies
the added credit risk. Two recent additions that fit our criteria were
pollution-control bonds backed by Laidlaw issued by Toole County, Utah and Grand
Haven Development District of Florida.
We also continued to emphasize bonds with attractive call protection. A call
feature is part of an agreement a bond issuer makes with the buyer describing
the schedule and price of redemption before maturity. During periods when
interest rates are falling, investors generally don't want their bond holdings
to be called away, because they will be forced to invest at lower interest
rates. We focused on non-callable bonds (those that can't be redeemed by their
issuer before maturity) and bonds that have relatively long call dates.
Outlook
For now, the economic backdrop appears favorable for municipal bonds. The
economy continues to look moderately strong, yet all appears to be quiet on the
inflationary front. However, we're not necessarily ruling out a further small
interest rate boost. If the Federal Reserve Board sees something it believes
could be inflationary -- such as a stronger-than-expected employment report --
it would be likely to act swiftly to curtail inflation before it becomes
problematic. But in our view, even a small, quarter-percentage-point hike in
interest rates probably would not rattle the bond markets to a great extent. As
for high-yield municipal bonds, the continued low supply and strong demand
should help their performance going forward.
"For now, the economic backdrop appears favorable for municipal bonds."
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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.
See the prospectus for a detailed discussion of the risks of investing in
high-yield bonds.
1Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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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 High Yield Tax-Free Fund. Total return is a
performance measure that equals the sum of all income and capital gains
distributions, assuming reinvestment of these distributions, and the change in
the price of the Fund's shares, expressed as a percentage of the Fund's net
asset value per share. Performance figures include the maximum applicable sales
charge of 4.5% for Class A shares. The effect of the maximum contingent deferred
sales charge for Class B shares (maximum 5% and declining to 0% over six years)
is included in Class B performance. Performance is affected by a 12b-1 plan.
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.
Please note that a portion of the Fund's income may be subject to taxes, and
some investors may be subject to the Alternative Minimum Tax. Also note that
capital gains are taxable.
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CUMULATIVE TOTAL RETURNS
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For the period ended June 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
John Hancock High Yield Tax-Free
Fund: Class A 2.10% 12.69%(1) N/A
John Hancock High Yield Tax-Free
Fund: Class B 1.13% 31.69% 95.42%
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended June 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
John Hancock High Yield Tax-Free
Fund: Class A 2.10% 3.48%(1) N/A
John Hancock High Yield Tax-Free
Fund: Class B 1.13% 5.66% 6.93%
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YIELDS
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As of August 31, 1997
SEC 30-DAY
YIELD
-----
John Hancock High Yield Tax-Free
Fund: Class A 5.00%
John Hancock High Yield Tax-Free
Fund: Class B 4.48%
Notes to Performance
(1) Class A commenced operations on December 31, 1993.
6
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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 John Hancock High
Yield Tax-Free Fund would be worth on August 31, 1997. They assume that you
invested on the day each class of shares started. They also assume that you have
reinvested all distributions. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Municipal Bond Index--an unmanaged index that
includes approximately 15,000 bonds and is commonly used as a measure of bond
performance.
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High Yield Tax-Free Fund
Class A shares
Line chart with the heading High Yield Tax-Free 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 Lehman Municipal Bond Index and is
equal to $12,220 as of August 31, 1997. The second line represents the value of
the hypothetical $10,000 investment made in the High Yield Tax-Free Fund on
December 31, 1993, before sales charge, and is equal to $12,069 as of August 31,
1997. The third line represents the High Yield Tax-Free Fund after sales charge
and is equal to $11,526 as of August 31, 1997.
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High Yield Tax-Free Fund
Class B shares*
Line chart with the heading High Yield Tax-Free Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the Lehman Municipal Bond Index and is
equal to $24,116 as of August 31, 1997. The second line represents the value of
the hypothetical $10,000 investment made in the High Yield Tax-Free Fund on
August 29, 1986, before contingent deferred sales charge, and is equal to
$19,655 as of August 31, 1997.
*No contingent deferred sales charge applicable.
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7
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FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on August 31, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
August 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $159,024,417) ................................ $169,092,419
Receivable for investments sold .............................. 102,000
Receivable for shares sold ................................... 429,772
Interest receivable .......................................... 2,838,240
Receivable for futures variation margin - Note A ............. 7,059
Other assets ................................................. 71,665
------------
Total Assets ..................... 172,541,155
-------------------------------------------------
Liabilities:
Due to custodian ............................................. 693,857
Payable for shares repurchased ............................... 7,739
Dividend payable ............................................. 32,761
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 136,023
Accounts payable and accrued expenses ........................ 86,301
------------
Total Liabilities ................ 956,681
-------------------------------------------------
Net Assets:
Capital paid-in .............................................. 172,342,082
Accumulated net realized loss on investments and
financial futures contracts ................................ (10,773,778)
Net unrealized appreciation of investments and
financial futures contracts ................................ 10,054,716
Distributions in excess of net investment income ............. (38,546)
------------
Net Assets ....................... $171,584,474
=================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - 125,000,000 shares
authorized with $0.01 per share par value)
Class A - $32,199,434/3,446,670 .............................. $9.34
=============================================================================
Class B - $139,385,040/14,919,959 ............................ $9.34
=============================================================================
Maximum Offering Price Per Share*
Class A - ($9.34 x104.71%) ................................... $9.78
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended August 31, 1997
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Investment Income:
Interest ..................................................... $12,173,550
-----------
Expenses:
Investment management fee - Note B ......................... 1,001,880
Distribution and service fee - Note B
Class A .................................................. 70,212
Class B .................................................. 1,440,890
Transfer agent fee - Note B ................................ 146,000
Custodian fee .............................................. 72,147
Registration and filing fees ............................... 59,415
Auditing fee ............................................... 39,731
Financial services fee - Note B ............................ 31,800
Trustees' fees ............................................. 16,475
Printing ................................................... 12,640
Miscellaneous .............................................. 6,171
Legal fees ................................................. 6,071
-----------
Total Expenses ................... 2,903,432
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Net Investment Income ............ 9,270,118
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Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold ........................ (3,303,515)
Net realized loss on financial futures contracts ............. (468,226)
Change in net unrealized appreciation/depreciation
of investments ............................................. 7,367,183
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................. (95,844)
-----------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ...... 3,499,598
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........ $12,769,716
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 TO YEAR ENDED
OCTOBER 31, 1995 AUGUST 31, 1996 (1) AUGUST 31, 1997
----------------- ------------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .................................................. $9,667,347 $8,208,767 $9,270,118
Net realized loss on investments sold and financial futures contracts .. (2,063,553) (2,976,596) (3,771,741)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts .......................................... 15,034,119 (2,920,056) 7,271,339
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ................. 22,637,913 2,312,115 12,769,716
------------ ------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5780; $0.4958 and $0.5587 per share, respectively) ..... (952,176) (965,509) (1,692,115)
Class B - ($0.5130; $0.4401 and $0.4905 per share, respectively) ..... (8,715,173) (7,210,525) (7,657,642)
Distributions in excess of net investment income
Class A - ($0.0384; none and none per share, respectively) ........... (63,196) -- --
Class B - ($0.0340; none and none per share, respectively) ........... (578,424) -- --
------------ ------------ ------------
Total Distributions to Shareholders ................................ (10,308,969) (8,176,034) (9,349,757)
------------ ------------ ------------
From Fund Share Transactions - Net : * ................................... (9,338,914) 7,736,188 (3,167,486)
------------ ------------ ------------
Net Assets:
Beginning of period .................................................... 166,469,702 169,459,732 171,332,001
------------ ------------ ------------
End of period (including undistributed net investment income of none;
$46,322 and distributions in excess of net investment income of
$38,546, respectively) ............................................... $169,459,732 $171,332,001 $171,584,474
============ ============ ============
* Analysis of Fund Share Transactions:
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 TO YEAR ENDED
OCTOBER 31, 1995 AUGUST 31, 1996 (1) AUGUST 31, 1997
------------------------- ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold 471,510 $4,304,187 1,391,142 $12,993,351 1,578,539 $14,597,255
Shares issued to shareholders in reinvestment
of distributions 40,880 373,017 43,404 405,043 84,834 785,117
--------- ---------- --------- ----------- --------- -----------
512,390 4,677,204 1,434,546 13,398,394 1,663,373 15,382,372
Less shares repurchased (755,291) (6,954,380) (352,595) (3,288,775) (801,201) (7,400,978)
--------- ---------- --------- ----------- --------- -----------
Net increase (decrease) (242,901) ($2,277,176) 1,081,951 $10,109,619 862,172 $7,981,394
--------- ---------- --------- ----------- --------- -----------
CLASS B
Shares sold 2,984,185 $26,948,744 2,138,726 $20,159,232 2,646,041 $24,449,200
Shares issued to shareholders in reinvestment
of distributions 341,251 3,125,237 266,206 2,501,301 277,587 2,569,048
--------- ---------- --------- ----------- --------- -----------
3,325,436 30,073,981 2,404,932 22,660,533 2,923,628 27,018,248
Less shares repurchased (4,059,955) (37,135,719) (2,673,804) (25,033,964) (4,127,421) (38,167,128)
--------- ---------- --------- ----------- --------- -----------
Net decrease (734,519) ($7,061,738) (268,872) ($2,373,431) (1,203,793) ($11,148,880)
========= ========== ========= =========== ========= ===========
(1) Effective August 31, 1996, the fiscal period end changed from October 31 to August 31.
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
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<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 31, 1993
(COMMENCEMENT OF PERIOD FROM
OPERATIONS) TO YEAR ENDED NOVEMBER 1, 1995 YEAR ENDED
OCTOBER 31, 1994 OCTOBER 31, 1995(2) TO AUGUST 31, 1996(6) AUGUST 31, 1997
---------------- ------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................. $ 9.85 $ 8.82 $ 9.47 $ 9.16
Net Investment Income ................................. 0.48(1) 0.57 0.49(1) 0.56(1)
Net Realized and Unrealized Gain (Loss) on
Investments Sold and Financial Futures Contracts .... (0.94) 0.70 (0.30) 0.18
Total from Investment Operations .................... (0.46) 1.27 0.19 0.74
Less Distributions:
Dividends from Net Investment Income .................. (0.48) (0.58) (0.50) (0.56)
Distributions in Excess of Net Investment Income ...... (0.09) (0.04) -- --
Total Distributions ................................. (0.57) 0.62 (0.50) (0.56)
Net Asset Value, End of Period ........................ $ 8.82 $ 9.47 $ 9.16 $ 9.34
Total Investment Return at Net Asset Value(3) ....... 4.96%(4) 14.85% 1.96%(4) 8.29%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............. $15,401 $14,225 $23,663 $32,199
Ratio of Expenses to Average Net Assets ............... 1.15%(6) 1.06% 1.10%(5) 1.06%
Ratio of Net Investment Income to Average Net Assets .. 6.08%(6) 6.36% 6.39%(5) 6.00%
Portfolio Turnover Rate ............................... 62% 64% 38% 51%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
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FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
Financial Highlights (continued)
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<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1995 YEAR ENDED
----------------------------------------- TO AUGUST 31, AUGUST 31,
1992 1993 1994 1995(2) 1996(6) 1997
-------- -------- -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $9.31 $9.39 $9.98 $8.82 $9.47 $9.16
------- -------- -------- -------- --------- --------
Net Investment Income .................................... 0.55 0.53 0.48 0.51 0.44(1) 0.49(1)
Net Realized and Unrealized Gain (Loss) on Investments
Sold and Financial Futures Contracts ................... 0.17 0.72 (0.90) 0.69 (0.31) 0.18
------- -------- -------- -------- --------- --------
Total from Investment Operations ..................... 0.72 1.25 (0.42) 1.20 0.13 0.67
------- -------- -------- -------- --------- --------
Less Distributions:
Dividends from Net Investment Income ................... (0.55) (0.56) (0.48) (0.51) (0.44) (0.49)
Distributions in Excess of Net Investment Income -- -- (0.07) (0.04) -- --
Distributions from Net Realized Gain on Investments Sold (0.09) (0.10) (0.19) -- -- --
------- -------- -------- -------- --------- --------
Total Distributions .................................. (0.64) (0.66) (0.74) (0.55) (0.44) (0.49)
------- -------- -------- -------- --------- --------
Net Asset Value, End of Period ........................... $9.39 $9.98 $8.82 $9.47 $9.16 $9.34
======= ======== ======== ======== ========= ========
Total Investment Return at Net Asset Value (3) ........... 7.89% 13.69% (4.44%) 13.99% 1.36%(4) 7.51%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $65,933 $113,442 $151,069 $155,234 $147,669 $139,385
Ratio of Expenses to Average Net Assets .................. 2.17% 2.06% 1.85% 1.79% 1.81%(5) 1.81%
Ratio of Net Investment Income to Average Net Assets ..... 5.78% 5.23% 5.36% 5.61% 5.65%(5) 5.28%
Portfolio Turnover Rate .................................. 40% 100% 62% 64% 38% 51%
(1) On average month end shares outstanding.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
(3) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) Annualized.
