ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAHIC OMITTED]
High Yield
Tax-Free
Fund
AUGUST 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
--------------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN
WILLIAM H. CUNNINGHAM*
RONALD R. DION
HAROLD R. HISER, JR.
ANNE C. HODSDON
CHARLES L. LADNER
LEO E. LINBECK, JR.
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 and Chief Operating Officer
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
Vice President and Chief 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 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5072
--------------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term is a
roller coaster. That is because, while long-term history suggests the market's
general direction is up, its swings over the short term can be dramatic and, at
times, violent. Recently, the market has given us a stark example of this
phenomenon. From the new highs set in mid-July, the major indices plunged by 19%
through the end of August. It was the worst such fall since 1990. For the first
time in a number of years, some bonds and bond mutual funds outperformed stocks
and stock mutual funds. Seeking safety in a world of global economic
uncertainties, investors everywhere converged on U.S. Treasury bonds and pushed
their yields to historic lows.
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
For the record-breaking number of investors who have entered the market
for the first time since 1990, it was their worst taste of stock market reality.
We are pleased to report that most individual investors did not panic, and we
hope that means they've taken our words to heart. Over the long term, markets do
not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering whether the global turmoil and the prospects
for slower U.S. economic and corporate earnings growth are signs that the long
bull market has finally run its course. While we don't make a practice of
opining on what the market will do next, we continue to believe it would be wise
for investors to set more realistic expectations. Over the long term, the
market's historical results have been more in the 10% per year range, which is
still a solid result, considering it has been produced despite wars, depressions
and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the last six months' divergence in
performance of stocks and high-quality bonds is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
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BY FRANK LUCIBELLA, CFA, BARRY EVANS, CFA, AND DIANNE SALES, CFA,
PORTFOLIO MANAGERS
John Hancock
High Yield Tax-Free Fund
High-yield municipal bonds boosted by
-------------------------------------
benign inflationary environment, falling interest rates
-------------------------------------------------------
Economic turmoil in Asia, Russia and other emerging markets sent bond yields
lower and bond prices higher during the past 12 months. The Asian meltdown,
which was still in its infancy at the beginning of the period, had two positive
effects on U.S. bonds. First, it helped to cool off inflationary pressures that
were building as a result of robust U.S. economic growth. Bond holders dislike
inflation because it eats away at their fixed-income payments. Second, the
crisis prompted a flood of international investors to seek out the relative
safety of U.S. Treasury bonds. As inflationary fears subsided and the news out
of Asia worsened, investors pushed bond yields -- which move in the opposite
direction of bond prices -- lower from September through December last year.
As fears about Asia's crisis spilling over into the U.S. subsided somewhat at
the start of this year, inflationary fears once again took center stage.
Investors worried that too much domestic growth would translate into higher
inflation. Throughout much of the spring, bond prices drifted lower. But a
second round of Asian "flu" in the summer buffeted world markets, prompting many
investors to pull money from Asia and Latin America and propel the rally in U.S.
Treasury bonds. Adding further fuel to bonds' advance was the devaluation of the
Russian ruble in mid-August. This
"The Asian meltdown... had two positive effects on U.S. bonds."
[A 3 1/2" x 2 1/2" photo at bottom right of page of fund management team
members. Caption below reads "Fund management team members (l - r): Barry Evans,
Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
3
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John Hancock Funds - High Yield Tax-Free Fund
"Among our biggest winners were our zero coupon bond holdings."
- --------------------------------------------------------------------------------
[Pie Chart at the top of left hand column with the heading "Portfolio
Diversification". The chart is divided into nine sections (from top to left):
General Obligation 3%, Other 22%, Transportation 14%, Pollution Control 21%,
Industrial 11%, Housing 7%, Health 16%, Education 3% and Airport 3%. A note
below the chart reads "As a percentage of net assets on August 31, 1998."]
- --------------------------------------------------------------------------------
event set off additional buying of U.S. Treasury bonds. Municipals, like
Treasuries, benefited from the benign inflationary environment, falling interest
rates and global economic uncertainty. However, their gains didn't keep pace
with U.S. Treasury bonds because the supply of municipals expanded while demand
remained firm at best. Municipal issuers advantageously issued new and
refinanced older debt at a near-record pace in order to take advantage of low
interest rates. And unlike the U.S. Treasury market, the municipal market did
not experience increased buying from international investors seeking a safe
haven from global turmoil.
Performance review
For the 12-month period ended August 31, 1998, John Hancock High Yield Tax-Free
Fund's Class A and Class B shares posted total returns of 9.34% and 8.53%,
respectively, at net asset value. Keep in mind that your net asset value return
will be different from the Fund's if you were not invested in the Fund for the
entire period and did not reinvest all distributions. The Fund's returns were in
line with the 8.62% return for the average high-yield municipal bond fund for
the same period, according to Lipper Analytical Services, Inc.1 Longer-term
performance information can be found on pages six and seven.
Among our biggest winners were our zero coupon bond holdings. Dubbed
"zeroes," these bonds make no periodic interest payments. Instead, they are sold
at a deep discount from their face value. Investors receive the rate of return
upon redemption of the bond at face value on a specified maturity date. The
reason for their relatively strong recent performance stems from the fact that
they tend to rally more than interest-bearing bonds when interest rates fall.
Other strong performers included non-callable bonds and bonds with good call
protection. Non-callable bonds can't be redeemed by their issuer before maturity
and bonds with good call protection cannot be redeemed for some period of time.
Municipal issuers, like homeowners, often refinance their debt when interest
rates fall. Refinancing is usually good for both homeowners and municipal
issuers because it lowers their debt costs. However, refinancing of debt can be
bad for municipal bond holders because they may be forced to reinvest the
proceeds from high-yielding redeemed or "called" bonds at lower prevailing
rates. Our holdings in Tooele County (UT), issued on behalf of Laidlaw Corp.,
for example, gave the Fund good income in the form of a 7.55% yield and they are
protected from being called away for 15 years.
[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Zero coupon
bonds followed by an up arrow with the phrase "Rallied more than coupon-paying
bonds as rates fell." The second listing is Call-protected bonds followed by an
up arrow with the phrase "Strong demand." The third listing is Housing bonds
followed by a down arrow with the phrase "More mortgage refinancings." A note
below the table reads "See 'Schedule of Investments.' Investment holdings are
subject to change."]
4
<PAGE>
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John Hancock Funds - High Yield Tax-Free Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the year ended August 31, 1998". The chart
is scaled in increments of 2% with 0% at the bottom and 10% at the top. The
first bar represents the 9.34% total return for John Hancock High Yield Tax-Free
Fund Class A. The second bar represents the 8.53% total return for John Hancock
High Yield Tax-Free Fund Class B and the third bar represents the 8.62% total
return for the Average high-yield municipal bond fund. A note below the chart
reads "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.]
- --------------------------------------------------------------------------------
Our main disappointment were our holdings in housing bonds. As mortgage rates
fell to their lowest levels in 25 years, near-record numbers of homeowners
refinanced. As we mentioned earlier, while good news for homeowners,
refinancings can be difficult for housing bond holders because they may have to
reinvest the proceeds at lower, prevailing rates.
A word about yield
We specifically avoided pushing for additional yield by adding a lot of
low-quality bonds. Generally speaking, the lower a bond's credit quality, the
higher its yield. That's because investors demand more yield as compensation for
taking on more risk that the issuer will not be able to meet its debt
obligations in a timely fashion. In our view, the small amount of incremental
yield currently offered by lower-quality, below-investment-grade bonds just
wasn't enough to compensate us for taking on more credit risk.
Outlook
Our outlook for interest rates, which are the prime determinant of municipal
bond performance, is cautiously optimistic. U.S. economic growth appears to be
slowing, thanks in large part to the problems in Asia, and inflation appears in
check. We believe that the current lack of inflationary pressures should
eliminate the need for the Federal Reserve to raise interest rates. Indeed, if
global economic turmoil continues, the Fed could look to lower rates to prevent
too much of a U.S. slowdown.
As far as municipal supply goes, we think it will taper off over the next
several months. The real question mark is demand. Municipals currently are
priced very cheaply relative to taxable securities. If demand for munis remains
firm, or strengthens as people look to our market for value, municipals should
have a chance to play catch-up to Treasuries. And as long as interest rates
remain low, we believe that high-yield municipal bonds will continue to
experience stronger demand than their higher-quality, lower-yielding
counterparts and outpace them as a result.
"Municipals currently are priced very cheaply relative to taxable securities."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
See the prospectus for a discussion of the risks of investing in high-yield
bonds.
(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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John Hancock Funds - High Yield Tax-Free Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
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
measures the change in value of an investment from the beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.50%. (Prior to May 15, 1995, the maximum applicable sales charge for
Class A shares was 4.75%.) Class B performance reflects a maximum contingent
deferred sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
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 (AMT). Also note that
capital gains are taxable.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (12/31/93)
------- ----------
Cumulative Total Returns 5.35% 24.31%
Average Annual Total Returns 5.35% 4.96%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
ONE FIVE TEN
YEAR YEARS YEARS
------ ------- --------
Cumulative Total Returns 4.50% 29.88% 101.03%
Average Annual Total Returns 4.50% 5.37% 7.23%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1998
SEC 30-DAY
YIELD
--------------
John Hancock High Yield Tax-Free Fund: Class A 4.47%
John Hancock High Yield Tax-Free Fund: Class B 3.93%
6
<PAGE>
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John Hancock Funds - High Yield Tax-Free Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
High Yield Tax-Free Fund would be worth, assuming all distributions were
reinvested for the period indicated. 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. Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
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 Brothers Municipal Bond Index
and is equal to $13,277 as of August 31, 1998. 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 $13,194 as of
August 31, 1998. The third line represents the High Yield Tax-Free Fund after
sales charge and is equal to $12,605 as of August 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Brothers Municipal Bond Index
and is equal to $22,426 as of August 31, 1998. 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 $20,358 as of August 31, 1998.
- --------------------------------------------------------------------------------
*No contingent deferred sales charge applicable.
7
<PAGE>
==============================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, 1998. 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, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $158,175,963) ......... $174,401,562
Cash ...................................................... 202,470
Receivable for investments sold ........................... 1,272,888
Receivable for shares sold ................................ 192,027
Interest receivable ....................................... 2,716,332
Other assets .............................................. 36,845
-------------
Total Assets ............................ 178,822,124
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ......................... 6,222,554
Payable for shares repurchased ............................ 144,095
Dividend payable .......................................... 30,601
Payable to John Hancock Advisers, Inc. ....................
and affiliates - Note B .................................. 136,950
Accounts payable and accrued expenses ..................... 65,918
-------------
Total Liabilities ....................... 6,600,118
-----------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 167,340,311
Accumulated net realized loss on investments and
financial futures contracts .............................. (11,336,051)
Net unrealized appreciation of investments and
financial futures contracts .............................. 16,227,313
Distributions in excess of net investment income .......... (9,567)
-------------
Net Assets .............................. $172,222,006
===========================================================
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 - $40,724,691/4,218,165 ........................... $9.65
=============================================================================
Class B - $131,497,315/13,620,174 ......................... $9.65
=============================================================================
Maximum Offering Price Per Share*
Class A - ($9.65 x 104.71%) ............................... $10.10
=============================================================================
* 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, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest ................................................... $11,411,602
-------------
Expenses:
Investment management fee - Note B ...................... 996,696
Distribution and service fee - Note B
Class A ............................................... 90,685
Class B ............................................... 1,343,573
Transfer agent fee - Note B ............................. 138,152
Auditing fee ............................................ 39,497
Custodian fee ........................................... 32,856
Financial services fee - Note B ......................... 29,472
Registration and filing fees ............................ 18,025
Printing ................................................ 17,853
Trustees' fees .......................................... 13,407
Miscellaneous ........................................... 4,575
Legal fees .............................................. 684
-------------
Total Expenses ........................... 2,725,475
-----------------------------------------------------------
Less Expense Reductions -
Note B ................................... (5,077)
-----------------------------------------------------------
Net Expenses ............................. 2,720,398
-----------------------------------------------------------
Net Investment Income .................... 8,691,204
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold ...................... (387,968)
Net realized loss on financial futures contracts ........... (166,240)
Change in net unrealized appreciation/depreciation
of investments ............................................ 6,157,597
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................ 15,000
-------------
Net Realized and Unrealized Gain
on Investments and Financial
Futures Contracts ........................ 5,618,389
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................ $14,309,593
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................... $9,270,118 $8,691,204
Net realized loss on investments sold and financial futures
contracts ......................................................... (3,771,741) (554,208)
Change in net unrealized appreciation/depreciation of investments
and financial futures contracts ................................... 7,271,339 6,172,597
------------- -------------
Net Increase in Net Assets Resulting from Operations .............. 12,769,716 14,309,593
------------- -------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5587 and $0.5394 per share, respectively) ........... (1,692,115) (2,047,191)
Class B - ($0.4905 and $0.4683 per share, respectively) ........... (7,657,642) (6,610,696)
------------- -------------
Total Distributions to Shareholders ............................... (9,349,757) (8,657,887)
------------- -------------
From Fund Share Transactions - Net : * ................................. (3,167,486) (5,014,174)
------------- -------------
Net Assets:
Beginning of period ................................................. 171,332,001 171,584,474
------------- -------------
End of period (including distributions in excess of net investment
income of $38,546 and $9,567, respectively) ....................... $171,584,474 $172,222,006
============= =============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------
1997 1998
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 1,578,539 $14,597,255 1,426,741 $13,621,218
Shares issued to shareholders in reinvestment of
distributions .............................................. 84,834 785,117 96,914 926,475
---------- ------------ ---------- ------------
1,663,373 15,382,372 1,523,655 14,547,693
Less shares repurchased ...................................... (801,201) (7,400,978) (752,160) (7,173,035)
---------- ------------ ---------- ------------
Net increase ................................................. 862,172 $7,981,394 771,495 $7,374,658
========== ============ ========== ============
CLASS B
Shares sold .................................................. 2,646,041 $24,449,200 2,165,723 $20,660,628
Shares issued to shareholders in reinvestment of
distributions .............................................. 277,587 2,569,048 228,203 2,182,260
---------- ------------ ---------- ------------
2,923,628 27,018,248 2,393,926 22,842,888
Less shares repurchased ...................................... (4,127,421) (38,167,128) (3,693,711) (35,231,720)
---------- ------------ ---------- ------------
Net decrease ................................................. (1,203,793) ($11,148,880) (1,299,785) ($12,388,832)
========== ============ ========== ============
</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 two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 31, 1993 PERIOD FROM
(COMMENCEMENT OF YEAR ENDED NOVEMBER 1, 1995 YEAR ENDED AUGUST 31,
OPERATIONS) TO OCTOBER 31, TO AUGUST 31, ---------------------------
OCTOBER 31, 1994 1995(2) 1996(6) 1997 1998
---------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........... $9.85 $8.82 $9.47 $9.16 $9.34
---------- ---------- ---------- ---------- ----------
Net Investment Income .......................... 0.48(1) 0.57 0.49(1) 0.56(1) 0.54(1)
Net Realized and Unrealized Gain (Loss) on
Investments Sold and Financial Futures
Contracts .................................. (0.94) 0.70 (0.30) 0.18 0.31
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ........... (0.46) 1.27 0.19 0.74 0.85
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ......... (0.48) (0.58) (0.50) (0.56) (0.54)
Distributions in Excess of Net Investment
Income ..................................... (0.09) (0.04) -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ........................ (0.57) (0.62) (0.50) (0.56) (0.54)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ................. $8.82 $9.47 $9.16 $9.34 $9.65
========== ========== ========== ========== ==========
Total Investment Return at Net Asset
Value (3) .................................... 4.96%(4) 14.85% 1.96%(4) 8.29% 9.34%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ....... $15,401 $14,225 $23,663 $32,199 $40,725
Ratio of Expenses to Average Net Assets ........ 1.15%(5) 1.06% 1.10%(5) 1.06% 1.00%(7)
Ratio of Net Investment Income to Average
Net Assets ................................... 6.08%(5) 6.36% 6.39%(5) 6.00% 5.66%
Portfolio Turnover Rate ........................ 62% 64% 38% 51% 35%
</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 - High Yield Tax-Free Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
---------------------------------- NOVEMBER 1, 1995 TO -----------------------
1993 1994 1995(2) AUGUST 31, 1996(6) 1997 1998
-------- -------- -------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ... $9.39 $9.98 $8.82 $9.47 $9.16 $9.34
-------- -------- -------- -------- -------- --------
Net Investment Income .................. 0.53 0.48 0.51 0.44(1) 0.49(1) 0.47(1)
Net Realized and Unrealized Gain
(Loss) on Investments Sold and
Financial Futures Contracts ........ 0.72 (0.90) 0.69 (0.31) 0.18 0.31
-------- -------- -------- -------- -------- --------
Total from Investment Operations ... 1.25 (0.42) 1.20 0.13 0.67 0.78
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income . (0.56) (0.48) (0.51) (0.44) (0.49) (0.47)
Distributions in Excess of Net
Investment Income .................. -- (0.07) (0.04) -- -- --
Distributions from Net Realized
Gain on Investments Sold ........... (0.10) (0.19) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ................ (0.66) (0.74) (0.55) (0.44) (0.49) (0.47)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ......... $9.98 $8.82 $9.47 $9.16 $9.34 $9.65
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset
Value (3) ............................ 13.69% (4.44%) 13.99% 1.36%(4) 7.51% 8.53%
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) ............................. $113,442 $151,069 $155,234 $147,669 $139,385 $131,497
Ratio of Expenses to Average Net
Assets ............................... 2.06% 1.85% 1.79% 1.81%(5) 1.81% 1.75%(7)
Ratio of Net Investment Income to
Average Net Assets ................... 5.23% 5.36% 5.61% 5.65%(5) 5.28% 4.92%
Portfolio Turnover Rate ................ 100% 62% 64% 38% 51% 35%
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(3) 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.
(7) The ratio of expenses to average net assets for the year ended August 31,
1998 excludes the effect of balance credits described in Note B. If these
expense reductions were included, the effect to the ratio of expenses to
average net assets would have been less than 0.01% for Class A and Class B
shares.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free Fund
Schedule of Investments
August 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by High
Yield Tax-Free Fund on August 31, 1998. It has one main category: tax-exempt
long-term bonds. The tax-exempt 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
Alaska (0.58%)
Anchorage, City of,
Ice Rink Rev.............................................. 6.375% 01-01-20 BB+ $1,000 $999,310 6.38%
-----------
California (15.25%)
ABAG Finance Authority for Nonprofit Corps.,
Cert of Part National Ctr for Int'l Schools Proj.......... 7.375 05-01-18 BB+ 1,000 1,061,280 6.95
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Sr Lien Cap Apprec Ser A...................... Zero 01-01-18 BBB- 7,950 2,919,081 5.25
Los Angeles Community Facilities District,
Spec Tax No 3 Cascades Business Park Proj................. 6.400 09-01-22 BB+ 1,000 1,038,400 6.16
Millbrae, City of,
Residential Facil Rev Ser 1997 A Magnolia of Millbrae
Proj ................................................... 7.375 09-01-27 BB 1,000 1,042,900 7.07
San Bernardino, County of,
Cert of Part Ref Medical Ctr Fin Proj..................... 5.500 08-01-17 A- 4,500 4,739,040 5.22
San Diego County Water Auth,
Water Rev Cert of Part Reg RITES.......................... 7.432# 04-23-08 AAA 1,000 1,220,000 7.24
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj...................... 8.500 12-01-26 BB 2,000 2,252,200 7.55
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Conv Cap Apprec Ser A......................... Zero 01-15-19 BBB- 3,000 2,084,310 5.07
Toll Rd Rev Sr Lien....................................... 5.000 01-01-33 BBB- 1,000 963,420 5.19
South Orange County Public Financing Auth,
Spec Tax Rev Levrrs Inflows............................... 7.880# 08-15-17 AAA 7,500 8,953,125 7.10
-----------
26,273,756
-----------