(6) Effective August 31, 1996, the fiscal period end changed from October 31 to August 31.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
Schedule of Investments
August 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by High
Yield Tax-Free Fund on August 31, 1997. It has one main category: tax-exempt
long-term bonds. The tax-exempt bonds are further broken down by state. Under
each state is a list of the securities owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
Arizona (0.90%)
Maricopa, County of,
Hosp Rev Ref Sun Health Corp ............................. 6.125% 04-01-18 BBB- $1,500 $ 1,545,090 5.95%
------------
California (11.63%)
ABAG Finance Auth for Nonprofit Corps,
Cert of Part Nat'l Ctr for Int'l Schools Proj ............ 7.375 05-01-18 BB+ 1,000 1,006,820 7.33
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Sr Lien Cap Apprec Ser A ..................... Zero 01-01-18 BBB- 7,950 2,379,356 6.02
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj ............ 5.500 08-01-17 A- 4,500 4,478,220 5.53
San Diego County Water Auth,
Wtr Rev Cert of Part Reg RITES ........................... 7.342# 04-23-08 AAA 1,000 1,127,500 7.84
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj ..................... 8.500 12-01-26 BB 2,000 2,069,040 8.22
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Sr Lien ...................................... 5.000 01-01-33 BBB- 1,000 900,940 5.55
South Orange County Public Financing Auth,
Spec Tax Rev Levrrs Inflows .............................. 8.190# 08-15-17 AAA 7,500 7,987,500 7.95
------------
19,949,376
------------
Colorado (6.74%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 ............................ 6.950 08-31-20 Baa 5,000 5,839,250 5.95
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref ......................... 7.250 11-15-25 AAA 1,410 1,614,831 6.33
Airport Sys Rev Ser 1992A Unref Bal ...................... 7.250 11-15-25 AAA 3,590 4,111,519 6.33
------------
11,565,600
------------
Connecticut (0.60%)
Connecticut State Development Auth,
Aquarium Proj Rev Ser A Mystic MarineLife Aquarium Proj .. 7.000 12-01-27 BB+ 1,000 1,034,650 6.77
------------
District Of Columbia (2.32%)
District of Columbia,
Cert of Part Ser 1993 .................................... 7.300 01-01-13 BB 1,000 1,085,540 6.72
GO 1996 Ser A ............................................ 6.375 06-01-1 BB 1,780 1,853,621 6.12
GO 1996 Ser A ............................................ 6.375 06-01-26 BB 1,000 1,034,900 6.16
------------
3,974,061
------------
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Florida (7.25%)
Grand Haven Community Development District,
Special Assessment Ser A ................................. 6.300% 05-01-02 BB+ $1,000 $1,011,970 6.23%
Special Assessment Ser B ................................. 6.900 05-01-19 BB+ 750 740,858 6.99
Hillsborough County Aviation Auth,
Rev Special Purpose Facility Imp US Air Proj ............. 8.600 01-15-22 B- 3,900 4,332,354 7.74
Homestead, City of,
Ind'l Development Rev Ser A Community Rehab Proj ......... 7.950 11-01-18 BB 3,980 4,232,054 7.48
South Indian River Water Control District,
Rev Egret Landing Proj Section 15 Phase 1 ................ 7.500 11-01-18 BB+ 2,000 2,115,400 7.09
------------
12,432,636
------------
Illinois (7.47%)
Bedford Park, City of,
Tax Increment Rev Ref 71st & Cicero Proj ................. 7.000 01-01-06 BBB- 650 673,127 6.76
Tax Increment Rev Ref 71st & Cicero Proj ................. 7.375 01-01-12 BBB- 1,000 1,031,580 7.15
Tax Increment Rev Sr Lien Mark IV Proj ................... 9.750 03-01-12 AA 1,000 1,215,210 8.02
Chicago, City of,
Chicago-O'Hare Int'l Airport Spec Facil Rev
Ref American Airlines Inc .............................. 8.200 12-01-24 BBB- 1,500 1,793,925 6.86
Illinois Health Facilities Auth,
Rev Ser A Fairview Obligated Group Proj .................. 9.500 10-01-22 AA 2,500 3,086,450 7.69
Rev Ser B Fairview Obligated Group Proj .................. 9.000 10-01-22 AA 1,500 1,819,365 7.42
Robbins, County of,
Res Recovery Rev Ser 1994 A Robbins Res Recovery Partners 8.375 10-15-16 BB 1,000 1,046,790 8.00
Round Lake Beach, City of,
Tax Increment Rev Ref .................................... 7.500 12-01-13 BBB- 2,000 2,145,060 6.99
------------
12,811,507
------------
Indiana (1.25%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj ......... 7.500 06-01-26 BB 2,000 2,144,580 6.99
------------
Iowa (0.15%)
Iowa Finance Auth,
Hlth Care Facil Rev Ref Care Initiatives Proj ............ 9.250 07-01-25 BB 200 261,142 7.08
------------
Kansas (1.28%)
Prairie Village, City of,
Rev Ser A Claridge Court Proj ............................ 8.750 08-15-23 BBB- 2,000 2,194,040 7.98
------------
Kentucky (3.16%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Inc Ser 1985 ............... 7.800 12-01-15 BB+ 2,500 2,680,625 7.27
Rev Spec Facil Delta Airlines Proj Ser B ................. 7.250 02-01-22 BB+ 2,500 2,739,325 6.62
------------
5,419,950
------------
Maryland (1.28%)
Baltimore, County of,
Poll Control Rev Ref Bethlehem Steel Corp Proj ........... 7.500 06-01-15 B+ 2,000 2,188,260 6.85
------------
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Massachusetts (3.27%)
Massachusetts Industrial Finance Agency,
Rev Ser A Southeastern Mass Proj ......................... 9.000% 07-01-15 BB $2,800 $3,153,164 7.99%
Massachusetts Port Auth,
Spec Proj Rev Harborside Hyatt Hotel ..................... 10.000 03-01-26 BBB- 2,200 2,456,300 8.96
------------
5,609,464
------------
Michigan (4.16%)
Waterford Township Economic Development Corp,
Rev Ltd Oblig Canterbury Hlth Care ....................... 8.375 07-01-23 BB- 3,500 3,766,420 7.78
Wayne Charter, County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest
Airlines, Inc. ......................................... 6.750 12-01-15 BB+ 3,120 3,375,434 6.24
------------
7,141,854
------------
Missouri (0.62%)
Lees Summit Industrial Development Auth,
Hlth Facil Rev Ref & Imp John Knox Vlg Proj .............. 7.125 08-15-12 A- 1,000 1,066,750 6.68
------------
Nevada (2.39%)
Clark, County of,
Spec Imp Dist No. 108 Summerlin South Area Local Imp
Ser 1997 ............................................... 6.625 02-01-17 BB+ 2,000 2,032,000 6.52
Las Vegas, City of,
Local Imp Ser 07-01-96 Spec Imp Dist 707
(Summerlin Area) ....................................... 7.100 06-01-16 BB+ 2,000 2,075,200 6.84
------------
4,107,200
------------
New Hampshire (1.54%)
New Hampshire Business Finance Auth,
Poll Control & Solid Waste Ref Crown Paper Co Proj ....... 7.750 01-01-22 BB- 1,500 1,635,060 7.11
New Hampshire Higher Educational and Health Facilities Auth,
Rev New Hampshire College ................................ 6.375 01-01-27 BBB- 1,000 1,009,540 6.31
------------
2,644,600
------------
New Jersey (5.40%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj .......... 9.875 01-01-21 BB+ 1,500 1,750,695 8.46
New Jersey Economic Development Auth,
Rev Ref Ind'l Development Newark Airport Marriott
Hotel Proj ............................................. 7.000 10-01-14 BBB- 2,500 2,659,400 6.58
Rev Ref Ser J Holt Hauling Proj .......................... 8.500 11-01-23 BBB 2,500 2,739,625 7.76
New Jersey Health Care Facilities Financing Auth,
Rev Care Institute Inc Cherry Hill Proj .................. 8.000 07-01-27 BB+ 2,000 2,115,420 7.56
------------
9,265,140
------------
New Mexico (2.11%)
Farmington, County of,
Poll Control Rev Ref Ser A Pub Serv Co of
New Mexico San Juan Proj ................................... 6.400 08-15-23 BB+ 3,500 3,625,055 6.18
------------
New York (4.26%)
Glen Cove Housing Auth,
Rev Sr Living Facil The Mayfair Proj ..................... 8.250 10-01-26 BB+ 1,425 1,516,998 7.75
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
New York (continued)
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of Technology Proj .... 7.500% 03-01-26 BB- $2,000 $2,126,580 7.05%
New York, City of,
GO Fiscal 1994 Ser B1 Preref ............................. 7.300 08-15-11 A- 185 215,569 6.26
GO Fiscal 1994 Ser B1 Unref Bal .......................... 7.300 08-15-11 A- 765 871,802 6.41
GO Fiscal 1997 Ser J ..................................... 6.000 08-01-17 A- 2,500 2,570,650 5.84
------------
7,301,599
------------
Ohio (5.03%)
Bedford, County of,
Rev Ref Community Hosp Bedford Inc. ...................... 8.500 05-15-09 AA 1,345 1,491,121 7.67
Cleveland, City of,
Parking Facil Imp Rev .................................... 8.000 09-15-12 AA 1,000 1,171,340 6.83
Parking Facil Imp Rev .................................... 8.100 09-15-22 AA 2,000 2,351,320 6.89
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj ................. 8.625 02-01-22 BBB- 3,300 3,611,784 7.88
------------
8,625,565
------------
Oklahoma (1.30%)
Tulsa Municipal Airport Trust, Trustees of,
Rev American Airlines, Inc. .............................. 7.350 12-01-11 BBB- 2,000 2,227,600 6.60
------------
Oregon (2.65%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj ................... 7.125 01-01-21 BBB- 4,300 4,555,377 6.73
------------
Pennsylvania (10.88%)
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A
Toledo Edison Co Beaver Valley Proj ........................ 7.750 05-01-20 BB+ 2,500 2,826,400 6.86
Poll Control Rev Ref Cleveland Elec Proj ................. 7.625 05-01-25 BB+ 1,600 1,788,112 6.82
Chester County Industrial Development Auth,
Rev 1st Mtg Rha/Pa Nursing Home .......................... 10.125 05-01-19 B- 196 180,038 11.02
Montgomery County Higher Education and Health Auth,
Hosp Rev Ser A Utd Hosp Original Iss ..................... 7.500 11-01-14 AAA 1,055 1,128,512 7.01
Hosp Rev Ser B Utd Hosp Original Iss ..................... 7.500 11-01-13 AAA 3,030 3,241,130 7.01
Montgomery County Redevelopment Auth,
Multifamily Hsg Rev Ser A KBF Assoc L.P. Proj ............ 6.500 07-01-25 BBB+ 2,500 2,507,325 6.48
Northampton County Industrial Development Auth,
Poll Control Rev Ref Bethlehem Steel Proj ................ 7.550 06-01-17 B+ 2,000 2,193,740 6.88
Philadelphia Auth For Industrial Development,
Rev 1st Mtg Rha Care Pavilion Proj ....................... 10.250 02-01-18 BB 280 286,504 10.02
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj .... 8.625 07-01-21 BB 2,300 2,462,173 8.06
Philadelphia Industrial Development Auth,
Commercial Devel Rev Ref Ser A Doubletree Proj ........... 6.500 10-01-27 BB+ 2,000 2,064,160 6.30
------------
18,678,094
------------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Rhode Island (1.37%)
Providence Redevelopment Agency,
Cert of Part Ser A ....................................... 8.000% 09-01-24 BB- $2,160 $2,349,151 7.36%
------------
Utah (2.85%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A East Carbon
Development Corp ....................................... 9.000 07-01-12 BBB- 2,000 2,120,160 8.49
Solid Waste Disp Rev Ref Sunnyside Cogeneration Proj ..... 9.250 07-01-18 B 1,900 1,235,000 14.23
Toole, County of,
Poll Control Rev Ref Ser A Laidlaw Environmental Proj .... 7.550 07-01-27 BBB- 1,500 1,543,545 7.34
------------
4,898,705
------------
Virginia (2.83%)
Hopewell Industrial Development Auth,
Resource Recovery Rev Ref Stone Container Corp Proj ...... 8.250 06-01-16 BB 4,400 4,855,048 7.48
------------
Washington (2.81%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj . 9.125 01-01-26 BB- 5,000 3,500,000 13.04
Spokane County Industrial Development Corp,
Solid Waste Disp Rev Kaiser Alum & Chem Corp Proj ........ 7.600 03-01-27 BB- 1,250 1,320,325 7.20
------------
4,820,325
------------
West Virginia (1.05%)
Marion, County of,
Community Solid Waste Disp Rev American
Pwr Paper Recycling Proj ............................... 7.750 12-01-11 B 4,000 1,800,000 17.22
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $159,024,417) (98.55%) $169,092,419
====== ============
</TABLE>
* Credit Ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Services, Fitch or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available.