Colorado (5.64%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470............................. 6.950 08-31-20 AAA 2,500 2,993,025 5.81
Black Hawk, City of,
Device Tax Rev............................................ 5.625 12-01-21 BB+ 1,000 989,040 5.69
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref.......................... 7.250 11-15-25 AAA 1,410 1,614,845 6.33
Airport Sys Rev Ser 1992A Unref Bal....................... 7.250 11-15-25 AAA 3,590 4,117,622 6.32
-----------
9,714,532
-----------
Connecticut (0.63%)
Connecticut State Development Auth,
Aquarium Proj Rev Ser A Mystic MarineLife Aquarium Proj... 7.000 12-01-27 BB+ 1,000 1,078,880 6.49
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free 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>
District of Columbia (1.83%)
District of Columbia,
Cert of Part Ser 1993..................................... 7.300% 01-01-13 BB- $1,000 $1,087,910 6.71%
GO 1996 Ser A............................................. 6.375 06-01-16 AAA 1,780 2,060,795 4.19
-----------
3,148,705
-----------
Florida (6.64%)
Grand Haven Community Development District,
Spec Assessment Ser B..................................... 6.900 05-01-19 BB+ 750 779,205 6.64
Hillsborough County Aviation Auth,
Rev Special Purpose Facility Imp US Air Proj.............. 8.600 01-15-22 B+ 3,900 4,391,868 7.64
Homestead, City of,
Ind'l Development Rev Ser A Community Rehab Proj.......... 7.950 11-01-18 BB 3,735 4,088,107 7.26
South Indian River Water Control District,
Rev Egret Landing Proj Section 15 Phase 1................. 7.500 11-01-18 BB+ 2,000 2,171,800 6.91
-----------
11,430,980
-----------
Illinois (6.86%)
Bedford Park, City of,
Tax Increment Rev Ref 71st & Cicero Proj.................. 7.000 01-01-06 BBB- 650 703,072 6.47
Tax Increment Rev Ref 71st & Cicero Proj.................. 7.375 01-01-12 BBB- 1,000 1,091,150 6.76
Tax Increment Rev Sr Lien Mark IV Proj.................... 9.750 03-01-12 AAA 980 1,167,631 8.18
Chicago, City of,
Chicago-O'Hare Int'l Airport Spec Facil Rev Ref
American Airlines, Inc.................................. 8.200 12-01-24 BBB- 1,500 1,797,420 6.84
Illinois Health Facilities Auth,
Rev Ser A Fairview Obligated Group Proj................... 9.500 10-01-22 BB 2,500 3,053,000 7.78
Rev Ser B Fairview Obligated Group Proj................... 9.000 10-01-22 BB 1,500 1,804,770 7.48
Round Lake Beach, City of,
Tax Increment Rev Ref..................................... 7.500 12-01-13 BBB- 2,000 2,192,800 6.84
-----------
11,809,843
-----------
Indiana (1.31%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj.......... 7.500 06-01-26 BB 2,000 2,250,640 6.66
-----------
Iowa (0.57%)
Iowa Finance Auth,
Hlth Care Facil Rev Ref Care Initiatives Proj Ser B....... 5.750 07-01-18 BB 715 715,236 5.75
Hlth Care Facil Rev Ref Care Initiatives Proj............. 9.250 07-01-25 BB 200 270,572 6.84
-----------
985,808
-----------
Kansas (1.31%)
Prairie Village, City of,
Rev Ser A Claridge Court Proj............................. 8.750 08-15-23 BBB- 2,000 2,252,440 7.77
-----------
Kentucky (3.13%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Inc Ser 1985................ 7.800 12-01-15 BBB- 2,500 2,651,425 7.35
Rev Spec Facil Delta Airlines Proj Ser B.................. 7.250 02-01-22 BBB- 2,500 2,742,425 6.61
-----------
5,393,850
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free 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>
Louisiana (0.30%)
West Feliciana, Parish of,
Poll Control Rev Ser D Gulf States Utilities Co........... 5.800% 12-01-15 BB+ $500 $512,845 5.65%
-----------
Maryland (1.30%)
Baltimore, County of,
Poll Control Rev Ref Bethlehem Steel Corp Proj............ 7.500 06-01-15 B+ 2,000 2,232,860 6.72
-----------
Massachusetts (3.24%)
Massachusetts Industrial Finance Agency,
Rev Ser A Southeastern Mass Proj.......................... 9.000 07-01-15 BB 2,800 3,129,868 8.05
Massachusetts Port Auth,
Spec Proj Rev Harborside Hyatt Hotel...................... 10.000 03-01-26 BBB- 2,200 2,451,152 8.98
-----------
5,581,020
-----------
Michigan (2.70%)
Waterford Township Economic Development Corp,
Rev Ltd Oblig Canterbury Hlth Care........................ 8.375 07-01-23 BB- 3,500 3,395,000 8.63
Wayne Charter, County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest
Airlines, Inc. ......................................... 6.750 12-01-15 BB+ 1,120 1,248,800 6.05
-----------
4,643,800
-----------
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 1,067,810 6.67
-----------
New Hampshire (3.12%)
New Hampshire Business Finance Auth,
Poll Control & Solid Waste Ref Crown Paper Co Proj........ 7.750 01-01-22 BB- 1,500 1,748,640 6.65
Poll Control Rev Ref Ser D Pub Serv Co.................... 6.000 05-01-21 BB- 1,000 1,027,170 5.84
New Hampshire Higher Educational and Health Facilities Auth,
Hosp-Littleton Hosp Assn-Ser A............................ 5.900 05-01-18 BB- 1,500 1,522,620 5.81
Rev New Hampshire College................................. 6.375 01-01-27 BBB- 1,000 1,078,000 5.91
-----------
5,376,430
-----------
New Jersey (6.28%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj........... 9.875 01-01-21 BB- 1,500 1,910,625 7.75
New Jersey Economic Development Auth,
Rev Ref Ind'l Development Newark Airport
Marriott Hotel Proj 7.000 10-01-14 BBB- 2,500 2,783,575 6.29
Rev Ref Ser J Holt Hauling Proj........................... 8.500 11-01-23 BBB 2,500 2,914,475 7.29
New Jersey Educational Facilities Auth,
Rev Fairleigh Dickinson Univ-Ser G**...................... 5.700 07-01-28 BBB- 1,000 997,060 5.72
New Jersey Health Care Facilities Financing Auth,
Rev Care Institute Inc Cherry Hill Proj................... 8.000 07-01-27 BB+ 2,000 2,203,900 7.26
-----------
10,809,635
-----------
New Mexico (2.16%)
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 3,721,340 6.02
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free 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>
New York (5.04%)
Glen Cove Housing Auth,
Rev Sr Living Facil The Mayfair Proj...................... 8.250% 10-01-26 BB+ $1,425 $1,599,477 7.35%
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of Technology Proj..... 7.500 03-01-26 BB- 2,000 2,228,520 6.73
New York City Industrial Development Agency
Rev Ref LaGuardia Assoc LP Proj**......................... 6.000 11-01-28 BB+ 1,000 998,380 6.01
New York City Municipal Water Finance Auth,
Wtr & Swr Sys Rev Cap Apprec 1998 Ser D................... Zero 06-15-19 A- 2,000 704,880 5.08
New York, City of,
GO Fiscal 1994 Ser B1 Preref.............................. 7.300 08-15-11 A- 950 1,121,494 6.18
GO Fiscal 1997 Ser J...................................... 6.000 08-01-17 A- 1,000 1,090,440 5.50
GO Cap Apprec Ref Fiscal 1998 Ser G....................... Zero 08-01-08 A- 1,500 940,785 4.76
-----------
8,683,976
-----------
Ohio (6.25%)
Bedford, County of,
Rev Ref Community Hosp Bedford Inc........................ 8.500 05-15-09 AA 1,275 1,385,376 7.82
Cleveland, City of,
Parking Facil Imp Rev..................................... 8.000 09-15-12 AAA 1,000 1,166,470 6.86
Parking Facil Imp Rev..................................... 8.100 09-15-22 AAA 2,000 2,340,340 6.92
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj.................. 8.625 02-01-22 AA 3,300 3,839,220 7.41
Ohio Water Development Auth,
Solid Waste Disposal Rev Ser A Bay Shore Pwr Proj......... 5.875 09-01-20 BB+ 1,000 1,020,030 5.76
Ohio, State of,
Solid Waste Disp Rev USG Corp Proj........................ 5.600 08-01-32 BBB 1,000 1,010,960 5.53
-----------
10,762,396
-----------
Oklahoma (1.29%)
Tulsa Municipal Airport Trust, Trustees of,
Rev American Airlines, Inc................................ 7.350 12-01-11 BBB- 2,000 2,229,320 6.59
-----------
Oregon (2.50%)
Oregon, State of,
Economic Development Rev Ref Ser 183
Georgia-Pacific Corp Proj............................... 5.700 12-01-25 BAA2 1,000 1,040,590 5.48
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj.................... 7.125 01-01-21 BBB- 3,000 3,268,470 6.54
-----------
4,309,060
-----------
Pennsylvania (9.63%)
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 2,898,650 6.68
Poll Control Rev Ref Cleveland Elec Proj.................. 7.625 05-01-25 BB+ 1,600 1,826,144 6.68
Chester County Industrial Development Auth,
Rev 1st Mtg Rha/Pa Nursing Home........................... 10.125 05-01-19 B- 193 181,393 10.77
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free 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>
Pennsylvania (continued)
Lehigh County General Purpose Auth,
Rev Ref KidsPeace Oblig Group............................. 6.000% 11-01-18 BB $1,000 $1,005,820 5.97%
Montgomery County Redevelopment Auth,
Multifamily Hsg Rev Ser A KBF Assoc L.P. Proj............. 6.500 07-01-25 BBB+ 2,500 2,610,200 6.23
Northampton County Industrial Development Auth,
Poll Control Rev Ref Bethlehem Steel Proj................. 7.550 06-01-17 B+ 2,000 2,237,740 6.75
Pennsylvania Economic Development Finance Auth,
Ser B Qualified Residential RSI Properties/Greensburg
LLC Proj ............................................... 8.000 09-01-27 BB 1,000 1,034,470 7.73
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj..... 8.625 07-01-21 BBB 2,300 2,628,532 7.55
Philadelphia Industrial Development Auth,
Commercial Devel Rev Ref Ser A Doubletree Proj............ 6.500 10-01-27 BB+ 2,000 2,171,960 5.99
-----------
16,594,909
-----------
Rhode Island (1.39%)
Providence Redevelopment Agency,
Cert of Part Ser A........................................ 8.000 09-01-24 BBB- 2,160 2,386,541 7.24
-----------
Texas (1.43%)
Brazos River Auth Texas,
Rev Ref Houston Inds Inc Proj-Ser D**..................... 4.900 10-01-15 AAA 1,500 1,519,035 4.84
Houston, City of,
Wtr & Swr Rev Jr Lien Cap Apprec Ref Ser A................ Zero 12-01-21 AAA 3,000 942,600 5.48
-----------
2,461,635
-----------
Utah (3.75%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A East Carbon
Development Corp ....................................... 9.000 07-01-12 BBB- 2,000 2,183,260 8.24
Solid Waste Disp Rev Ref Sunnyside Cogeneration Proj...... 9.250 07-01-18 B 1,900 1,140,380 15.41
Intermountain Power Agency Utah,
Pwr Supply Rev Ref-Ser A**................................ 5.000 07-01-19 AAA 1,500 1,456,485 5.15
Tooele, County of,
Poll Control Rev Ref Ser A Laidlaw Environmental Proj..... 7.550 07-01-27 BBB- 1,500 1,671,075 6.78
-----------
6,451,200
-----------
Virgin Islands (0.61%)
Virgin Islands Public Finance Auth,
Rev Sub Lien Fd Ln Notes Ser E............................ 6.000 10-01-22 BB+ 1,000 1,043,660 5.75
-----------
Virginia (4.08%)
Hopewell Industrial Development Auth,
Resource Recovery Rev Ref Stone Container Corp Proj....... 8.250 06-01-16 BB 4,400 4,919,288 7.38
Pocahontas Parkway Association,
Toll Rd Rev Cap Apprec-1st Tier-Sub-Ser C................. Zero 08-15-20 BA1 4,000 1,074,280 6.08
Toll Rd Rev Cap Apprec-1st Tier-Sub-Ser C................. Zero 08-15-21 BA1 4,100 1,036,931 6.08
-----------
7,030,499
-----------
Washington (0.82%)
Spokane County Industrial Development Corp,
Solid Waste Disp Rev Kaiser Alum & Chem Corp Proj......... 7.600 03-01-27 BB- 1,250 1,419,675 6.69
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free 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>
West Virginia (1.01%)
Marion, County of,
Community Solid Waste Disposal Facil Rev
Ref Ser A Adirondack Recycling.................. 8.000% 12-01-25 BB- $1,646 $1,530,331 8.60%
Community Solid Waste Disposal Facil Rev
Ref Ser B Adirondack Recycling.................. 10.000 12-01-25 BB- 230 213,876 10.75
-----------
1,744,207
-----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $158,175,963) (101.27%) 174,401,562
---------- ------------
TOTAL INVESTMENTS (101.27%) 174,401,562
---------- ------------
OTHER ASSETS AND LIABILITIES, NET (1.27%) (2,179,556)
---------- ------------
TOTAL NET ASSETS (100.00%) $172,222,006
========== ============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investors Service, Fitch or John Hancock Advisers,
Inc. where Standard & Poor's ratings are not available.
** These securities, having an aggregate value $4,970,960 or 2.89% of the
Fund's net asset value, have been purchased as forward commitments - that
is, the Fund has agreed on trade date, to take delivery of and make
payment for such securities on a delayed basis subsequent to the date of
this schedule. The purchase price and interest rate of such securities 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 a current value at least equal to the amount
of the forward commitment. Accordingly, the market value of $5,610,625 of
South Orange County Public Financing Authority, 7.27%, 08-15-17, has been
segregated to cover the forward commitment.
+ 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, 1998.
The percentage 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.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Tax-Free Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
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,
1998, assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ----------
General Obligation .............................................. 3.03%
Revenue Bonds - Airport ......................................... 3.33
Revenue Bonds - Authority ....................................... 1.02
Revenue Bonds - Combined ........................................ 0.96
Revenue Bonds - Economic Development ............................ 1.20
Revenue Bonds - Education ....................................... 3.11
Revenue Bonds - Electric ........................................ 0.85
Revenue Bonds - Facility ........................................ 1.39
Revenue Bonds - General Purpose ................................. 0.58
Revenue Bonds - Health .......................................... 15.61
Revenue Bonds - Highway ......................................... 1.23
Revenue Bonds - Housing ......................................... 6.59
Revenue Bonds - Industrial ...................................... 10.98
Revenue Bonds - Lease ........................................... 0.64
Revenue Bonds - Other ........................................... 12.04
Revenue Bonds - Pollution Control Facilities .................... 21.01
Revenue Bonds - Recreation Facility ............................. 0.58
Revenue Bonds - Solid Waste Disposal ............................ 0.59
Revenue Bonds - Special Tax ..................................... 1.02
Revenue Bonds - Transportation .................................. 13.54
Revenue Bonds - Water & Sewer ................................... 1.97
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 101.27%
======
SEE NOTES TO FINANCIAL STATEMENTS.
18
<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 has 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,
Inc., 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 $9,957,299 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 expire
as follows: August 31, 2002 -- $2,785,979, August 31, 2003 -- $205,838, August
31, 2004 -- $3,207,633, August 31, 2005 -- $716,668 and August 31, 2006 --
$3,041,181.
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
19
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Tax-Free Fund
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 unsecured
lines of credit with banks which permit borrowings up to $1 billion,
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
rates ranging from 0.070% to 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, 1998.
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, 1998, there were no open positions in financial futures
contracts.
OPTIONS The Fund may purchase options contracts. Listed options will be valued
at the last quoted sales price on the exchange on which they are primarily
traded. Purchased put or call over-the-counter options will be valued at the
average of the "bid" prices obtained from two independent brokers. Written put
or call over-the-counter options will be valued at the average of the "asked"
prices obtained from two independent brokers. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund will be included in
the Statement of Assets and Liabilities as an asset and corresponding liability.
The amount of the liability will be subsequently marked-to-market to reflect the
current market value of the written option.
The Fund may use options contracts to manage its exposure to changing
security prices. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument, and buying
20
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Tax-Free Fund
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 year 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 Statement of
Assets and Liabilities.
At August 31, 1998, there were no open written options contracts.
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 an agreement with its custodian bank under which $5,077 of
custodian fees have been reduced by balance credits applied during the year
ended August 31, 1998. If the Fund had not entered into this agreement, the
assets not invested, on which these balance credits earned, could have produced
taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended August 31,
1998, net sales charges received with regard to sales of Class A shares amounted
to $225,191. Out of this amount, $27,441 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $178,887 was
paid as sales commissions to unrelated broker-dealers and $18,863 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, 1998,
contingent deferred sales charges paid to JH Funds amounted to $367,303.
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. 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.
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.
21
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Tax-Free Fund
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. 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 an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At August 31, 1998, 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 fiscal
year ended August 31, 1998, aggregated $59,184,299 and $59,461,210,
respectively. There were no purchases or sales of obligations of the U.S.
government and its agencies during the fiscal year ended August 31, 1998.
The cost of investments owned at August 31, 1998 for federal income tax
purposes was $158,175,963. Gross unrealized appreciation and depreciation of
investments aggregated $18,994,591 and $2,768,992 respectively, resulting in net
unrealized appreciation of $16,225,599.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1998, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of $8,065,
an increase in distributions in excess of net investment income of $4,338 and an
increase in capital paid-in of $12,403. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of August 31, 1998. 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.
22
<PAGE>
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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, 1998, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers, and other
auditing procedures where 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 the John Hancock Tax-Free Bond Trust at
August 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young
Boston, Massachusetts
October 9, 1998
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,
1998.
None of the 1998 income dividends qualify for the corporate dividends
received deduction. Shareholders, who are not subject to the alternative minimum
tax, received income dividends which are 99.97% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 16.97%
None of the income dividends were derived from the U.S. Treasury Bills.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Shareholders will receive a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the total of all distributions which are taxable
for calendar year 1998.
23
<PAGE>
================================================================================
-------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds -------------
- --------------------------------------------------------------------------------
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 8/98
10/98
<PAGE>
ANNUAL REPORT
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[GRAPHIC OMITTED]
Tax-Free
Bond Fund
AUGUST 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
------------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN
WILLIAM H. CUNNINGHAM*
RONALD R. DION
HAROLD R. HISER, JR.
ANNE C. HODSDON
CHARLES L. LADNER
LEO E. LINBECK, JR.
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 and Chief Operating Officer
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
Vice President and Chief 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 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5072
------------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term is a
roller coaster. That is because, while long-term history suggests the market's
general direction is up, its swings over the short term can be dramatic and, at
times, violent. Recently, the market has given us a stark example of this
phenomenon. From the new highs set in mid-July, the major indices plunged by 19%
through the end of August. It was the worst such fall since 1990. For the first
time in a number of years, some bonds and bond mutual funds outperformed stocks
and stock mutual funds. Seeking safety in a world of global economic
uncertainties, investors everywhere converged on U.S. Treasury bonds and pushed
their yields to historic lows.
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
For the record-breaking number of investors who have entered the market
for the first time since 1990, it was their worst taste of stock market reality.
We are pleased to report that most individual investors did not panic, and we
hope that means they've taken our words to heart. Over the long term, markets do
not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering whether the global turmoil and the prospects
for slower U.S. economic and corporate earnings growth are signs that the long
bull market has finally run its course. While we don't make a practice of
opining on what the market will do next, we continue to believe it would be wise
for investors to set more realistic expectations. Over the long term, the
market's historical results have been more in the 10% per year range, which is
still a solid result, considering it has been produced despite wars, depressions
and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the last six months' divergence in
performance of stocks and high-quality bonds is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY DIANNE SALES, CFA, FRANK LUCIBELLA, CFA AND BARRY EVANS, CFA,
PORTFOLIO MANAGERS
John Hancock
Tax-Free Bond Fund
Falling interest rates, tame inflation boost municipals
A healthy bond market buoyed municipal bonds during the past 12 months.
Continued slowdown in Asian markets constrained U.S. economic growth, while
turmoil in emerging markets drew investors to the safety of U.S. Treasuries. As
a result, U.S. interest rates fell and inflation remained under control. Against
this positive backdrop, municipal bonds turned in solid returns for the year.
Municipal performance has been somewhat constrained compared to Treasury
bonds, however, as low interest rates have resulted in an increased supply of
municipal bonds. During the first six months of 1998, the supply of municipal
bonds increased more than 50% versus 1997. The reason is that many local
governments have been issuing large amounts of new tax-exempt bonds in order to
take advantage of lower interest rates. This strong influx of new bond issuance
has put pressure on municipal bond prices, causing them to lag Treasuries.
The silver lining, however, is that municipal bonds now offer their best
relative values versus U.S. Treasuries in almost five years. This has not gone
unnoticed, particularly among non-traditional buyers who have crossed over into
the tax-exempt market to take advantage of these attractive values. This strong
demand from non-traditional "crossover" buyers has helped to absorb the recent
flood of new issuance into the municipal bond market.
Even with the supply pressures, municipal bonds turned in a solid
performance during the period. For the 12 months ended August 31,
"Even with the supply pressures, municipal bonds turned in a solid
performance..."
[A 3 1/2" x 2 1/2" photo at bottom right of page of fund management team
members. Caption below reads "Fund management team members (l - r): Barry Evans,
Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
3
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John Hancock Funds - Tax-Free Bond Fund
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[Pie Chart at the top of left hand column with the heading "Portfolio
Diversification". The chart is divided into ten sections (from top to left):
Other 14%, Water & Sewer 4%, Transportation 19%, Pollution Control 13%,
Industrial 7%, Housing 3%, Health 14%, Electric 15%, Education 3% and General
Obligation 8%. A note below the chart reads "As a percentage of net assets on
August 31, 1998."]
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1998, John Hancock Tax-Free Bond Fund's Class A and Class B shares returned
9.08% and 8.27%, respectively, at net asset value. Keep in mind that your net
asset value return will be different if you were not invested in the Fund for
the entire period and did not reinvest all distributions. The Fund's returns
outpaced the average general municipal bond fund's return of 8.20%, according to
Lipper Analytical Services, Inc.1 Please see pages six and seven for longer-term
performance information.
Narrowing credit spreads drive performance
Credit spreads in the municipal market narrowed substantially in the first six
months of the period. Credit spread refers to the difference in yields between
bonds with different credit ratings. As the gap between yields on higher- and
lower- quality bonds narrowed, the Fund benefited significantly thanks to its
holdings in lower- quality bonds. With in-depth credit analysis, we've been able
to identify lower-quality bonds not only with attractive yields, but also with
improving credit profiles. One of our best performers was the Sacramento
Cogeneration Authority. This cogeneration project completed construction on two
out of three of its power plants and the credit was upgraded.
Focus on portfolio duration and call protection
Throughout the year, we continued to carefully manage the portfolio's duration
and structure. Duration is a measure of how sensitive a bond's price, and
therefore the Fund's share price, is to interest-rate changes. The longer the
duration, the more the price rises when rates fall (and falls when rates rise).
For most of the year, we've kept the Fund's duration relatively long. That way
we could take advantage of falling interest rates and the bond market's strong
rally.
We also maintained our long-term focus on call protection. As we've
discussed in previous reports, call protection guards a bond from being redeemed
by its issuer for a certain period of time. Strong call protection is especially
important during periods of falling interest rates -- when issuers often try to
refinance their bonds at lower interest rates. If a bond gets "called away," or
redeemed early, investors are forced to reinvest their money in bonds with lower
yields. By focusing on issues with strong call protection, we've been able to
maintain the Fund's competitive yield levels.
Looking ahead
The Federal Reserve has been vigilant about keeping inflation under control, and
there's no reason to believe this will change in the near future. The biggest
question is the direction of
"...we continued to carefully manage the portfolio's duration and structure."
[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Sacramento
Power Authority followed by an up arrow with the phrase "Credit upgrade." The
second listing is Zero coupon bonds followed by an up arrow with the phrase
"High sensitivity to rate changes." The third listing is Housing bonds followed
by a down arrow with the phrase "Increased prepayments." A note below the table
reads "See 'Schedule of Investments.' Investment holdings are subject to
change."]
4
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John Hancock Funds - Tax-Free Bond Fund
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[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the year ended August 31, 1998". The chart
is scaled in increments of 2% with 0% at the bottom and 10% at the top. The
first bar represents the 9.08% total return for John Hancock Tax-Free Bond Fund
Class A. The second bar represents the 8.27% total return for John Hancock
Tax-Free Bond Fund Class B and the third bar represents 8.20% total return for
the Average general municipal bond fund. A note below the chart reads "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
- --------------------------------------------------------------------------------
the U.S. economy. We expect that Asia's financial woes will continue to slow the
U.S. economy in the second half of the year. In this environment, we could see
interest rates continue to fall. As a result, we will be biased toward
maintaining our longer duration. In addition, we expect credit spreads to
continue to remain narrow and yield opportunities to be limited. Given our
economic outlook and the narrow spreads in the market, we will be highly
selective in adding yield to the portfolio, instead focusing on higher- quality
credits.