+ The yield is not calculated in accordance with guidelines established by the
U.S. Securities & Exchange Commission and is unaudited. Zero coupon yields
are at yield to maturity.
# Represents the rate in effect on August 31, 1997.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
Portfolio Concentration
- --------------------------------------------------------------------------------
The High Yield Tax-Free 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,
1997, assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ----------
General Obligation ......................................... 4.84%
Revenue Bonds - Certificate of Participation ............... 2.59
Revenue Bonds - Education .................................. 1.83
Revenue Bonds - Health ..................................... 19.33
Revenue Bonds - Housing .................................... 5.66
Revenue Bonds - Industrial Development Bond ................ 8.20
Revenue Bonds - Other ...................................... 12.66
Revenue Bonds - Pollution Control Facilities ............... 24.20
Revenue Bonds - Transportation ............................. 17.35
Revenue Bonds - Water & Sewer .............................. 1.89
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.55%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax Free Bond Trust (the "Trust") is a diversified, open-end
management investment company, registered under the Investment Company Act of
1940. The Trust consists of two series: John Hancock High Yield Tax-Free Fund
(the "Fund") and John Hancock Tax-Free Bond Fund. The other series of the Trust
is reported in separate financial statements. The investment objective of the
Fund is to provide as high a level of interest income exempt from federal income
taxes as is consistent with the preservation of capital by investing primarily
in municipal bonds, notes and commercial paper, the interest on which is exempt
from federal income taxes.
The Board of 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 Board of Trustees may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission. Shareholders of a class which bears
distribution and service expenses under terms of a distribution plan have
exclusive voting rights regarding that distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Board of 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 $6,907,488 of a capital
loss carryforward available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent such carryforward is used by
the Fund, no capital gains distribution will be made. The carryforwards will
expire as follows: August 31, 2002--$2,785,979, August 31, 2003--$205,838,
August 31, 2004--$3,207,633 and August 31, 2005--$708,038. Additionally, net
capital losses of $2,602,569 attributable to security transactions incurred
after October 31, 1996 are treated as arising on the first day (September 1,
1997) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or
18
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
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.
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 and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with a bank which permits borrowings up to $400 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended August 31, 1997.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates and other market conditions. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling futures
tends to decrease the Fund's exposure to the underlying instrument or hedge
other Fund instruments. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin," equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange on which it trades. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
Daily variation margin adjustments, arising from this "mark to market," will be
recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At August 31, 1997 there were the following open positions in financial
futures contracts:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
SEP 97 20 U.S. TREASURY BOND SHORT ($15,000)
=======
At August 31, 1997, the Fund has deposited $36,000 in a segregated account 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 cor-
19
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
responding liability. The amount of the liability will be subsequently
marked-to-market to reflect the current market value of the written option.
The Fund may use option contracts to manage its exposure to the stock market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
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 year ended August 31, 1997.
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, on
an annual basis, to the sum of (a) 0.625% of the first $75,000,000 of the Fund's
average daily net asset value, (b) 0.5625% of the next $75,000,000 and (c) 0.50%
of the Fund's average daily net asset value in excess of $150,000,000.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended August 31,
1997, net sales charges received with regard to sales of Class A shares amounted
to $215,849. Out of this amount, $26,764 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $174,321 was
paid as sales commissions to unrelated broker-dealers and $14,764 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended August 31, 1997,
contingent deferred sales charges paid to JH Funds amounted to $458,112.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% 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. The Fund has
temporarily agreed to limit the distribution and service fees pursuant to Class
A to 0.25% of the average daily net assets.Up to a maximum of 0.25% of such
payments may be service fees as defined by the amended Rules of Fair Practice of
the National Association of Securities Dealers. Under the amended Rules of Fair
Practice, curtailment of a portion of the Fund's 12b-1 payments could occur
under certain circumstances.
20
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an an annual rate of less than 0.02% of the average net assets of each Fund.
Mr. Edward J. Boudreau Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipone
are directors and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as another 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, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $1,714.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended August 31, 1997, aggregated $85,565,249 and $89,916,289, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1997.
The cost of investments owned at August 31, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $159,024,417. Gross
unrealized appreciation and depreciation of investments aggregated $14,610,395
and $4,542,393 respectively, resulting in net unrealized appreciation of
$10,068,002.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $459, an
increase to distributions in excess of net investment income of $5,229 and an
increase in capital paid-in of $4,770. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of August 31, 1997. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on the net
asset value of the Fund, are primarily attributable to certain differences in
the computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
21
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - High Yield Tax-Free Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Tax-Free Bond Trust --
John Hancock High Yield Tax-Free Fund
We have audited the accompanying statement of assets and liabilities of the John
Hancock High Yield Tax-Free Fund (the "Fund"), one of the portfolios
constituting John Hancock Tax-Free Bond Trust, including the schedule of
investments, as of August 31, 1997, and the related statement of operations for
the year ended, and the statement of changes in net assets 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, 1997, by correspondence with the custodian and brokers, and other
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 High Yield Tax-Free Fund of John Hancock Tax-Free Bond Trust at
August 31, 1997, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 14, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund during its fiscal year ended August 31,
1997.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 99.91% tax-exempt. Approximately 18.82% of the 1997
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 receive a 1997 U.S. Treasury
Department Form 1099-DIV in January 1998 representing their proportionate share.
22
<PAGE>
================================================================================
NOTES
John Hancock Funds - John Hancock High Yield Tax-Free Fund
23
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
INTERNET: www.jhancock.com/funds Permit No. 75
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock High
Yield Tax-Free Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 5900A 8/97
10/97
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Tax-Free
Bond Fund
AUGUST 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<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, Jr.*
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 and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The Taxpayer Relief Act of 1997 recently signed into law by President Clinton
includes new twists and important changes to Individual Retirement Account (IRA)
laws. The provisions will, among other things, allow more people to qualify for
annual tax-deductible IRA contributions and to save tax-free for college. They
also allow IRA investors to withdraw money penalty-free from all IRAs to buy a
first home or pay for college expenses.
For existing deductible IRAs, the law doubles income limits over the next
eight to 10 years for those eligible to deduct an annual IRA contribution of up
to $2,000. For individuals, the annual income cap will increase incrementally
from the current $25,000 to $50,000 by 2005. For couples, the limit would
increase from $40,000 today to $80,000 in 2007. The new law allows non-working
spouses to make IRA contributions even if their spouse is covered by a pension
plan at work, provided the couple's joint income is less than $150,000.
[A 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief Executive Officer,
flush right, next to second paragraph.]
The law also creates two new IRA investment vehicles. One, called the "Roth
IRA" after its principal congressional sponsor, allows for non-deductible annual
contributions up to a $2,000 maximum. But income accumulates tax-free and if the
account has been open for five years, distributions are tax-free if they are
used after age 591/2 or upon death, disability or a first-time home purchase.
Withdrawals for higher-education expenses would not be subject to a 10% penalty.
Eligible investors must earn less than $95,000 per year individually or $150,000
per couple.
A second new IRA plan is called the "Education IRA" which allows non-
deductible contributions of up to $500 per year, per child under age 18.
Earnings in the account accumulate tax-free, and withdrawals are also not taxed
when applied toward undergraduate or graduate-level expenses. Eligible investors
are subject to the same income restrictions as the Roth IRA.
The law has also made some important changes in capital gains tax rates and
estate tax laws. But the devil is in the details, and so we recommend exploring
how you can benefit from the changes with your investment professional and tax
advisor. The Taxpayer Relief Act of 1997 gives investors new options toward
savings. It's a move we applaud.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Thomas C. Goggins, Portfolio Manager
John Hancock Tax-Free
Bond Fund
Low inflation, strong technical factors
---------------------------------------
fuel municipal bond rally
-------------------------
Powered by a number of favorable factors, municipal bonds turned in a strong
performance during the past 12 months. The most important factor aiding
municipal bonds was the lack of inflationary pressure. Inflation is the bugaboo
of bond investing because it eats away at the value of bonds' fixed-income
payments. At times during the past year, bond investors were worried that
stronger-than-expected economic reports would mean that inflation was in danger
of heating up. Moreover, investors feared that the Federal Reserve Board would
be forced to raise interest rates as a pre-emptive strike. When inflation
worries were at their peak -- as they were during much of the first calendar
quarter of 1997 -- bond investors sent bond prices lower and bond yields higher.
But after this bout of hand wringing and a small rate hike by the Fed, the bond
markets staged an impressive rally that began in late spring and lasted almost
to the end of the period. Not only was there evidence that the economy was
growing at a non-inflationary pace, but fears of rising interest rates were put
to rest when Fed Chairman Alan Greenspan strongly suggested to Congress in July
that no further rate hikes were on the near-term horizon.
"Municipals got other good news on the legislative and technical fronts."
Municipals got other good news on the legislative and technical fronts. The
past year saw the death of major support for a federal flat tax. If enacted, the
flat tax would have wiped out the tax-exempt advantage of municipal bonds. And
from a technical standpoint, a slight increase in
[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".]
3
<PAGE>
================================================================================
John Hancock Funds - Tax-Free Bond Fund
[Pie Chart entitled "Portfolio Diversification" at top left hand column. The
chart is divided into 11 sections. Going from top right clockwise: General
Obligation 9%; Certificate of participation 1%; Education 4%; Electric 16%;
Health 15%; Housing 4%; Industrial Development 8%; Other 4%; Pollution Control
14%; Transportation 21%; Water & Sewer 4%. A footnote below states "As a
percentage of net assets on August 31, 1997".]
The Fund's stake in non-callable securities boosted performance.
the amount of the total supply of municipal bonds available was adequately
digested by somewhat stronger demand for them.
A look at performance
Against that backdrop, John Hancock Tax-Free Bond Fund turned in a solid
performance for the year. For the 12 months ended August 31, 1997, the Fund's
Class A and Class B shares posted total returns of 9.44% and 8.63%,
respectively, at net asset value. That compared favorably to the average general
municipal bond fund's 8.83% 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 Port
Authority of New York followed by an up arrow and the phrase "Strong demand for
uninsured New York bonds". The second listing is Arapahoe County followed by an
up arrow and the phrase "Improving credit quality". The third listing is Paper
recycling products followed by a down arrow and the phrase "Weak paper prices."
A footnote below states "See 'Schedule of Investments'. Investment holdings are
subject to change."]
Several factors contributed to the Fund's better-than-average performance.
First was our relatively heavy weighting in investment-grade bonds rated BBB by
Standard & Poor's. Throughout the past year, these lower-rated bonds were in
great demand among investors, primarily because they offered higher yields than
bonds rated A or higher. However, we've done some recent pruning among our
BBB-rated holdings. In our view, there is a risk that the economy could weaken,
especially given current economic conditions in parts of Europe and Asia. If the
U.S. economy falters in response, lower-rated bonds -- which are more sensitive
than higher-rated securities to economic weakness -- could suffer. In light of
that outlook, we felt it prudent to pare some of our lower-rated holdings at a
time period when their prices were quite good. Even after those sales, however,
the Fund remained overweighted in relatively high-yielding, BBB-rated bonds
compared to its peers. Another factor that worked in the Fund's favor was our
stake in non-callable securities, which can't be redeemed by their issuer before
maturity. Municipalities, like homeowners, often like to refinance their debt
when interest rates fall. When they call away -- or refinance -- their debt when
rates fall, bondholders may be forced to find replacement bonds that offer lower
interest rates. Because they can't be redeemed prior to maturity, non-callable
bonds tend to perform better than their callable counterparts when interest
rates are on the decline.