The macro-environment for municipal bonds also remains favorable. Current
municipal bond prices represent historic values relative to U.S. Treasuries. In
addition, we believe that supply pressures are likely to moderate in the second
half of the year. Once the pace of new issues slows, municipal bonds should have
a chance to improve their performance relative to U.S. Treasuries.
"We expect that Asia's financial woes will continue to slow the U.S. economy..."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' 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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John Hancock Funds - Tax-Free Bond Fund
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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 measures the
change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.50%. Class B performance reflects a maximum contingent deferred
sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
Please note that a portion of the Fund's income may be subject to taxes, and
some investors may be subject to the Alternative Maximum Tax (AMT). Also note
that capital gains are taxable.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/5/90)
------ ------- ---------
Cumulative Total Returns 4.24% 28.23% 89.58%
Average Annual Total Returns(1) 4.24% 5.10% 7.83%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
------ ------- ----------
Cumulative Total Returns 3.33% 27.36% 55.35%
Average Annual Total Returns(1) 3.33% 4.96% 7.01%
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YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1998
SEC 30-DAY
YIELD
----------
John Hancock Tax-Free Bond Fund: Class A 4.01%
John Hancock Tax-Free Bond Fund: Class B 3.46%
Notes to Performance
(1) 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 4.21%, 5.01% and 7.58%, respectively. The average
annualized total returns for the one-year, five-year and since inception
periods for Class B shares would have been 3.30%, 4.87% and 6.87%,
respectively.
6
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John Hancock Funds - Tax-Free Bond Fund
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WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Free Bond Fund would be worth, assuming all distributions were reinvested
for the period indicated. 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. Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Line chart with the heading Tax-Free Bond Fund: Class A, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Tax-Free Bond Fund on January 5, 1990, before sales charge, and is equal
to $20,236 as of August 31, 1998. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $19,518 as of August 31,
1998. The third line represents the Tax-Free Bond Fund after sales charge and is
equal to $19,327 as of August 31, 1998.
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- --------------------------------------------------------------------------------
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 two lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $16,223 as of as of August 31, 1998. 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
$16,223 as of as of August 31, 1998.
- --------------------------------------------------------------------------------
* No contingent deferred sales charge applicable.
7
<PAGE>
==============================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, 1998. 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, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $684,096,285) ......... $775,511,961
Cash ...................................................... 7,199,612
Receivable for investments sold ........................... 117,065
Receivable for shares sold ................................ 105,870
Interest receivable ....................................... 10,581,184
Receivable for futures variation margin - Note A .......... 114,844
Other assets .............................................. 115,909
-------------
Total Assets ............................ 793,746,445
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ......................... 7,642,022
Payable for shares repurchased ............................ 171,709
Dividend payable .......................................... 283,702
Payable to John Hancock Advisers, Inc. ....................
and affiliates - Note B .................................. 530,215
Accounts payable and accrued expenses ..................... 128,384
-------------
Total Liabilities ....................... 8,756,032
-----------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 713,180,412
Accumulated net realized loss on investments and
financial futures contracts .............................. (20,880,193)
Net unrealized appreciation of investments and
financial futures contracts .............................. 91,571,857
Undistributed net investment income ....................... 1,118,337
-------------
Net Assets .............................. $784,990,413
===========================================================
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 - $600,904,969/54,576,528 ......................... $11.01
=============================================================================
Class B - $184,085,444/16,719,356 ......................... $11.01
=============================================================================
Maximum Offering Price Per Share*
Class A - ($11.01 x 104.71%) .............................. $11.53
=============================================================================
* 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, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................. $47,494,288
-------------
Expenses:
Investment management fee - Note B ....................... 4,201,258
Distribution and service fee - Note B
Class A ................................................ 893,325
Class B ................................................ 1,752,314
Transfer agent fee - Note B .............................. 837,466
Custodian fee ............................................ 248,222
Financial services fee - Note B .......................... 139,637
Registration and filing fees ............................. 87,045
Trustees' fees ........................................... 64,964
Auditing fee ............................................. 42,037
Printing ................................................. 36,239
Miscellaneous ............................................ 21,035
Legal fees ............................................... 9,584
Less Management Fee Reduction - Note B ................... (147,165)
-------------
Total Expenses .......................... 8,185,961
-----------------------------------------------------------
Net Investment Income ................... 39,308,327
-----------------------------------------------------------
Realized and Unrealized Gain on Investments and
Financial Futures Contracts:
Net realized gain on investments sold ..................... 2,711,101
Net realized gain on financial futures contracts .......... 710,047
Change in net unrealized appreciation/depreciation
of investments ........................................... 24,583,936
Change in net unrealized appreciation/depreciation
of financial futures contracts ........................... 34,571
-------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ............. 28,039,655
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............... $67,347,982
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................................... 41,842,397 $39,308,327
Net realized gain (loss) on investments sold
and financial futures contracts ......................................................... (2,378,086) 3,421,148
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts .......................................... 26,195,799 24,618,507
------------- -------------
Net Increase in Net Assets Resulting from Operations .................................... 65,660,110 67,347,982
------------- -------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5859 and $0.5609 per share, respectively) ................................. (33,144,713) (30,751,765)
Class B - ($0.5073 and $0.4794 per share, respectively) ................................. (8,723,112) (8,591,825)
------------- -------------
Total Distributions to Shareholders ..................................................... (41,867,825) (39,343,590)
------------- -------------
From Fund Share Transactions - Net:* ......................................................... 128,973,479 (37,820,203)
------------- -------------
Net Assets:
Beginning of period ....................................................................... 642,040,460 794,806,224
------------- -------------
End of period (including distributions in excess of
net investment income of $169,244 and undistributed net
investment income of $1,118,337, respectively) .......................................... $794,806,224 $784,990,413
============= =============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1997 1998
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ..................................... 45,295,498 $471,394,805 9,452,430 $102,833,221
Shares issued in reorganization - Note D ........ 3,663,041 38,514,684 -- --
Shares issued to shareholders in
reinvestment of distributions ................. 2,401,808 25,169,422 2,056,575 22,345,666
------------- ------------- ------------- -------------
51,360,347 535,078,911 11,509,005 125,178,887
Less shares repurchased ......................... (50,443,895) (525,552,293) (12,463,378) (135,519,593)
------------- ------------- ------------- -------------
Net increase (decrease) ......................... 916,452 $9,526,618 (954,373) ($10,340,706)
============= ============= ============= =============
CLASS B
Shares sold ..................................... 1,491,837 $15,614,797 1,812,250 $19,737,401
Shares issued in reorganization - Note D ........ 14,270,326 150,045,343 -- --
Shares issued to shareholders in
reinvestment of distributions ................. 441,650 4,628,530 419,825 4,561,374
------------- ------------- ------------- -------------
16,203,813 170,288,670 2,232,075 24,298,775
Less shares repurchased ......................... (4,854,334) (50,841,809) (4,765,668) (51,778,272)
------------- ------------- ------------- -------------
Net increase (decrease) ......................... 11,349,479 $119,446,861 (2,533,593) ($27,479,497)
============= ============= ============= =============
</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 two 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>
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
-------------------------------- JANUARY 1, 1996 TO -----------------------
1993 1994(1) 1995 AUGUST 31, 1996(8) 1997 1998
-------- -------- -------- ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........ $10.47 $10.96 $9.39 $10.67 $10.27 $10.63
-------- -------- -------- ---------- -------- --------
Net Investment Income ....................... 0.62 0.58 0.57(2) 0.40 0.59 0.56(2)
Net Realized and Unrealized Gain
(Loss) on Investments ...................... 0.93 (1.58) 1.28 (0.41) 0.36 0.38
-------- -------- -------- ---------- -------- --------
Total from Investment Operations ........ 1.55 (1.00) 1.85 (0.01) 0.95 0.94
-------- -------- -------- ---------- -------- --------
Less Distributions:
Dividends from Net Investment Income ........ (0.62) (0.57) (0.57) (0.39) (0.59) (0.56)
Distributions from Net Realized Gains
on Investments Sold ........................ (0.44) -- -- -- -- --
-------- -------- -------- ---------- -------- --------
Total Distributions ..................... (1.06) (0.57) (0.57) (0.39) (0.59) (0.56)
-------- -------- -------- ---------- -------- --------
Net Asset Value, End of Period .............. $10.96 $9.39 $10.67 $10.27 $10.63 $11.01
======== ======== ======== ========== ======== ========
Total Investment Return at Net Asset
Value (3) .................................. 15.15% (9.28%) 20.20% (0.01%)(4) 9.44% 9.08%
Total Adjusted Investment Return at Net
Asset Value (3,5) .......................... 14.98% (9.39%) 20.08% (0.09%)(4) 9.38% 9.06%
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) ................................... $136,521 $114,539 $118,797 $560,863 $590,185 $600,905
Ratio of Expenses to Average Net
Assets ..................................... 0.78% 0.85% 0.85% 0.85%(7) 0.85% 0.85%
Ratio of Adjusted Expenses to Average
Net Assets (6) ............................. 0.95% 0.96% 0.97% 0.98%(7) 0.91% 0.87%
Ratio of Net Investment Income to
Average Net Assets ......................... 5.57% 5.72% 5.67% 5.75%(7) 5.61% 5.16%
Ratio of Adjusted Net Investment
Income to Average Net Assets (6) ........... 5.40% 5.61% 5.55% 5.62%(7) 5.55% 5.14%
Portfolio Turnover Rate ..................... 116% 107% 113% 116%(9) 46%(9) 24%
Fee Reduction Per Share ..................... $0.02 $0.01 $0.01(2) $0.01(2) $0.01 $0.01(2)
</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>
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
-------------------------------- JANUARY 1, 1996 TO -----------------------
1993 1994(1) 1995 AUGUST 31, 1996(8) 1997 1998
-------- -------- -------- ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ........ $10.47 $10.96 $9.38 $10.67 $10.27 $10.63
-------- -------- -------- ---------- -------- --------
Net Investment Income ....................... 0.54 0.50 0.50(2) 0.34 0.51 0.48(2)
Net Realized and Unrealized Gain
(Loss) on Investments ...................... 0.93 (1.58) 1.28 (0.40) 0.36 0.38
-------- -------- -------- ---------- -------- --------
Total from Investment Operations ...... 1.47 (1.08) 1.78 (0.06) 0.87 0.86
-------- -------- -------- ---------- -------- --------
Less Distributions:
Dividends from Net Investment Income ........ (0.54) (0.50) (0.49) (0.34) (0.51) (0.48)
Distributions from Net Realized Gains
on Investments Sold ........................ (0.44) -- -- -- -- --
-------- -------- -------- ---------- -------- --------
Total Distributions ................... (0.98) (0.50) (0.49) (0.34) (0.51) (0.48)
-------- -------- -------- ---------- -------- --------
Net Asset Value, End of Period .............. $10.96 $9.38 $10.67 $10.27 $10.63 $11.01
======== ======== ======== ========== ======== ========
Total Investment Return at Net
Asset Value (3) ............................ 14.30% (10.05%) 19.41% (0.51%)(4) 8.63% 8.27%
Total Adjusted Investment Return at
Net Asset Value (3,5) ...................... 14.13% (10.16%) 19.29% (0.59%)(4) 8.57% 8.25%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) ............................. $56,384 $70,243 $76,824 $81,177 $204,621 $184,085
Ratio of Expenses to Average Net
Assets ..................................... 1.53% 1.60% 1.60% 1.60%(7) 1.60% 1.60%
Ratio of Adjusted Expenses to Average
Net Assets (6) ............................. 1.70% 1.71% 1.72% 1.73%(7) 1.66% 1.62%
Ratio of Net Investment Income to
Average Net Assets ......................... 4.66% 4.97% 4.90% 4.91%(7) 4.85% 4.41%
Ratio of Adjusted Net Investment
Income to Average Net Assets (6) ........... 4.49% 4.86% 4.78% 4.78%(7) 4.79% 4.39%
Portfolio Turnover Rate ..................... 116% 107% 113% 116%(9) 46%(9) 24%
Fee Reduction per Share ..................... $0.02 $0.01 $0.01(2) $0.01(2) $0.01 $0.01(2)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
(8) Effective August 31, 1996, the fiscal period end changed from December 31
to August 31.
(9) Portfolio turnover rate excludes merger activity.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
Schedule of Investments
August 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Tax-Free Bond Fund on August 31, 1998. 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 (1.15%)
Alabama State Docks Department,
Docks Facil Rev Ref Ser 1998 ..................... 5.250% 10-01-12 AAA $4,245 $4,482,296 4.97%
Docks Facil Rev Ref Ser 1998 ..................... 5.375 10-01-15 AAA 3,835 4,046,040 5.09
Citronelle Industrial Development Board,
Poll Control Rev Stauffer Chemical Co
Proj 1982 ........................................ 8.000 12-01-12 A1 500 538,010 7.43
-------------
9,066,346
-------------
Alaska (0.37%)
Alaska Housing Finance Corp,
Coll Home Mtg Ser B-1 GNMA Coll .................. 7.650 06-01-24 AAA 1,640 1,752,701 7.16
Valdez Alaska Marine Terminal,
Rev Ref Sohio Pipe Line Co Proj
Ser 1985 ......................................... 7.125 12-01-25 AA 1,000 1,114,770 6.39
-------------
2,867,471
-------------
Arizona (2.06%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial
Hosp Proj ........................................ 8.200 06-01-21 BBB 2,150 2,323,956 7.59
Arizona Municipal Financing Program,
Cert of Part Ser 25 .............................. 7.875 08-01-14 AAA 1,000 1,354,340 5.81
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 2,258,840 6.20
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 9,077,706 6.00
Navajo County Industrial Development
Auth, Ind'l Devel Rev Stone Container
Corp Proj ........................................ 7.200 06-01-27 B 1,000 1,125,050 6.40
-------------
16,139,892
-------------
Arkansas (0.33%)
Arkansas Development Finance Auth,
Single Family Mtg Rev Ref Ser
1991 A ........................................... 8.000 08-15-11 AA 370 396,684 7.46
Jefferson, County of,
Poll Control Rev Ref Entergy
Arkansas Proj .................................... 5.600 10-01-17 BBB- 2,150 2,182,831 5.52
-------------
2,579,515
-------------
California (14.80%)
California Statewide Community
Development Auth, Rev Cert of
Part Ref Insured Health Facil
Eskaton Inc. ..................................... 5.875 05-01-20 A+ 4,000 4,205,280 5.59
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen
Proj Ser 1993 .................................... 6.200 07-01-20 AA 7,000 7,831,880 5.54
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
California (continued)
Foothill/Eastern Transportation
Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec
Ser 1995A ...................................... Zero% 01-01-19 BBB- $36,600 $12,760,224 5.25%
Toll Rd Rev Fixed Rate Cap Apprec
Ser 1995A ...................................... Zero 01-01-20 BBB- 10,000 3,289,700 5.28
Toll Rd Rev Fixed Rate Current
Int Ser 1995A .................................. 6.000 01-01-16 BBB- 20,500 22,348,485 5.50
Madera, County of,
Cert of Part Valley Children's Hosp .............. 6.500 03-15-15 AAA 13,185 15,888,848 5.39
Millbrae, City of,
Residential Facil Rev Ser 1997A
Magnolia of Millbrae Proj ...................... 7.375 09-01-27 BB 1,000 1,042,900 7.07
Sacramento Cogeneration Auth,
Cogeneration Proj Rev Procter &
Gamble Proj ...................................... 6.500 07-01-21 BBB- 3,750 4,355,325 5.60
Sacramento Municipal Utilities District,
Ind'l Devel Rev Ref San Diego Gas &
Electric Ser C Inflos ............................ 8.342# 08-15-18 AAA 1,000 1,191,250 7.15
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center
Fin Proj ....................................... 5.500 08-01-17 to A- 11,630 12,248,586 5.22
08-01-22
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj ............. 8.500 12-01-26 BB 2,000 2,252,200 7.55
San Joaquin Hills Transportation
Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec ................... Zero 01-01-10 AAA 6,250 3,728,625 4.61
Toll Rd Rev Ref Conv Cap Apprec
Ser 1997A ...................................... Zero 01-15-17 BBB- 10,000 6,976,800 4.97
Toll Rd Rev Sr Lien Cap Apprec ................... Zero 01-01-14 AAA 5,000 2,394,450 4.86
Toll Rd Rev Sr Lien Cap Apprec ................... Zero 01-01-17 AAA 4,900 2,002,875 4.94
Toll Rd Rev Sr Lien Cap Apprec ................... Zero 01-01-19 AAA 15,510 5,738,700 4.95
Toll Rd Rev Sr Lien Cap Apprec ................... Zero 01-01-20 AAA 2,000 700,300 4.98
Toll Rd Rev Sr Lien Cap Apprec ................... Zero 01-01-23 AAA 7,500 2,255,100 5.00
San Jose Financing Auth,
Rev Ser B Community Facil Proj ................... 5.625 11-15-18 A+ 2,500 2,583,625 5.44
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding
Facil Ser A .................................... 6.250 07-01-19 AAA 2,000 2,365,880 5.28
-------------
116,161,033
-------------
Colorado (1.79%)
Arapahoe County Capital Improvement
Trust Fund,
Highway Rev Current Ser E-470 .................... 6.950 08-31-20 AAA 5,000 5,986,050 5.81
Colorado Housing Finance Auth,
Single Family Prog Sr Iss A-2 .................... 7.625 08-01-17 AA+ 530 551,333 7.33
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref ................. 7.250 11-15-25 AAA 1,980 2,267,654 6.33
Airport Sys Rev Ser 1994A Preref ................. 7.500 11-15-23 BBB 535 642,701 6.24
Airport Sys Rev Ser 1994A Unref Bal .............. 7.500 11-15-23 BBB 2,565 2,987,404 6.44
Douglas County School District No. Re. 1,
Douglas and Elbert Counties Imp Ser
1994A .......................................... 6.400 12-15-11 AAA 1,400 1,596,840 5.61
-------------
14,031,982
-------------
Connecticut (0.14%)
Connecticut Health and Educational
Facilities Auth, Rev Ser D Univ
of Hartford ...................................... 6.800 07-01-22 AA 1,000 1,062,670 6.40
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Delaware (0.91%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva
Pwr Proj ......................................... 6.750% 05-01-19 AAA $6,500 $7,143,305 6.14%
-------------
Florida (4.31%)
Citrus, County of,
Poll Control Ref Rev Ser 1992A Florida
Pwr Corp Crystal Rvr Pwr Plant
Project .......................................... 6.625 01-01-27 A+ 1,250 1,362,588 6.08
Dade, County of,
Professional Sports Franchise Facil
Tax Rev Cap Apprec ............................... Zero 10-01-27 AAA 5,500 1,310,540 4.99
Hernando County Industrial Development
Auth, Rev Ref 2nd Fla Crushed Stone Co. ........... 8.500 12-01-14 BBB- 200 228,414 7.44
Hernando, County of,
Rev Criminal Justice Complex Fin Proj ............ 7.650 07-01-16 AAA 500 668,690 5.72
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport ............ 6.000 10-01-17 AAA 5,880 6,723,192 5.25
Hillsborough, County of,
Ref Util Rev Ser 1991A ........................... 7.000 08-01-14 BBB+ 1,245 1,346,007 6.47
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A ............................. 5.250 10-01-28 AA 9,000 9,079,380 5.20
Lee, County of,
Hosp Board of Directors Hosp Rev
Inflos ........................................... 9.289# 04-01-20 AAA 2,000 2,352,500 7.75
Orange County Health Facilities Auth,
Hosp Orlando Regional Medical Center
Rev Inflos ....................................... 8.877# 10-29-21 AAA 1,000 1,195,000 7.34
Orange County School Board,
Cert of Part Ref Ser 1997A ....................... Zero 08-01-13 AAA 10,365 5,123,316 4.78
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D ..................... 6.750 10-01-17 AA- 2,200 2,713,238 5.47
Tampa, City of,
Health Sys Rev Ref Ser 1998A-1
Catholic Health East Oblig Group ............... 5.500 11-15-14 AAA 1,615 1,760,285 5.05
-------------
33,863,150
-------------
Georgia (4.83%)
Georgia Municipal Electric Auth,
Power Rev Ser Y .................................. 6.500 01-01-17 AAA 3,500 4,195,800 5.42
Pwr Rev Ref Ser BB ............................... 5.700 01-01-19 A 1,000 1,079,290 5.28
Pwr Rev Ser C .................................... 5.700 01-01-19 AAA 5,000 5,531,450 5.15
Pwr Rev Ser EE ................................... 7.250 01-01-24 AAA 2,000 2,670,480 5.43
Pwr Rev Ser Z .................................... 5.500 01-01-20 AAA 5,840 6,300,075 5.10
Georgia, State of,
GO Fiscal 1997 Ser A ............................. 6.000 04-01-15 AAA 11,000 12,675,190 5.21
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr
Corp Scherer Proj ................................ 6.800 01-01-12 A 1,000 1,201,360 5.66
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj .................. 7.000 01-01-23 BB 4,000 4,303,280 6.51
-------------
37,956,925
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Illinois (3.14%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen
Airport Rev 1990 Ser A ........................... 7.500% 01-01-16 A+ $2,000 $2,124,000 7.06%
Chicago-O'Hare Int'l Airport
Int'l Terminal Spec Rev Ser 1992 ................. 6.750 01-01-12 AAA 3,000 3,257,280 6.22
Chicago-O'Hare Int'l Airport
Spec Facil Rev Ser 1990A
American Airlines Proj ......................... 7.875 11-01-25 BBB- 3,000 3,253,200 7.26
Skyway Toll Bridge Rev Ref Ser 1994 .............. 6.750 01-01-17 AAA 2,000 2,293,000 5.89
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth
Edison Co Proj ................................... 5.850 01-15-14 BBB 3,000 3,168,540 5.54
Rev Ref Ser A Columbus Cuneo
Cabrini Proj ..................................... 8.500 02-01-15 BAA2 2,150 2,330,535 7.84
Illinois Health Facilities Auth,
Rev Methodist Hlth Serv Corp Ser
1991 B ........................................... 9.706# 05-01-21 AAA 1,000 1,190,000 8.22
Rev Ref Friendship Vlg Schamburg ................. 6.750 12-01-08 BBB+ 1,640 1,745,239 6.34
Rev Ref Ser 1992 Mercy Hosp & Medical
Center Proj ...................................... 7.000 01-01-07 A- 1,500 1,631,355 6.44
Rev Swedish-American Hosp ........................ 7.400 04-01-20 AAA 750 806,220 6.88
Illinois Industrial Pollution Control
Financing Auth, Rev Great Lakes
Carbon Corp Proj ................................. 7.125 10-01-01 BBB 900 902,610 7.10
Robbins, County of,
Res Recovery Rev Ser A Robbins Res