In response to changing market conditions, and depending on our view of where
interest rates were headed, we adjusted the Fund's duration. Duration measures
how sensitive a bond's price, and therefore the Fund's share price, is to
changes in interest rates. The longer the duration, the more sensitive; the
shorter, the less sensitive. Our duration was relatively long during the spring
and summer, which was a generally a
4
<PAGE>
================================================================================
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, 1997." The chart is
scaled in increments of 2%, with 10% at the top and 0% at the bottom. Within the
chart are three solid bars. The first represents the 9.44% total return for John
Hancock Tax-Free Bond Fund: Class A. the second represents the 8.63% total
return for John Hancock Tax-Free Bond Fund: Class B. The third represents the
8.83% 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, Inc. (1). See the following two pages for
historical performance information."]
positive given the market's rally as interest rates fell.
Winners and losers
As we mentioned previously, many of our BBB-rated holdings did quite well during
the period. One example was bonds issued by the Port Authority of New York for a
co-generation plant used to provide energy and heat for the authority's
terminals. Strong demand for all types of New York uninsured bonds helped send
these holdings higher. Houston Airport bonds issued on behalf of Continental
Airlines did well as the company's financial picture improved. Finally, Araphoe
County, Colorado bonds -- which are used to fund a highway surrounding the
Denver Airport -- were advance refunded. In an advance refunding, an issuer with
existing bonds will issue a second set of bonds. Proceeds from this sale are
then invested in U.S. Treasury securities, and these Treasuries then secure the
original bonds until their call date. Because they are backed by the
highest-quality Treasury bonds, the refunded municipals experience credit
quality improvement, and in this case, price appreciation.
Our disappointments were limited to a very small holding in a paper recycling
plant, which suffered when the price of paper remained low during the period.
"In our view, the bond markets are poised to continue their climb."
Outlook
The bond market could continue to experience bouts of volatility over the near
term as investors try to sort out various economic reports -- which may prove to
be contradictory at times -- and what they portend for interest rates and
inflation. But our longer-term view is that bonds are poised to continue their
climb. The deflationary pressures that have curtailed economic growth in Europe
and Asia could ultimately translate into slower economic growth in the United
States. If the American economy shows signs of slowing, the Federal Reserve
Board would have the luxury of lowering interest rates. Since bond prices move
in the opposite direction of interest rates, falling rates could prompt a bond
rally. We also believe that there are strong underpinnings to the municipal
market. Supply, which has been stronger so far in 1997 than it was in preceding
years, continues to be easily absorbed by demand.
- --------------------------------------------------------------------------------
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.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load adjusted performance is
lower.
5
<PAGE>
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- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Free Bond Fund. Total return is a
performance measure that equals the sum of all income and capital gains
distributions, assuming reinvestment of these distributions, and the change in
the price of the Fund's shares, expressed as a percentage of the Fund's net
asset value per share. Performance figures include the maximum applicable sales
charge of 4.5% for Class A shares. The effect of the maximum contingent deferred
sales charge for Class B shares (maximum 5% and declining to 0% over six years)
is included in Class B performance. Performance is affected by a 12b-1 plan.
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.
Please note that a portion of the Fund's income may be subject to taxes, and
some investors may be subject to the Alternative Minimum Tax. Also note that
capital gains are taxable.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A 3.70% 34.70% 73.69%(1)
John Hancock Tax-Free Bond Fund: Class B 2.78% 33.86% 42.40%(2)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
John Hancock Tax-Free Bond Fund: Class A(3) 3.70% 6.14% 7.66%(1)
John Hancock Tax-Free Bond Fund: Class B(3) 2.78% 6.01% 6.50%(2)
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1997
SEC 30-DAY
YIELD
-----
John Hancock Tax-Free Bond Fund: Class A 4.53%
John Hancock Tax-Free Bond Fund: Class B 3.99%
Notes to Performance
(1) Class A commenced operations on January 5, 1990.
(2) Class B commenced operations on December 31, 1991.
(3) The Adviser voluntarily waived a portion of the management fee during the
period. Without the waiver of expenses, the average annualized total return
for the one-year, five-year, and since inception periods for Class A shares
would have been 3.62%, 6.00% and 7.38%, respectively. The average
annualized total returns for the one-year, five-year, and since inception
periods for Class B shares would have been 2.69%, 5.87% and 6.48%,
respectively.
6
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in John Hancock
Tax-Free Bond Fund would be worth on August 31, 1997. They assume that you
invested on the day each class of shares started. They also assume that you have
reinvested all distributions. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Municipal Bond Index--an unmanaged index that
includes approximately 15,000 bonds and is commonly used as a measure of bond
performance. *No contingent deferred sales charge applicable.
- --------------------------------------------------------------------------------
Tax-Free Bond Fund
Class A shares
Line chart with the heading Tax-Free Bond Fund: Class A, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $18,617 as of August 31, 1997. The second 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 $17,964 as of August 31,
1997. The third line represents the Tax-Free Bond Fund after sales charge and is
equal to $17,779 as of August 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Tax-Free Bond Fund
Class B shares
Line chart with the heading Tax-Free Bond Fund: Class B, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $14,931 as of August 31, 1997. The second line represents the
value of the hypothetical $10,000 investment made in the Tax-Free Bond Fund on
December 31, 1991, before contingent deferred sales charge, and is equal to
$14,618 as of August 31, 1997. The third line represents the Tax-Free Bond Fund
after contingent deferred sales charge and is equal to $14,518 as of August 31,
1997.
- --------------------------------------------------------------------------------
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on August 31, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
August 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $742,512,417) ............. $809,344,157
Receivable for investments sold ................................ 215,288
Receivable for shares sold ..................................... 51,756
Interest receivable ............................................ 13,402,686
Receivable for variation margin ................................ 142,019
Other assets ................................................... 95,649
------------
Total Assets ....................... 823,251,555
-------------------------------------------------
Liabilities:
Payable for investments purchased .............................. 25,367,119
Due to Custodian ............................................... 1,943,051
Payable for shares repurchased ................................. 99,111
Dividend payable ............................................... 323,473
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 574,648
Accounts payable and accrued expenses .......................... 137,929
------------
Total Liabilities .................. 28,445,331
-------------------------------------------------
Net Assets:
Capital paid-in ................................................ 744,787,590
Accumulated net realized loss on investments and
financial futures contracts .................................. (16,765,472)
Net unrealized appreciation of investments and
financial futures contracts .................................. 66,953,350
Distributions in excess of net investment income ............... (169,244)
------------
Net Assets ......................... $794,806,224
=================================================
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)
Class A - $590,184,987/55,530,901 .............................. $10.63
=============================================================================
Class B - $204,621,237/19,252,949 ............................. $10.63
=============================================================================
Maximum Offering Price Per Share*
Class A - ($10.63 x104.71%) .................................... $11.13
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended August 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Interest ....................................................... $49,758,278
-----------
Expenses:
Investment management fee - Note B ........................... 4,110,920
Distribution and service fee - Note B
Class A .................................................... 887,187
Class B .................................................... 1,625,302
Transfer agent fee - Note B .................................. 949,844
Custodian fee 222,618
Registration and filing fees ................................. 204,718
Financial services fee - Note B .............................. 143,283
Trustees' fees ............................................... 68,544
Printing ..................................................... 45,223
Auditing fee ................................................. 44,715
Legal fees ................................................... 32,801
Miscellaneous ................................................ 23,283
Interest expense - Note A .................................... 17,018
Less management fee reduction - Note B ....................... (459,575)
-----------
Net Expenses ....................... 7,915,881
-------------------------------------------------
Net Investment Income .............. 41,842,397
-------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold .......................... (604,926)
Net realized loss on financial futures contracts ............... (1,773,160)
Change in net unrealized appreciation/depreciation
of investments ................................................. 28,236,018
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................... (2,040,219)
-----------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ........ 23,817,713
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .......... $65,660,110
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996 YEAR ENDED
DECEMBER 31, TO AUGUST 31, AUGUST 31,
1995 1996 (1) 1997
------------- -------------- -------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................................ $10,263,078 $15,419,178 $41,842,397
Net realized gain (loss) on investments sold and financial futures contracts ..... (7,036,534) 150,708 (2,378,086)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts .................................................... 31,417,068 (2,174,110) 26,195,799
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ........................... 34,643,612 13,395,776 65,660,110
------------ ------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5699, $0.3940 and $0.5859 per share, respectively) ............... (6,647,931) (12,785,885) (33,144,713)
Class B - ($0.4927, $0.3421 and $0.5073 per share, respectively) ............... (3,620,138) (2,575,862) (8,723,112)
------------ ------------ ------------
Total Distributions to Shareholders .......................................... (10,268,069) (15,361,747) (41,867,825)
------------ ------------ ------------
From Fund Share Transactions - Net* ................................................ (13,536,114) 448,385,360 128,973,479
------------ ------------ ------------
Net Assets:
Beginning of period .............................................................. 184,781,642 195,621,071 642,040,460
------------ ------------ ------------
End of period (including undistributed net investment income of none,
$70,842 and distributions in excess of net investment income of $169,244,
respectively) .................................................................... $195,621,071 $642,040,460 $794,806,224
============ ============ ============
* Analysis of Fund Share Transactions:
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996 TO YEAR ENDED
DECEMBER 31, 1995 AUGUST 31, 1996 (1) AUGUST 31, 1997
------------------------ ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ..................................... 990,678 $10,001,197 5,071,402 $52,156,414 45,295,498 $471,394,805
Shares issued in reorganization - Note D ........ -- -- 45,353,943 460,732,563 3,663,041 38,514,684
Shares issued to shareholders in reinvestment
of distributions .............................. 365,927 3,709,354 891,259 9,157,732 2,401,808 25,169,422
--------- ---------- ---------- ----------- ---------- -----------
1,356,605 13,710,551 51,316,604 522,046,709 51,360,347 535,078,911
Less shares repurchased ......................... (2,422,945) (24,445,738) (7,839,272) (80,702,212) (50,443,895) (525,552,293)
--------- ---------- ---------- ----------- ---------- -----------
Net increase (decrease) ......................... (1,066,340) ($10,735,187) 43,477,332 $441,344,497 916,452 $9,526,618
========= =========== ========== ============ ========== ===========
CLASS B
Shares sold ..................................... 722,057 $7,261,875 801,687 $8,269,693 1,491,837 $15,614,797
Shares issued in reorganization - Note D ........ -- -- 903,108 9,174,769 14,270,326 150,045,343
Shares issued to shareholders in reinvestment
of distributions .............................. 202,597 2,054,192 143,061 1,478,978 441,650 4,628,530
--------- ---------- ---------- ----------- ---------- -----------
924,654 9,316,067 1,847,856 18,923,440 16,203,813 170,288,670
Less shares repurchased ......................... (1,207,168) (12,116,994) (1,147,198) (11,882,577) (4,854,334) (50,841,809)
--------- ---------- ---------- ----------- ---------- -----------
Net increase (decrease) ......................... (282,514) ($2,800,927) 700,658 $7,040,863 11,349,479 $119,446,861
========= =========== ========== ============ ========== ===========
(1) Effective August 31, 1996, the fiscal period end changed from December 31 to August 31.