Recovery Partners ................................ 8.375 10-15-16 BB 2,000 1,940,040 8.63
-------------
24,642,019
-------------
Indiana (0.29%)
Wabash, County of,
Solid Waste Disp Rev Jefferson
Smurfit Corp Proj ................................ 7.500 06-01-26 BB 2,000 2,250,640 6.66
-------------
Iowa (0.13%)
Iowa Finance Auth,
Health Care Facil Rev Ref Care
Initiatives Proj Ser B ........................... 5.750 07-01-18 BB 1,000 1,000,330 5.75
-------------
Kentucky (0.83%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj
Ser 1992A ........................................ 6.750 02-01-02 BBB- 2,000 2,140,940 6.31
Rev Spec Facil Delta Airlines Proj
Ser 1992A ........................................ 7.500 02-01-12 BBB- 2,000 2,202,880 6.81
Rev Spec Facil Delta Airlines Proj
Ser 1992A ........................................ 7.125 02-01-21 BBB- 2,000 2,176,180 6.55
-------------
6,520,000
-------------
Louisiana (1.98%)
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992 Gulf States
Util Co Proj ..................................... 6.750 10-01-12 BB+ 2,975 3,202,022 6.27
De Soto, Parish of,
Rev Environ Imp Rev Int'l Paper Co Proj
Ser A ............................................ 7.700 11-01-18 BBB+ 2,750 3,217,775 6.58
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding
Proj ............................................. 6.500 05-15-22 AAA 3,405 3,709,611 5.97
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr
& Light Co Proj .................................. 7.500 06-01-21 BBB 4,000 4,367,920 6.87
West Feliciana, Parish of,
Poll Control Rev Ser D Gulf States
Utilities Co. .................................... 5.800 12-01-15 BB+ 1,000 1,025,690 5.65
-------------
15,523,018
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Massachusetts (4.67%)
Massachusetts Health and Educational
Facilities Auth, Rev Brigham & Women's
Hosp Iss Ser D ................................... 6.750% 07-01-24 AAA $2,450 $2,688,385 6.15%
Rev Lowell Gen Hosp Iss Ser A .................... 8.400 06-01-11 A3 1,100 1,249,127 7.40
Rev New England Deaconess Hosp Iss
Ser D ............................................ 6.625 04-01-12 AAA 3,500 3,881,885 5.97
Rev New England Deaconess Hosp Iss
Ser D ............................................ 6.875 04-01-22 AAA 5,960 6,659,704 6.15
Rev St. Elizabeth's Hosp of Boston
Ser E ............................................ 9.670# 08-15-21 AAA 1,000 1,176,250 8.39
Rev Worcester Polytechnic Institute
Ser E ............................................ 6.750 09-01-11 AAA 3,840 4,307,520 6.02
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A ....................... 6.900 11-15-24 AAA 2,700 2,960,550 6.29
Single Family Hsg Ser 8 .......................... 7.700 06-01-17 A+ 2,500 2,558,000 7.53
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 4,778,808 6.22
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 1,111,050 5.74
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B ....................... 6.000 08-01-14 AA- 2,000 2,238,220 5.36
Plymouth, County of,
Cert of Part Ser A ............................... 7.000 04-01-22 AA- 2,750 3,079,147 6.25
-------------
36,688,646
-------------
Michigan (1.88%)
Detroit, City of,
GO Unltd Ser 1995 A .............................. 6.800 04-01-15 BBB+ 1,315 1,531,357 5.84
Michigan Housing Development Auth,
Single Family Mtg Rev Ser A ...................... 7.500 06-01-15 AA+ 1,415 1,476,779 7.19
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical
Center Hosp Proj ................................. 8.250 07-01-12 A3 2,250 2,462,445 7.54
Hosp Rev Ref Ser 1995A Genesys
Hlth Sys Oblig Group ............................. 8.100 10-01-13 BBB 3,000 3,773,970 6.44
Wayne Charter, County of,
Spec Airport Facil Rev Ref Ser 1995
Northwest Airlines Inc. .......................... 6.750 12-01-15 BB+ 4,985 5,558,275 6.05
-------------
14,802,826
-------------
Minnesota (0.61%)
Minnesota Housing Finance Agency,
Single Family Mtg 1990 Ser C ..................... 7.700 07-01-14 AA+ 230 240,960 7.35
Southern Minnesota Municipal Power
Agency, Pwr Supply Sys Rev Cap
Apprec Ser A ..................................... Zero 01-01-23 AAA 15,000 4,559,700 4.95
-------------
4,800,660
-------------
Mississippi (1.00%)
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A ............... 9.250 03-01-12 AAA 70 75,032 8.63
Mississippi Hospital Equipment and
Facilities Auth, Rev Ser A Rush
Memorial Foundation Proj ......................... 8.750 01-01-16 BAA3 2,000 2,252,160 7.77
Washington, County of,
Poll Control Rev Ref Mississippi
Pwr & Light Co Proj .............................. 7.000 04-01-22 BAA3 5,000 5,542,850 6.31
-------------
7,870,042
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Nebraska (0.17%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B .......................... 6.200% 02-01-17 AA2 $1,200 $1,368,924 5.43%
-------------
Nevada (1.51%)
Clark, County of,
Ind'l Development Rev Ser A Southwest
Gas Corp Proj .................................... 6.500 12-01-33 BBB- 10,000 10,704,200 6.07
Nevada Housing Division,
Single Family Proj Sr Rev Ser 1989
Iss A-1 .......................................... 7.350 04-01-16 AA 795 817,355 7.15
Single Family Proj Sr Rev Ser
1990 Iss C-1 ..................................... 7.850 10-01-15 AA 270 282,423 7.50
Nevada, State of,
GO Ltd Tax Municipal Bond Bank Proj
No. 38 Ser A Unref Bal ........................... 6.750 07-01-09 AA 25 27,578 6.12
-------------
11,831,556
-------------
New Jersey (1.58%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling &
Warehousing Proj ................................. 9.875 01-01-21 BB- 1,100 1,401,125 7.75
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens ............. 8.500 11-01-16 BB+ 100 112,772 7.54
Rev Ref Ind'l Development Newark
Airport Marriott Hotel Proj ...................... 7.000 10-01-14 BBB- 4,000 4,453,720 6.29
Rev Ref Ser J Holt Hauling Proj .................. 8.500 11-01-23 BBB 2,500 2,914,475 7.29
New Jersey Educational Facilities Auth,
Rev Fairleigh Dickinson Univ Ser G ** ............ 5.700 07-01-28 BBB- 500 498,530 5.72
New Jersey Health Care Facilities
Financing Auth, Rev Care Institute
Inc Cherry Hill Proj ............................. 8.000 07-01-27 BB+ 1,370 1,509,672 7.26
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 ............................ 10.375 01-01-03 AAA 1,360 1,557,622 9.06
-------------
12,447,916
-------------
New Mexico (0.29%)
Farmington, City of,
Poll Control Rev 1997 Ser A Tucson
Elec Pwr Co San Juan Proj ........................ 6.950 10-01-20 B 2,000 2,254,820 6.16
-------------
New York (13.29%)
Dutchess County Resource Recovery
Agency, Rev Solid Waste Sys Ser A ** ............. 5.350 01-01-12 AAA 1,235 1,256,242 5.26
Islip Community Development Agency,
Community Dev Rev Ref NY Institute
of Technology Proj ............................... 7.500 03-01-26 BB- 2,500 2,785,650 6.73
Long Island Power Auth,
Elec Sys Gen Rev Ser A ........................... 5.500 12-01-29 A- 2,250 2,311,762 5.35
New York City Industrial Development
Agency, Solid Waste Disposal Rev
1995 Visy Paper NY Inc Proj ...................... 7.950 01-01-28 BB 2,000 2,336,960 6.80
New York City Municipal Water Finance
Auth, Wtr & Swr Sys Rev Ref Cap
Apprec Fiscal 1998 Ser D ......................... Zero 06-15-19 A- 5,000 1,762,200 5.08
New York Local Government Assistance
Corp, Rev Ref Cap Apprec Ser 1993 C .............. Zero 04-01-14 AAA 7,210 3,411,556 4.86
Ser 1992 A Pub Benefit Corp. ..................... 6.875 04-01-19 A+ 10,700 11,975,226 6.14
New York State Dormitory Auth,
City Univ Sys Consol Rev 2nd
Generation Ser 1993A ............................. 5.750 07-01-09 BBB+ 1,000 1,100,770 5.22
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
New York (continued)
New York State Dormitory Auth, (continued)
Cornell Univ Rev Ser 1990A ....................... 7.375% 07-01-30 AA $1,000 $1,079,190 6.83%
Memorial Sloan-Kettering Cancer
Ctr Rev .......................................... Zero 07-01-18 AAA 3,000 1,139,670 4.94
State Univ Ed Facil Rev Iss Ser
1990B ............................................ 7.500 05-15-11 A- 500 618,705 6.06
State Univ Ed Facil Rev Ser 1990B ................ 7.000 05-15-16 A- 5,000 5,324,450 6.57
State Univ Ed Facil Rev Ser 1993A ................ 5.500 05-15-19 A- 1,000 1,072,010 5.13
New York State Energy Research and
Development Auth, Elec Facil Rev
Ser 1990 A Long Island Lighting Co
Proj ............................................. 7.150 06-01-20 A- 5,250 5,762,873 6.51
Elec Facil Rev Ser 1991 A Consol
Edison Co of NY Inc Proj ......................... 7.500 01-01-26 A+ 2,000 2,103,740 7.13
New York State Environmental
Facilities Corp, State Wtr Poll
Control Rev Rites Ser PA-174 ..................... 9.439# 06-15-11 AAA 2,000 2,890,000 6.53
State Wtr Poll Control Revolving
Fund Rev Ser 1990A ............................... 7.500 06-15-12 AA- 4,370 4,729,389 6.93
New York State Housing Finance Agency,
State Univ Construction Ref 1986
Ser A ............................................ 8.000 05-01-11 AAA 2,000 2,607,300 6.14
New York State Medical Care Facilities
Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990
Ser B Preref ..................................... 7.875 08-15-08 AAA 345 378,641 7.18
Mental Hlth Serv Facil Imp Rev 1990
Ser B Preref ..................................... 7.875 08-15-20 AAA 371 407,176 7.18
Mental Hlth Serv Facil Imp Rev 1990
Ser B Unref Bal .................................. 7.875 08-15-08 A- 155 169,100 7.22
Mental Hlth Serv Facil Imp Rev 1990
Ser B Unref Bal .................................. 7.875 08-15-20 A- 84 91,767 7.21
Mental Hlth Serv Facil Imp Rev 1991
Ser A Preref ..................................... 7.750 08-15-11 AAA 1,795 1,993,760 6.98
Mental Hlth Serv Facil Imp Rev 1991
Ser A Unref Bal .................................. 7.750 08-15-11 A- 205 225,863 7.03
New York, City of,
GO Cap Apprec Ref Fiscal 1998 Ser G .............. Zero 08-01-08 A- 6,000 3,763,140 4.76