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 YEAR ENDED
----------------------------------------- TO AUGUST 31, AUGUST 31,
1992 1993 1994(1) 1995 1996(8) 1997
-------- -------- -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................... $10.24 $10.47 $10.96 $9.39 $10.67 $10.27
Net Investment Income ...................................... 0.67 0.62 0.58 0.57(2) 0.40 0.59
Net Realized and Unrealized Gain (Loss) on Investments ..... 0.42 0.93 (1.58) 1.28 (0.41) 0.36
Total from Investment Operations ......................... 1.09 1.55 (1.00) 1.85 (0.01) 0.95
Less Distributions:
Dividends from Net Investment Income ....................... (0.68) (0.62) (0.57) (0.57) (0.39) (0.59)
Distributions from Net Realized Gains on Investments Sold .. (0.18) (0.44) -- -- -- --
Total Distributions ...................................... (0.86) (1.06) (0.57) (0.57) (0.39) (0.59)
Net Asset Value, End of Period ............................. $10.47 $10.96 $9.39 $10.67 $10.27 $10.63
Total Investment Return at Net Asset Value (3) ............. 10.97% 15.15% (9.28%) 20.20% (0.01%)(4) 9.44%
Total Adjusted Investment Return at Net Asset Value (3,5) .. 10.67% 14.98% (9.39%) 20.08% (0.09%)(4) 9.38%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $99,523 $136,521 $114,539 $118,797 $560,863 $590,185
Ratio of Expenses to Average Net Assets .................... 0.66% 0.78% 0.85% 0.85% 0.85%(7) 0.85%
Ratio of Adjusted Expenses to Average Net Assets (6) ....... 0.96% 0.95% 0.96% 0.97% 0.98%(7) 0.91%
Ratio of Net Investment Income to Average Net Assets ....... 6.46% 5.57% 5.72% 5.67% 5.75%(7) 5.61%
Ratio of Adjusted Net Investment Income to Average
Net Assets (6) ........................................... 6.16% 5.40% 5.61% 5.55% 5.62%(7) 5.55%
Portfolio Turnover Rate ................................... 79% 116% 107% 113% 116%(9) 46%(9)
Fee Reduction Per Share .................................... $0.03 $0.02 $0.01 $0.01(2) $0.01(2) $0.01
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 YEAR ENDED
----------------------------------------- TO AUGUST 31, AUGUST 31,
1992 1993 1994(1) 1995 1996(8) 1997
-------- -------- -------- -------- -------------- -----------
<S> <C> <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 $10.27
Net Investment Income ...................................... 0.59(2) 0.54 0.50 0.50(2) 0.34 0.51
Net Realized and Unrealized Gain (Loss) on Investments ..... 0.42 0.93 (1.58) 1.28 (0.40) 0.36
Total from Investment Operations ......................... 1.01 1.47 (1.08) 1.78 (0.06) 0.87
Less Distributions:
Dividends from Net Investment Income ....................... (0.60) (0.54) (0.50) (0.49) (0.34) (0.51)
Distributions from Net Realized Gains on Investments Sold .. (0.18) (0.44) -- -- -- --
Total Distributions ...................................... (0.78) (0.98) (0.50) (0.49) (0.34) (0.51)
Net Asset Value, End of Period ............................. $10.47 $10.96 $9.38 $10.67 $10.27 $10.63
Total Investment Return at Net Asset Value (3) ............. 10.15% 14.30% (10.05%) 19.41% (0.51%)(4) 8.63%
Total Adjusted Investment Return at Net Asset Value (3,5) .. 9.85% 14.13% (10.16%) 19.29% (0.59%)(4) 8.57%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $18,272 $56,384 $70,243 $76,824 $81,177 $204,621
Ratio of Expenses to Average Net Assets .................... 1.43% 1.53% 1.60% 1.60% 1.60%(7) 1.60%
Ratio of Adjusted Expenses to Average
Net Assets (6) ........................................... 1.73% 1.70% 1.71% 1.72% 1.73%(7) 1.66%
Ratio of Net Investment Income to Average Net Assets ....... 5.57% 4.66% 4.97% 4.90% 4.91%(7) 4.85%
Ratio of Adjusted Net Investment Income to Average
Net Assets (6) ........................................... 5.27% 4.49% 4.86% 4.78% 4.78%(7) 4.79%
Portfolio Turnover Rate .................................... 79% 116% 107% 113% 116%(9) 46%(9)
Fee Reduction per Share .................................... $0.03(2) $0.02 $0.01 $0.01(2) $0.01(2) $0.01
(1) On December 22, 1994 John Hancock Advisers, Inc. became the investment adviser of the fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) 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.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
Schedule of Investments
August 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Tax-Free Bond Fund on August 31, 1997. It has one main category: tax-exempt
long-term bonds. The tax-exempt long-term bonds are broken down by state. Under
each state is a list of the securities owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
Alabama (1.09%)
Birmingham, City of,
GO Iss of 1989 ........................................... 7.350% 03-01-14 Aa $750 $789,592 6.98%
Citronelle Industrial Development Board,
Poll Control Rev Stauffer Chemical Co Proj 1982 .......... 8.000 12-01-12 A1 500 548,865 7.29
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy Serv Co
Proj 1995 ................................................ 6.950 01-01-20 BBB- 6,750 7,338,937 6.39
----------
8,677,394
----------
Alaska (0.40%)
Alaska Housing Finance Corp,
Coll Home Mtg Ser B-1 GNMA Coll .......................... 7.650 06-01-24 AAA 1,975 2,092,591 7.22
Valdez Alaska Marine Terminal,
Rev Ref Sohio Pipe Line Co Proj Ser 1985 ................. 7.125 12-01-25 AA 1,000 1,116,240 6.38
----------
3,208,831
----------
Arizona (2.10%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj .............. 8.200 06-01-21 BBB 2,150 2,352,487 7.49
Arizona Municipal Financing Program,
Cert of Part Ser 25 ...................................... 7.875 08-01-14 AAA 1,000 1,299,900 6.06
Coconino County Pollution Control Corp,
Poll Control Rev 1997 Ser B Tucson Elec Pwr Co
Navajo Proj .............................................. 7.000 10-01-32 B 2,000 2,078,100 6.74
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 8,803,678 6.19
Navajo County Industrial Development Auth,
Ind'l Devel Rev Stone Container Corp Proj ................ 7.200 06-01-27 B 1,000 1,065,250 6.76
Pima, County of,
Swr Rev Ref Ser 1991 PreRef .............................. 6.750 07-01-15 AAA 460 503,534 6.17
Swr Rev Ref Ser 1991 Unref Bal ........................... 6.750 07-01-15 AAA 540 585,122 6.23
----------
16,688,071
----------
Arkansas (0.06%)
Arkansas Development Finance Auth,
Single Family Mtg Rev Ref Ser 1991 A ..................... 8.000 08-15-11 AA 470 504,705 7.45
----------
California (13.34%)
California State Department of Water Resources,
Wtr Sys Rev Ser T Central Valley Proj** .................. 5.000 12-01-11 AA 2,000 1,938,440 5.16
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
California (continued)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc ........ 5.875% 05-01-20 A+ $4,000 $4,057,520 5.79%
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 ....... 6.200 07-01-20 BBB- 7,000 7,262,920 5.98
Fontana Unified School District,
GO Ref Cap Apprec Ser A .................................. Zero 07-01-16 AAA 2,350 827,177 5.62
GO Ref Cap Apprec Ser A .................................. Zero 07-01-17 AAA 1,915 635,263 5.64
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A .............. Zero 01-01-19 BBB- 36,600 10,323,396 6.02
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A .............. Zero 01-01-20 BBB- 10,000 2,652,400 6.03
Toll Rd Rev Fixed Rate Current Int Ser 1995A ............. 6.000 01-01-16 BBB- 20,500 21,258,705 5.79
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration
Plant Proj ............................................... 8.000 06-01-10 Aa 1,000 1,049,870 7.62
Madera, County of,
Cert of Part Valley Children's Hosp Proj ................. 6.500 03-15-15 AAA 13,185 15,125,041 5.67
Sacramento Cogeneration Auth,
Cogeneration Proj Rev Proctor & Gamble Proj ............. 6.500 07-01-21 BBB- 3,750 4,005,225 6.09
Sacramento Municipal Utilities District,
Ind'l Devel Rev Ref San Diego Gas & Electric
Ser C Inflos ............................................. 8.868# 08-15-18 AAA 1,000 1,153,750 7.38
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A ......... 7.750 09-01-16 BBB 2,000 2,178,480 7.12
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj ............ 5.500 08-01-17 A- 9,130 9,085,811 5.53
Cert of Part Ser 1994 Medical Center Fin Proj ............ 5.500 08-01-22 A- 2,500 2,446,800 5.62
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj ..................... 8.500 12-01-26 BB 2,000 2,069,040 8.22
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec ........................... Zero 01-01-10 BBB 6,250 2,825,062 6.54
Toll Rd Rev Sr Lien ...................................... 5.000 01-01-33 BBB 2,500 2,252,350 5.55
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-19 BBB 15,510 4,420,195 5.97
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-14 BBB 5,000 1,936,700 5.89
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-17 BBB 4,900 1,573,782 5.96
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-20 BBB 2,000 536,260 5.98
Toll Rd Rev Sr Lien Cap Apprec ........................... Zero 01-01-23 BBB 7,500 1,676,850 6.00
San Jose Financing Auth,
Rev Ser B Community Facil Proj ........................... 5.625 11-15-18 A+ 2,500 2,509,300 5.60
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding Facil Ser A ............. 6.250 07-01-19 AAA 2,000 2,227,300 5.61
-----------
106,027,637
-----------
Colorado (2.53%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 6.950 08-31-20 Aa 5,000 5,839,250 5.95
Colorado Housing Finance Auth,
Single Family Prog Sr Iss A-2 7.625 08-01-17 AA 740 774,728 7.28
Single Family Residential Rev Ser C 8.750 09-01-17 Aa 320 329,882 8.49
SEE NOTES TO FINANCIALS STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Colorado (continued)
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref ......................... 7.250% 11-15-25 AAA $1,980 $2,267,635 6.33%
Airport Sys Rev Ser 1992A Unref Bal ...................... 7.250 11-15-25 AAA 5,020 5,749,255 6.33
Airport Sys Rev Ser 1994A ................................ 7.500 11-15-23 BBB 3,100 3,552,538 6.54
Douglas County School District No. Re. 1,
Douglas and Elbert Counties Imp Ser 1994A ................ 6.400 12-15-11 AAA 1,400 1,563,674 5.73
----------
20,076,962
----------
Connecticut (0.13%)
Connecticut Health and Educational Facilities Auth,
Rev Ser D Univ of Hartford ............................... 6.800 07-01-22 BBB- 1,000 1,014,580 6.70
----------
Delaware (0.90%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj ............. 6.750 05-01-19 AAA 6,500 7,126,145 6.16
----------
Florida (4.60%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co.
L.P. South Proj .......................................... 7.950 12-01-08 A 3,045 3,315,031 7.30
Citrus, County of,
Poll Control Ref Rev Ser 1992A Florida Pwr Corp
Crystal Rvr Pwr Plant Proj ............................... 6.625 01-01-27 A+ 1,250 1,339,800 6.18
Dade, County of,
Professional Sports Franchise Facil Tax Rev Cap Apprec ... Zero 10-01-27 AAA 5,500 1,028,390 5.65
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co ......................... 8.500 12-01-14 BBB- 200 226,308 7.51
Hernando, County of,
Criminal Justice Complex Rev Ser 1986 .................... 7.650 07-01-16 AAA 500 641,000 5.97
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport .................... 6.000 10-01-17 AAA 5,880 6,407,730 5.51
Hillsborough, County of,
Ref Util Rev Ser 1991A ................................... 7.000 08-01-14 BBB+ 1,245 1,348,036 6.46
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A ..................................... 5.250 10-01-28 AA 9,000 8,627,400 5.48
Lee, County of,
Hosp Board of Directors Hosp Rev Inflos .................. 9.367# 04-01-20 AAA 2,000 2,367,500 7.70
Orange County Health Facilities Auth,
Hosp Orlando Regional Medical Center Rev Inflos .......... 8.717# 10-29-21 AAA 1,000 1,191,250 7.37
Orange, County of,
School Board Cert of Part Ser A .......................... Zero 08-01-13 Aaa 10,365 4,437,257 5.40
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D ............................. 6.750 10-01-17 AA- 2,200 2,600,400 5.71
Tampa, County of,
Util Tax Cap Apprec ...................................... Zero 04-01-21 AAA 2,000 542,040 5.61
Util Tax Cap Apprec ...................................... Zero 10-01-21 AAA 2,800 737,436 5.62
Util Tax Cap Apprec ...................................... Zero 04-01-22 AAA 4,400 1,126,092 5.62
SEE NOTES TO FINANCIAL STATMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Florida (continued)
Util Tax Cap Apprec ...................................... Zero% 10-01-22 AAA $2,540 $631,698 5.62%
----------
36,567,368
----------
Georgia (5.22%)
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB ....................................... 5.700 01-01-19 A 1,000 1,017,280 5.60
Pwr Rev Ser C ............................................ 5.700 01-01-19 AAA 5,000 5,188,250 5.49
Pwr Rev Ser EE ........................................... 7.250 01-01-24 AAA 2,000 2,529,920 5.73
Pwr Rev Ser Z ............................................ 5.500 01-01-20 AAA 5,840 5,914,810 5.43
Georgia, State of,
GO Fiscal 1997 Ser A ..................................... 6.000 04-01-15 AAA 16,000 17,501,600 5.49
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj .. 6.800 01-01-12 A 1,000 1,149,460 5.92
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1 .......................... 6.500 01-01-17 AAA 3,500 4,008,585 5.68
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj .......................... 7.000 01-01-23 BB 4,000 4,191,680 6.68
----------
41,501,585
----------
Illinois (2.97%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A .. 7.500 01-01-16 A+ 2,000 2,158,840 6.95
Chicago-O'Hare Int'l Airport Int'l Terminal Spec
Rev Ser 1992 ............................................. 6.750 01-01-12 AAA 3,000 3,248,850 6.23
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A
American Airlines Proj ................................... 7.875 11-01-25 BBB- 3,000 3,275,910 7.21
Skyway Toll Bridge Rev Ref Ser 1994 ...................... 6.750 01-01-17 AAA 2,000 2,250,960 6.00
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj ......... 5.850 01-15-14 BBB 3,000 3,005,430 5.84
Rev Ref Ser A Columbus Cuneo Cabrini Proj ................ 8.500 02-01-15 Aa 2,150 2,393,337 7.64
Illinois Health Facilities Auth,
Rev Methodist Hlth Serv Corp Ser 1991 B .................. 9.770# 05-01-21 AAA 1,000 1,166,250 8.39
Rev Ref Friendship Vlg Schamburg ......................... 6.750 12-01-08 A- 1,640 1,731,118 6.39
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj ........ 7.000 01-01-07 A- 1,500 1,616,610 6.50
Rev Swedish-American Hosp ................................ 7.400 04-01-20 AAA 750 820,597 6.76
Illinois Industrial Pollution Control Financing Auth,
Rev Great Lakes Carbon Corp Proj ......................... 7.125 10-01-01 BBB 900 902,187 7.11
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners ..... 8.375 10-15-16 BB- 1,000 1,046,790 8.00
----------
23,616,879
----------
Indiana (0.27%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj ......... 7.500 06-01-26 BB 2,000 2,144,580 6.99
----------
Kansas (0.51%)
Johnson County Water District No.1,
Wtr Rev Ref Ser 1984 ..................................... 10.500 12-01-08 AAA 2,000 2,157,240 9.73
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Kansas (continued)
Sedgwick, County of,
GNMA Coll Mtg Ln Rev Ser C ............................... 8.625% 11-01-18 AAA $1,805 $1,863,626 8.35%
----------
4,020,866
----------
Kentucky (0.82%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A ............. 6.750 02-01-02 BB+ 2,000 2,136,820 6.32
Rev Spec Facil Delta Airlines Proj Ser 1992A ............. 7.500 02-01-12 BB+ 2,000 2,202,640 6.81
Rev Spec Facil Delta Airlines Proj Ser 1992A ............. 7.125 02-01-21 BB+ 2,000 2,173,420 6.56
----------
6,512,880
----------
Louisiana (1.82%)
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States Util Co Proj ... 6.750 10-01-12 BB+ 2,975 3,153,024 6.37
De Soto, Parish of,
Rev Environ Imp Rev Int'l Paper Co Proj Ser A ............ 7.700 11-01-18 A- 2,750 3,208,150 6.60
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj ............. 6.500 05-15-22 AAA 3,405 3,712,710 5.96
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj .. 7.500 06-01-21 BBB 4,000 4,384,640 6.84
----------
14,458,524
----------
Massachusetts (6.09%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B ................................. 7.875 03-01-21 AAA 2,000 2,264,760 6.95
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D ..................... 6.750 07-01-24 AA- 2,450 2,646,441 6.25
Rev Lowell Gen Hosp Iss Ser A ............................ 8.400 06-01-11 A- 1,100 1,267,200 7.29
Rev New England Deaconess Hosp Iss Ser D ................. 6.625 04-01-12 A 3,500 3,707,725 6.25
Rev New England Deaconess Hosp Iss Ser D ................. 6.875 04-01-22 A 7,960 8,620,043 6.35
Rev New England Medical Center Hosp Iss Ser E ............ 7.875 07-01-11 A+ 1,950 2,051,829 7.48
Rev St. Elizabeth's Hosp of Boston Ser E ................. 10.006# 08-15-21 AAA 1,000 1,161,250 8.50
Rev Worcester Polytechnic Institute Ser E ................ 6.750 09-01-11 AAA 3,840 4,286,669 6.05
Massachusetts Housing Finance Agency,
Hsg Rev Insured Rental Ser A ............................. 6.650 07-01-19 AAA 5,500 5,788,145 6.32
Residential Dev 1992 Ser A ............................... 6.900 11-15-24 AAA 2,700 2,919,942 6.38
Single Family Hsg Ser 8 .................................. 7.700 06-01-17 A+ 2,500 2,582,825 7.45
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 4,756,211 6.25
Massachusetts State Water Pollution Abatement Trust,
Wtr Poll Rev 1994 South Essex Swr District Loan Proj Ser A 6.375 02-01-15 AA+ 1,000 1,079,500 5.91
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B ............................... 6.000 08-01-14 A+ 2,000 2,189,760 5.48
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj 7.000 04-01-22 A- 2,750 3,067,323 6.28
----------
48,389,623
----------
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Michigan (1.81%)
Detroit, City of,
GO Unltd Ser 1995 A ...................................... 6.800% 04-01-15 BBB $1,315 $1,502,348 5.95%
Michigan Housing Development Auth,
Single Family Mtg Rev Ser A .............................. 7.500 06-01-15 AA+ 1,415 1,485,764 7.14
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj ...... 8.250 07-01-12 A3 2,250 2,501,100 7.42
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group ...... 8.100 10-01-13 BBB 3,000 3,506,760 6.93
Wayne Charter, County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest
Airlines Inc. ............................................ 6.750 12-01-15 BB 4,995 5,403,941 6.24
----------
14,399,913
----------
Minnesota (0.49%)
Minnesota Housing Finance Agency,
Single Family Mtg 1990 Ser C ............................. 7.700 07-01-14 AA+ 235 247,657 7.31
Southern Minnesota Municipal Power Agency,
Pwr Supply Sys Rev Cap Apprec Ser A ...................... Zero 01-01-23 AAA 15,000 3,632,250 5.68
----------
3,879,907
----------
Mississippi (0.97%)
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A ....................... 9.250 03-01-12 AAA 85 91,125 8.63
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Memorial Foundation Proj .................. 8.750 01-01-16 Baa3 2,000 2,231,220 7.84
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj ..... 7.000 04-01-22 Baa3 5,000 5,419,600 6.46
----------
7,741,945
----------
Nebraska (0.16%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B .................................. 6.200 02-01-17 Aa2 1,200 1,310,448 5.68
----------
Nevada (1.55%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj ...... 6.500 12-01-33 BBB- 10,000 10,528,600 6.17
Nevada Housing Division,
Single Family Proj Sr Rev Ser 1989 Iss A-1 ............... 7.350 04-01-16 AA 865 896,927 7.09
Single Family Proj Sr Rev Ser 1990 Iss C-1 ............... 7.850 10-01-15 AA 325 342,608 7.45
Nevada, State of,
GO Ltd Tax Municipal Bond Bank Proj No. 38 Ser A
Unref Bal ................................................ 6.750 07-01-09 AA 25 27,370 6.17
Reno, City of,
Hosp Rev St. Mary's Regional Medical Center Ser A
Unref Bal ................................................ 7.750 07-01-07 AAA 480 503,213 7.39
----------
12,298,718
----------
New Hampshire (0.21%)
New Hampshire Business Finance Auth,
Poll Control & Solid Waste Ref Crown Paper Co Proj ....... 7.750 01-01-22 BB- 1,500 1,635,060 7.11
----------
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
New Jersey (1.96%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj .......... 9.875% 01-01-21 BB+ $1,100 $1,283,843 8.46%
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens ..................... 8.500 11-01-16 BB+ 100 105,659 8.04
Rev Cap Apprec Hillcrest Hlth Serv ....................... Zero 01-01-16 AAA 2,500 930,925 5.46
Rev Cap Apprec Hillcrest Hlth Serv ....................... Zero 01-01-21 AAA 7,000 1,946,420 5.56
Rev Ref Ind'l Development Newark Airport Marriott
Hotel Proj ............................................... 7.000 10-01-14 BBB 4,000 4,255,040 6.58
Rev Ref Ser J Holt Hauling Proj .......................... 8.500 11-01-23 BBB 2,500 2,739,625 7.76
New Jersey Health Care Facilities Financing Auth,
Rev Care Institute Inc Cherry Hill Proj .................. 8.000 07-01-27 BB+ 1,370 1,449,063 7.56
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 .................................... 10.375 01-01-03 AAA 1,560 1,838,148 8.81
Union County Utilities Auth,
Rev Solid Waste Ser A .................................... 7.150 06-15-09 BB 1,000 1,010,750 7.07
----------
15,559,473
----------
New Mexico (0.26%)
Farmington, City of,
Poll Control Rev 1997 Ser A Tucson Elec Pwr Co
San Juan Proj .............................................. 6.950 10-01-20 B 2,000 2,091,980 6.64
----------
New York (12.24%)
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of Technology Proj .... 7.500 03-01-26 BB- 2,500 2,658,225 7.05
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj ..... 7.950 01-01-28 BB 2,000 2,252,520 7.06
New York Local Government Assistance Corp,
Rev Ref Cap Apprec Ser 1993 C ............................ Zero 04-01-14 AAA 7,210 2,978,884 5.40
Rev Ser 1991C ............................................ 7.000 04-01-10 A 2,000 2,215,080 6.32
Ser 1992 A Pub Benefit Corp .............................. 6.875 04-01-19 A 10,700 11,969,020 6.15
New York State Dormitory Auth,
City Univ Ref Iss 1988B .................................. 8.125 07-01-08 BBB 1,000 1,049,790 7.74
City Univ Sys Consol Rev 2nd Generation Ser 1993A ........ 5.750 07-01-09 BBB 1,000 1,058,990 5.43
Cornell Univ Rev Ser 1990A ................................. 7.375 07-01-30 AA 1,000 1,095,330 6.73
State Univ Ed Facil Rev Iss Ser 1990B .................... 7.500 05-15-11 BBB+ 500 598,570 6.26
State Univ Ed Facil Rev Ser 1990B ........................ 7.000 05-15-16 BBB+ 5,000 5,385,200 6.50
State Univ Ed Facil Rev Ser 1993A ........................ 5.500 05-15-19 BBB+ 1,000 1,001,170 5.49
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+ 5,250 5,656,508 6.64
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj 7.500 01-01-26 A+ 2,000 2,136,660 7.02
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A ..... 7.500 06-15-12 A 4,370 4,825,136 6.79
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A ................... 8.000 05-01-11 AAA 2,000 2,504,860 6.39
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B Preref ......... 7.875 08-15-08 AAA 345 385,948 7.04
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal ...... 7.875 08-15-08 BBB+ 155 172,155 7.09
Mental Hlth Serv Facil Imp Rev 1990 Ser B Preref ......... 7.875 08-15-20 AAA 371 415,034 7.04
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
New York (continued)
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal ...... 7.875% 08-15-20 A- $84 $93,297 7.09%
Mental Hlth Serv Facil Imp Rev 1991 Ser A Preref ......... 7.750 08-15-11 AAA 1,795 2,025,101 6.87
Mental Hlth Serv Facil Imp Rev 1991 Ser A Unref Bal ...... 7.750 08-15-11 A- 205 229,362 6.93
New York State Power Auth,
Gen Purpose Ser V ........................................ 7.875 01-01-13 AAA 2,400 2,480,688 7.62
New York, City of,
GO Fiscal 1991 Ser D Preref .............................. 8.000 08-01-04 A 165 188,970 6.99
GO Fiscal 1991 Ser D Unref Bal ........................... 8.000 08-01-04 A 30 33,675 7.13
GO Fiscal 1991 Ser F Preref .............................. 8.200 11-15-03 A 210 243,888 7.06
GO Fiscal 1991 Ser F Unref Bal ........................... 8.200 11-15-03 A 1,040 1,182,615 7.21
GO Fiscal 1992 Ser A Preref .............................. 7.750 08-15-12 Aaa 1,715 1,950,761 6.81
GO Fiscal 1992 Ser A Unref Bal ........................... 7.750 08-15-12 A 285 318,536 6.93
GO Fiscal 1992 Ser D Preref .............................. 7.700 02-01-09 Aaa 920 1,052,535 6.73
GO Fiscal 1992 Ser D Unref Bal ........................... 7.700 02-01-09 A 80 90,250 6.83
GO Fiscal 1992 Ser H Preref .............................. 7.000 02-01-08 A 1,130 1,258,899 6.28
GO Fiscal 1992 Ser H Unref Bal ........................... 7.000 02-01-08 A 870 951,249 6.40
GO Fiscal 1995 Ser B Preref .............................. 7.000 08-15-16 A 410 471,816 6.08
GO Fiscal 1995 Ser B Unref Bal ........................... 7.000 08-15-16 A 2,590 2,906,420 6.24
GO Fiscal 1996 Ser J ..................................... 5.500 02-15-26 A 4,000 3,855,200 5.71
GO Rev Ref Ad Valorem Property Tax Ser D ................. 5.750 08-15-13 A 3,170 3,204,173 5.69
Port Auth of New York and New Jersey,
Spec Proj KIAC Partners Proj Ser 4 ....................... 6.750 10-01-19 BBB 12,000 12,922,080 6.27
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser 1993 ................................. Zero 01-01-22 AAA 20,755 5,517,717 5.52
Gen Purpose Rev Ser L .................................... 8.000 01-01-07 A+ 500 517,045 7.74
Gen Purpose Rev Ser L .................................... 8.125 01-01-12 A+ 1,750 1,810,445 7.85
Gen Purpose Rev Ser R .................................... 7.375 01-01-16 AAA 1,600 1,735,568 6.80
Gen Purpose Rev Ser X .................................... 6.500 01-01-19 A+ 1,250 1,360,325 5.97
Spec Oblig Ref Ser 1991B ................................. 6.875 01-01-15 A- 2,300 2,498,076 6.33
----------
97,257,771
----------
North Carolina (1.58%)
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 ................................ 5.750 01-01-15 AAA 7,410 7,545,455 5.65
Catawba Elec Rev Ser 1993 ................................ 5.000 01-01-15 AAA 5,220 5,003,474 5.22
----------
12,548,929
----------
Ohio (4.09%)
Akron, County of,
Cert of Part Akron Municipal Baseball Stadium Proj ....... Zero 12-01-16 BBB 1,000 821,600 6.22
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser 1994A ........................... 7.000 11-15-16 AAA 5,860 6,648,756 6.17
Elec Sys Rev 1st Mtg Ser A ............................... 7.000 11-15-24 AAA 6,200 7,197,332 6.03
Coshocton, County of,
Solid Waste Disp Rev Stone Container Corp Proj ........... 7.875 08-01-13 BB 1,000 1,090,030 7.22
Cuyahoga, County of,
Hosp Imp Rev Deaconess Hosp of Cleveland Proj Ser 1985 B . 7.450 10-01-18 A+ 750 835,950 6.68
Hosp Rev Meridia Hlth Sys Ser 1991 ....................... 7.000 08-15-23 A 750 806,910 6.51
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Ohio (continued)
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside
United Methodist Hosp Proj ............................... 7.600% 05-15-20 AAA $1,000 $1,102,960 6.89%
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj ................. 8.625 02-01-22 BBB- 3,865 4,230,165 7.88
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj ...................... 6.250 12-01-20 Baa2 4,500 4,628,205 6.08
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co Proj 7.700 08-01-25 BB+ 2,800 3,149,496 6.85
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan ............... 8.875 08-01-08 BBB- 1,000 1,040,490 8.53
University of Akron,
Gen Receipt Ser 1997 ..................................... 5.250 01-01-17 AAA 1,000 976,200 5.38
----------
32,528,094
----------
Oklahoma (0.51%)
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 ......................... 7.875 01-01-21 AAA 1,745 1,865,737 7.37
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc ....................... 7.375 12-01-20 BBB- 2,000 2,161,420 6.82
----------
4,027,157
----------
Oregon (0.64%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj ................... 7.125 01-01-21 BBB- 4,800 5,085,072 6.73
----------
Pennsylvania (7.88%)
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt .................... 7.000 06-01-22 BBB 1,500 1,599,465 6.56
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj ........ 6.700 12-01-20 BBB- 10,000 10,707,700 6.26
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 2,487,232 6.86
Delaware County Auth,
1st Mtg Rev Riddle Village Proj .......................... 7.000 06-01-26 BBB- 1,250 1,285,600 6.81
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co Proj 7.375 04-01-21 BBB+ 5,095 5,546,366 6.77
Northumberland County Auth,
Commonwealth Lease Rev Ser 1991 .......................... 6.250 10-15-09 AAA 1,000 1,071,410 5.83
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A ........................................ 6.700 09-01-14 BBB 4,950 5,392,381 6.15
Pennsylvania Economic Development Finance Auth,
Recycling Rev Ser A Ponderosa Fibres Proj ................ 9.250 01-01-22 B 100 65,250 14.18
Resource Recovery Rev Ser 1994 D Colver Proj ............. 7.150 12-01-18 BBB- 1,500 1,636,590 6.55
Resource Recovery Rev Ser 1994D Colver Proj .............. 7.125 12-01-15 BBB- 7,000 7,627,130 6.54
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Pennsylvania (continued)
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser K ....................................... 7.625% 12-01-09 AAA $500 $546,795 6.97%
Turnpike Rev Ser N ....................................... 6.500 12-01-13 A 2,840 3,068,847 6.02
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj .... 8.625 07-01-21 BB 2,700 2,890,377 8.06
Hosp Rev 1992 Ser A Childrens Seashore House Proj ........ 7.000 08-15-12 A- 1,250 1,355,750 6.45
Hosp Rev Ser 1993A Temple Univ Hosp Proj ................. 6.625 11-15-23 A- 2,375 2,547,757 6.18
Philadelphia Industrial Development Auth,
Commercial Devel Rev Ref Ser A Doubletree Proj ........... 6.500 10-01-27 BB+ 1,000 1,032,080 6.30
Commercial Devel Rev Ser 1995 Philadelphia Airport
Hotel Proj ............................................... 7.750 12-01-17 B+ 3,250 3,582,052 7.03
Philadelphia, City of,
Wtr & Swr Rev 16th Ser ................................... 7.500 08-01-10 AAA 3,000 3,389,100 6.64
Schuylkill County Industrial Development Auth,
Res Recovery Rev Ref Schuylkill Energy Resource Inc ...... 6.500 01-01-10 BBB- 1,950 1,970,768 6.43
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj ....... 7.600 07-15-20 BBB- 3,500 3,812,130 6.98
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 1,037,330 7.90
----------
62,652,110
----------
Puerto Rico (5.47%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico .............................................. 8.096# 07-01-11 AAA 6,500 7,791,875 6.86
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico .............................................. 6.000 07-01-11 AAA 200 219,988 5.45
Puerto Rico Highway and Transportation Auth,
Highway Rev Ser Y Res Int Tax-Exempt Sec Rec'ts
Ser PA-114 (r) ........................................... 8.030# 07-01-11 Aa 13,130 15,739,588 6.93
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Floater Ser 1992A ..................... 7.999# 07-01-08 AAA 2,700 2,980,125 6.96
GO Pub Imp Inverse Rate Securities Ser 1996 .............. 8.070# 07-01-11 AAA 14,000 16,782,500 6.86
----------
43,514,076
----------
South Carolina (1.42%)
Florence, County of,
Ind'l Dev Rev Stone Container Proj ....................... 7.375 02-01-07 BB 4,735 5,009,867 6.97
James Island Public Service District,
Charleston County Swr Sys Ref ............................ 7.500 06-01-18 AAA 1,250 1,345,563 6.97
Lexington County School District No. 1,
Cert of Part 1989 Ser B Pelion High School Proj .......... 7.650 09-01-09 AAA 1,145 1,226,925 7.14
Richland, County of,
Poll Control Rev Union Camp Corp Proj Ser 1992 B ......... 6.625 05-01-22 A- 2,460 2,634,070 6.19
Poll Control Rev Union Camp Corp Proj Ser 1992 C ......... 6.550 11-01-20 A- 1,000 1,077,580 6.08
----------
11,294,005
----------
South Dakota (0.26%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss Preref ................ 7.625 11-01-13 AA- 1,850 1,962,055 7.19
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
South Dakota (continued)
Rev Ser 1989 Sioux Valley Hosp Iss Unref Bal ............. 7.625% 11-01-13 AA- $75 $82,231 6.95%
----------
2,044,286
----------
Tennessee (4.54%)
Eastside Utility District of Hamilton,
Waterworks Rev Iss ....................................... 6.750 11-01-11 A 1,000 1,064,970 6.34
Humphreys County Industrial Development Board,
Solid Waste Disposal Rev E.I. DuPont Denemours and Co Proj 6.700 05-01-24 AA- 6,500 7,105,735 6.13
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj ......................................... 6.500 09-01-24 A- 9,000 9,799,650 5.97
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp ............................. 6.750 09-01-12 BBB 4,000 4,360,360 6.19
Metropolitan Nashville and Davidson County Health and
Educational Facility Board,
Rev Ref Vanderbilt Univ Ser A ............................ 7.625 05-01-16 AA 1,750 1,824,042 7.32
Rev Ref Vanderbilt Univ Ser A** .......................... 5.600 05-01-16 AA 3,000 3,006,990 5.59
Shelby, County of,
GO Ref Cap Apprec Ser B .................................. Zero 12-01-12 AA+ 17,705 7,912,187 5.35
Tennessee Housing Development Agency,
Homeownership Program Proj J ............................. 7.750 07-01-17 AA 1,000 1,016,210 7.63
----------
36,090,144
----------
Texas (7.08%)
Austin, City of,
Combined Util Sys Rev Ref Ser 1998** ..................... 6.750 11-15-10 AAA 3,125 3,576,156 5.90
Utility Sys Rev Ref Ser B ................................ 7.800 11-15-12 A 1,000 1,059,770 7.36
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj .... 8.250 05-01-15 A- 2,000 2,086,000 7.91
Corpus Christi Housing Finance Corp,
Single Family Mtg Sr Rev Ref Ser 1991 A .................. 7.700 07-01-11 AAA 560 624,014 6.91
Dallas-Fort Worth International Airport Facility Improvement,
Rev American Airlines Inc ................................ 7.250 11-01-30 BBB- 10,250 11,264,032 6.60
Rev Delta Air Lines Inc .................................. 7.600 11-01-11 BB+ 3,000 3,308,520 6.89
Ector County Hospital District,
Hosp Rev 1992 ............................................ 7.300 04-15-12 Aaa 4,000 4,535,240 6.44
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds 1991 Ser A ............... 8.750 10-01-11 A 530 599,478 7.74
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj .................... 7.750 03-01-12 B 1,410 1,412,764 7.73
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj ...... 8.250 02-15-08 AAA 2,475 2,705,051 7.55
Houston, City of,
Spec Facil Rev Ser C Continental Airline Inc ............. 6.125 07-15-27 BB 4,000 4,057,360 6.04
Wtr & Swr Sys Rev Ref Prior Lien Ser B Preref ............ 6.750 12-01-08 A 180 199,526 6.09
Wtr & Swr Sys Rev Ref Prior Lien Ser B Unref Bal ......... 6.750 12-01-08 A 1,320 1,437,322 6.20
North Central Texas Health Facilities Development,
Hospital Rev Baylor Univ Medical Center Ser 1991A ........ 9.786# 05-15-16 AA 1,000 1,198,750 8.15
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Texas (continued)
San Antonio, County of,
GO Ref Gen Imp Ser 1996** ................................ 6.000% 08-01-08 AA $1,000 $1,072,650 5.59%
Texas A & M University,
Rev Ref Financing Sys Ser 1997** ......................... 5.500 05-15-02 AA 3,230 3,348,929 5.30
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996** .................. 5.000 01-01-10 AAA 7,000 6,999,510 5.00
Dallas North Thruway Rev Ref Ser 1996** .................. 5.500 01-01-15 AAA 5,000 5,057,700 5.44
Texas, State of,
Veterans' Land Board GO .................................. 7.125 12-01-09 AA 1,000 1,069,240 6.66
Veterans' Land Board GO Preref ........................... 8.250 12-01-10 AAA 610 663,973 7.58
----------
56,275,985
----------
Utah (0.85%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A East Carbon
Development Corp ......................................... 9.000 07-01-12 B 1,000 1,060,080 8.49
Intermountain Power Agency,
Pwr Supply Rev Ref Ser A ................................. 5.000 07-01-21 A+ 2,000 1,835,620 5.45
Salt Lake City Hospital,
Ref Ref IHC Hosp Inc VRDN/RIBS ........................... 9.616# 05-15-20 AAA 1,500 1,756,875 7.91
Rev Ref IHC Hosp Inc Ser B ............................... 8.000 05-15-07 Aaa 350 365,554 7.66
Rev Ref Ser A ............................................ 8.125 05-15-15 AAA 1,000 1,262,340 6.44
Utah Housing Finance Agency,
Single Family Mtg Sr 1990 Iss B-2 ........................ 7.700 07-01-15 AA 235 244,821 7.39
Single Family Mtg Sr 1991 Iss B-1 ........................ 7.500 07-01-16 AA 220 231,865 7.12
----------
6,757,155
----------
Virginia (0.93%)
Arlington County Industrial Development Auth,
Hosp Facil Rev Arlington Hosp Ser 1991 A ................. 7.125 09-01-21 Aaa 500 559,310 6.37
Fairfax County Industrial Develpment Auth,
Rev RITES ................................................ 9.577# 08-29-23 AA- 1,000 1,205,000 8.93
Fredericksburg Industrial Auth,
Hosp Facil Rev ........................................... 9.337# 08-15-23 AAA 1,500 1,785,000 7.73
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil ................................... 7.550 01-01-19 BB 3,500 3,803,310 6.95
----------
7,352,620
----------
Washington (3.39%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj . 9.125 01-01-26 BB- 7,900 5,530,000 13.04
Seattle, City of,
Municipal Light & Pwr Rev 1994 ........................... 6.625 07-01-16 AA 3,600 3,922,848 6.08
Spokane County Industrial Development Corp,
Solid Waste Disp Rev Kaiser Alum & Chem Corp Proj ........ 7.600 03-01-27 BB- 1,250 1,320,325 7.20
Tacoma Electric System,
Rev VRDN/RIBS Iss of 1991 ................................ 8.901# 01-02-15 AAA 1,000 1,162,500 7.61
University of Washington,
Housing & Dining Sys Rev Ser 1991 ........................ 7.000 12-01-21 AAA 750 831,143 6.32
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Washington (continued)
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A Unref Bal ........... 7.500% 07-01-15 AA- $1,455 $1,568,388 6.96%
Nuclear Proj No. 1 Ref Rev Ser 1989B ..................... 7.125 07-01-16 AA- 1,500 1,771,800 6.03
Nuclear Proj No. 1 Ref Rev Ser 1991A ..................... 6.875 07-01-17 AA- 1,250 1,379,712 6.23
Nuclear Proj No. 2 Ref Rev Ser 1990C ..................... 7.625 07-01-10 AAA 5,000 5,591,650 6.82
Nuclear Proj No. 3 Ref Rev Ser 1989B ..................... 7.250 07-01-15 AAA 2,500 2,710,425 6.69
Washington, State of,
GO Ser A of 1990 ......................................... 6.750 02-01-15 AA+ 1,000 1,169,830 5.77
------------
26,958,621
------------
Wisconsin (0.69%)
Sturgeon Bay Combined Utilities,
Door County Combined Util Mtg Rev Ser 1990 Preref ........ 7.500 01-01-10 AAA 770 846,938 6.82
Door County Combined Util Mtg Rev Ser 1990 Unref Bal ..... 7.500 01-01-10 AAA 230 251,680 6.85
Wisconsin Public Power,
Pwr Supply Sys Rev Ser 1990A ............................. 7.400 07-01-20 AAA 4,000 4,405,440 6.72
------------
5,504,058
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $742,512,417) (101.83%) $809,344,157
======= ============
</TABLE>
(r) Direct placement securities are restricted to resale. They have been valued
in accordance with procedures approved by the Trustees after consideration
of restrictions as to resale, financial condition and prospects of the
issuer, general market conditions and pertinent information in accordance
with the Fund's By-Laws and the Investment Company Act of 1940, as amended.
The Fund has limited rights to registration under the Securities Act of
1933 with respect to these restricted securities. Additional information on
these securities 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
8.030%, 07-01-11 ......................................... 04-02-96 $14,925,160 1.88% $15,739,588
</TABLE>
*Credit Ratings are unaudited and rated by Standard & Poor's where available, or
Moody's Investors Services, Fitch or John Hancock Advisers, Inc. where Standard
& Poor's ratings are not available.
**These securities having an aggregate value of $25,000,375 or 3.15% 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 are fixed at trade date,
although the Fund does not earn any interest on such securities until settlement
date. The Fund has instructed its Custodian Bank to segregate assets with the
current value at least equal to the amount of its forward commitment.
Accordingly, the market values of $3,112,680 of Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993, 6.20%, 07-01-20, $1,179,024
of Citrus, County of, Poll Control Ref Rev Ser 1992A Florida Pwr Corp Crystal
Rvr Pwr Plant Proj, 6.625%, 01-01-27, $3,946,924 of Cleveland Public Power
System, Elec Sys Rev 1st Mtg Ser A, 7.00%, 11-15-24, $14,568,678 of Madera,
County of, Cert of Part Valley Children's Hosp Proj, 6.50%, 03-15-15, $3,810,065
of Delaware County Industrial Development Auth, Poll Control Rev Ref 1991 Ser A
Philadelphia Elec Co Proj, 7.375%, 04-01-21, and $2,658,500 of Triborough Bridge
and Tunnel Auth, Gen Purpose Rev Ser 1993, Zero Coupon, 01-01-22 have been
segregated to cover the forward commitments.
+ The yield is not calculated in accordance with guidelines established by the
U.S. Securities & Exchange Commission and is unaudited. Zero coupon yields are
at yield to maturity.
# Represents rate in effect on August 31, 1997.
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.
24
<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,
1997 assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ----------
General Obligation ........................................ 9.16%
Revenue Bonds - Certificate of Participation .............. 1.29
Revenue Bonds - Education ................................. 4.30
Revenue Bonds - Electric Power ............................ 16.10
Revenue Bonds - Health .................................... 15.16
Revenue Bonds - Housing ................................... 4.13
Revenue Bonds - Industrial Development Bond ............... 7.85
Revenue Bonds - Other ..................................... 5.55
Revenue Bonds - Pollution Control Facilities .............. 13.96
Revenue Bonds - Transportation ............................ 20.56
Revenue Bonds - Water & Sewer ............................. 3.77
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 101.83%
======
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Free Bond Trust (the "Trust") is a diversified open-end
management investment company registered under the Investment Company Act of
1940. The Trust consists of two series: John Hancock Tax-Free Bond Fund (the
"Fund") and John Hancock High Yield Tax-Free Fund. The other series of the Trust
is reported in separate financial statements. The investment objective of the
Fund is to provide as high a level of interest income exempt from federal income
taxes as is consistent with preservation of capital by investing primarily in
municipal bonds, notes and commercial paper, the interest on which is exempt
from federal income taxes.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses subject to the approval of the Trustees may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
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 $15,619,534 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent such carryforwards are used by
the Fund, no capital gains distribution will be made. The carryforwards expire
as follows: August 31, 2002 -- $10,378,466, August 31, 2003 -- $5,155,633 and
August 31, 2004 -- $85,435. The amount expiring August 31, 2004 was acquired on
December 6, 1996 in the merger with John Hancock Managed Tax-Exempt Fund. The
use of this loss to offset future gains may be limited in a given year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at time of disposition.
26
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and relative
sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with a bank which permits borrowings up to $400 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The maximum loan balance
during the year for which loans were outstanding amounted to $19 million. The
interest rate was in the range of 5.94% and 6.06%. At August 31, 1997, there
were no outstanding borrowings.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it will be required to deposit
with its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of the
financial futures contract being traded. Each day, the futures contract is
valued at the official settlement price on the board of trade or U.S.
commodities exchange on which it trades. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market," will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of the
Funds gains and/or losses can be affected as a result of futures contracts. At
August 31, 1997, open positions in financial futures contracts were as follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
DEC 1997 250 U.S. TREASURY BONDS SHORT $117,187
========
At August 31, 1997, the Fund has deposited $675,000 par value of County of
Clark, 6.50%, 12-01-33 bonds in a segregated account 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.
27
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
The Fund may use option contracts to manage its exposure to the price
volatility of financial instruments. Writing puts and buying calls will tend to
increase the Fund's exposure to the underlying instrument and buying puts and
writing calls will tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
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 year ended August 31, 1997.
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 on
an annual basis to the sum of (a) 0.55% of the first $500,000,000 of the Fund's
average daily net asset value, (b) 0.50% of the next $500,000,000 and (c) 0.45%
of the Fund's average daily net asset value in excess of $1,000,000,000.
The Adviser has voluntarily agreed to limit the Fund's expenses further to
the extent required to prevent expenses from exceeding 0.85% and 1.60% of the
average net assets attributable to Class A and Class B, respectively.
Accordingly, for the year ended August 31, 1997, the reduction in the Adviser's
fee collectively with any additional amounts not borne by the Fund by virtue of
the expense limit amounted to $459,575. This limitation may be discontinued at
any time.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended August 31,
1997, net sales charges received with regard to sales of Class A shares amounted
to $642,722. Out of this amount, $65,427 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $169,794 was
paid as sales commissions to unrelated broker-dealers and $407,501 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
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 for providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended August 31, 1997
the contingent deferred sales charges received by JH Funds amounted to $419,544.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B, pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.25% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution 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. Up to
a maximum of 0.25% of such payments may be service fees as defined by the
amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a
28
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
portion of the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are directors and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as another 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, 1997 the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $4,423.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended August 31, 1997, aggregated $357,615,898 and $419,388,809, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1997.
The cost of investments owned at August 31, 1997 for federal income tax
purposes was $742,638,643. Gross unrealized appreciation and depreciation of
investments aggregated $69,294,777 and $2,589,262 respectively, resulting in net
unrealized appreciation of $66,705,515.
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.
On November 14, 1996, the shareholders of John Hancock Managed Tax-Exempt
Fund (JHMTE) approved a plan of reorganization between JHMTE and the Fund
providing for the transfer of substantially all of the assets and liabilities of
JHMTE 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 3,663,041 Class A
shares and 14,270,326 Class B shares of the Fund for the net assets of JHMTE,
which amounted to $38,514,684 and $150,045,343 for Class A and Class B shares,
respectively, including $13,013,699 of unrealized appreciation, after the close
of business on December 6, 1996.
NOTE E --
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1997, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of $135,179,
an increase in distributions in excess of net investment income of $214,658 and
an increase in capital paid-in of $349,837. This represents the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of August 31, 1997. 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 certain
differences in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles. The
calculation of net investment income per share in the financial highlights
excludes these adjustments.
29
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
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 Trust--
John Hancock Tax-Free Bond Fund
We have audited the accompanying statement of assets and liabilities of the John
Hancock Tax-Free Bond Fund (the "Fund"), one of the port-folios constituting
John Hancock Tax-Free Bond Trust, including the schedule of investments, as of
August 31, 1997, and the related statement of operations for the year ended, and
the statement of changes in net assets 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, 1997, by correspondence with the custodian and brokers, and other
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, of John Hancock Tax-Free Bond Trust at August
31, 1997, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
changes in its net assets and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 14, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund during its fiscal year ended August 31,
1997.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 99.81% tax-exempt. Approximately 18.36% of the 1997
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 1997 U.S. Treasury
Department Form 1099-DIV in January 1998 representing their proportionate share.
30
<PAGE>
================================================================================
NOTES
John Hancock Funds - Tax-Free Bond Fund
31
<PAGE>
================================================================================
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- --------------------------------------------------------------------------------
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accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 5200A 8/97
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