GO Fiscal 1991 Ser D Preref ...................... 8.000 08-01-04 A- 165 186,466 7.08
GO Fiscal 1991 Ser D Unref Bal ................... 8.000 08-01-04 A- 30 33,619 7.14
GO Fiscal 1991 Ser F Preref ...................... 8.200 11-15-03 AAA 1,050 1,204,129 7.15
GO Fiscal 1991 Ser F Unref Bal ................... 8.200 11-15-03 A- 200 227,272 7.22
GO Fiscal 1992 Ser A Preref ...................... 7.750 08-15-12 A- 1,895 2,131,193 6.89
GO Fiscal 1992 Ser A Unref Bal ................... 7.750 08-15-12 A- 105 117,084 6.95
GO Fiscal 1992 Ser D Preref ...................... 7.700 02-01-09 A- 920 1,045,092 6.78
GO Fiscal 1992 Ser D Unref Bal ................... 7.700 02-01-09 A- 80 89,972 6.85
GO Fiscal 1992 Ser H Preref ...................... 7.000 02-01-08 A- 1,760 1,959,602 6.29
GO Fiscal 1992 Ser H Unref Bal ................... 7.000 02-01-08 A- 240 264,617 6.35
GO Fiscal 1995 Ser B Preref ...................... 7.000 08-15-16 A- 3,000 3,501,570 6.00
GO Fiscal 1996 Ser J ............................. 5.500 02-15-26 A- 2,000 2,060,880 5.34
GO Rev Ref Ad Valorem Property Tax
Ser D ............................................ 5.750 08-15-13 A- 3,170 3,331,765 5.47
New York City Indl Dev Agy,
Indl Dev Rev Ref-Laguardia Assoc
LP Proj ** ....................................... 6.000 11-01-28 BB+ 2,500 2,495,950 6.01
Port Auth of New York and New Jersey,
Spec Proj KIAC Partners Proj Ser 4 ............... 6.750 10-01-19 BBB 11,000 12,173,480 6.10
Triborough Bridge & Tunnel Auth,
Spec Oblig Ref Ser 1991B ......................... 6.875 01-01-15 A- 2,300 2,490,118 6.35
Gen Purpose Rev Ser 1993 ......................... Zero 01-01-22 AAA 20,755 6,628,524 4.95
Gen Purpose Rev Ser R ............................ 7.375 01-01-16 AAA 1,600 1,700,608 6.94
Gen Purpose Rev Ser X ............................ 6.500 01-01-19 A+ 1,250 1,360,500 5.97
-------------
104,299,581
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
North Carolina (1.65%)
North Carolina Municipal Power
Agency Number 1,
Catawba Elec Rev Ser 1992 ........................ 5.750% 01-01-15 AAA $7,410 $7,696,619 5.54%
Catawba Elec Rev Ser 1993 ........................ 5.000 01-01-15 AAA 5,220 5,242,133 4.98
-------------
12,938,752
-------------
Ohio (4.65%)
Akron, City of,
Cert of Part Akron Municipal
Baseball Stadium Proj ............................ Zero 12-01-16 BBB 1,000 939,570 5.64
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser 1994A ................... 7.000 11-15-16 AAA 5,860 6,817,231 6.02
Elec Sys Rev 1st Mtg Ser A ....................... 7.000 11-15-24 AAA 4,200 4,949,196 5.94
Dayton, City of,
Spec Facil Rev Ref Ser A Emery
Air Freight ...................................... 5.625 02-01-18 BBB 5,500 5,647,565 5.48
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B
Riverside United Methodist Hosp
Proj ............................................. 7.600 05-15-20 AAA 1,000 1,082,860 7.02
Lorain, County of,
Health Care Fac Rev Ref Ser A
Kendal At Oberlin Proj ........................... 5.250 02-01-21 BBB 2,000 1,952,280 5.38
Rev 1st Mtg Ser A Kendal At Oberlin
Proj ............................................. 8.625 02-01-22 AA 3,865 4,496,541 7.41
Ohio State Air Quality Development
Auth, Rev Adj Ser B Columbus & South
Proj ............................................. 6.250 12-01-20 BAA1 4,500 4,749,165 5.92
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1995
Cleveland Elec Co Proj ........................... 7.700 08-01-25 BB+ 2,800 3,218,460 6.70
Ohio, State of,
Solid Waste Rev Ref CSC Ltd Proj ................. 8.500 08-01-22 BB 1,825 1,950,086 7.95
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio
Student Loan ..................................... 8.875 08-01-08 BBB- 695 731,946 8.43
-------------
36,534,900
-------------
Oklahoma (0.27%)
Tulsa Municipal Airport Trust,
Trustees of, Rev Ser 1988 American
Airlines Inc. .................................... 7.375 12-01-20 BBB- 2,000 2,152,800 6.85
-------------
Oregon (0.47%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration
Proj ............................................. 7.125 01-01-21 BBB- 3,400 3,704,266 6.54
-------------
Pennsylvania (8.08%)
Allegheny County Hospital Development
Auth, Rev Hlth & Ed Rehab Institute of
Pittsburgh ....................................... 7.000 06-01-22 AA 1,500 1,684,350 6.23
Allegheny County Industrial Development
Auth, Environment Imps Rev Ref USX
Corp ............................................. 5.600 09-01-30 BBB- 1,000 1,016,200 5.51
Rev Ref Ser 1994A Environmental Imp
USX Corp Proj .................................... 6.700 12-01-20 BBB- 10,000 11,042,900 6.07
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 2,550,812 6.68
Delaware County Auth,
1st Mtg Rev Riddle Village Proj .................. 7.000 06-01-26 BBB- 1,250 1,318,500 6.64
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Pennsylvania (continued)
Delaware County Industrial Development
Auth, Poll Control Rev Ref 1991 Ser
A Philadelphia Elec Co Proj ...................... 7.375% 04-01-21 BBB+ $5,095 $5,511,720 6.82%
Lehigh County General Purpose Auth,
Rev KidsPeace Oblig Group ........................ 6.000 11-01-18 BB 2,000 2,011,640 5.97
Northumberland County Auth,
Commonwealth Lease Rev Ser 1991 .................. 6.250 10-15-09 AAA 1,000 1,072,660 5.83
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A ................................ 6.700 09-01-14 BBB 4,950 5,551,128 5.97
Pennsylvania Economic Development
Finance Auth, Resource Recovery Rev
Ser 1994 D Colver Proj ........................... 7.150 12-01-18 BBB- 1,500 1,683,690 6.37
Resource Recovery Rev Ser 1994D
Colver Proj ...................................... 7.125 12-01-15 BBB- 7,000 7,835,940 6.36
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N ............................... 6.500 12-01-13 A 2,840 3,094,066 5.97
Philadelphia Hospitals and Higher
Education Facilities Auth, Hosp Rev
1991 Ser A Philadelphia Protestant
Home Proj ........................................ 8.625 07-01-21 BBB 2,700 3,085,668 7.55
Hosp Rev 1992 Ser A Childrens
Seashore House Proj .............................. 7.000 08-15-12 A- 1,250 1,376,313 6.36
Hosp Rev Ser 1993A Temple Univ Hosp
Proj ............................................. 6.625 11-15-23 A- 2,375 2,565,997 6.13
Philadelphia Industrial Development
Auth, Commercial Devel Rev Ref Ser
A Doubletree Proj ................................ 6.500 10-01-27 BB+ 1,000 1,085,980 5.99
Commercial Devel Rev Ser 1995
Philadelphia Airport Hotel Proj ................ 7.750 12-01-17 B+ 3,250 3,677,310 6.85
Philadelphia, City of,
Wtr & Swr Rev 16th Ser ........................... 7.500 08-01-10 AAA 3,000 3,359,130 6.70
Scranton-Lackawanna Health and Welfare
Auth, Rev Ser A Allied Services
Rehabilitation Hosp Proj ......................... 7.600 07-15-20 BBB- 3,525 3,945,039 6.79
-------------
63,469,043
-------------
Puerto Rico (6.86%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995
Gtd by the Commonwealth of Puerto
Rico ........................................... 8.120# 07-01-11 AAA 6,500 8,417,500 6.35
Ref Pars & Inflos Ser 1995
Gtd by the Commonwealth of Puerto
Rico ............................................ 6.000 07-01-11 AAA 200 229,614 5.23
Puerto Rico Highway and Transportation
Auth, Highway Rev Ser Y Res Int
Tax-Exempt Sec Rec'ts Ser PA-114 (r) ............. 7.852# 07-01-11 AAA 13,130 17,157,496 6.36
Puerto Rico, Commonwealth of,
GO Cap Apprec Ref Pub Imp Ser 1998 ............... Zero 07-01-14 A 4,000 1,855,720 4.91
GO Pub Imp Inverse Floater Ser 1992A ............. 7.884# 07-01-08 AAA 2,700 3,071,250 6.76
GO Pub Imp Inverse Rate Securities
Ser 1996 ......................................... 8.073# 07-01-11 AAA 14,000 18,130,000 6.35
Puerto Rico Infrastructure Financing
Auth, Spec Tax Rev Ref Ser 1998A ................. 5.500 07-01-08 AAA 4,495 4,961,491 4.98
-------------
53,823,071
-------------
South Carolina (1.50%)
Florence, County of,
Ind'l Dev Rev Stone Container Proj ............... 7.375 02-01-07 BB- 4,330 4,672,590 6.83
James Island Public Service District,
Charleston County Swr Sys Ref .................... 7.500 06-01-18 AAA 1,250 1,311,563 7.15
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
South Carolina (continued)
Richland, County of,
Poll Control Rev Union Camp Corp
Proj Ser 1992 B .................................. 6.625% 05-01-22 A- $2,460 $2,671,240 6.10%
Poll Control Rev Union Camp Corp
Proj Ser 1992 C .................................. 6.550 11-01-20 A- 1,000 1,095,240 5.98
South Carolina Jobs-Economic
Development Auth, Solid Waste
Recycling Rev Santee River Rubber
Proj Ser A ....................................... 8.000 12-01-14 BB- 2,000 1,996,000 8.02
-------------
11,746,633
-------------
South Dakota (0.24%)
South Dakota Health and Educational
Facilities Auth, Rev Ser 1989 Sioux
Valley Hosp Iss Preref ........................... 7.625 11-01-13 AA- 1,850 1,899,377 7.43
-------------
Tennessee (2.95%)
Eastside Utility District of Hamilton,
Waterworks Rev Iss ............................... 6.750 11-01-11 A 1,000 1,107,460 6.10
Hardeman, County of, Correctional
Facil Rev Ser B Corrections Corp of
America .......................................... 7.375 08-01-17 BB 500 554,095 6.65
Humphreys County Industrial
Development Board, Solid Waste
Disposal Rev E.I. Dupont Denemours
and Co Proj ...................................... 6.700 05-01-24 AA- 6,500 7,236,125 6.02
Maury County Industrial Development
Board, Multi-Modal Interchangeable
Rate Poll Control Ref Rev Saturn
Corp Proj ........................................ 6.500 09-01-24 A 9,000 9,882,810 5.92
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp. .................... 6.750 09-01-12 BBB 4,000 4,380,720 6.16
-------------
23,161,210
-------------
Texas (5.29%)
Austin, City of,
Combined Util Sys Rev Ref Ser 1998 ............... 6.750 11-15-10 AAA 3,125 3,789,406 5.57
Utility Sys Rev Ref Ser B ........................ 7.800 11-15-12 A 1,000 1,027,550 7.59
Corpus Christi Housing Finance Corp,
Single Family Mtg Sr Rev Ref Ser
1991 A ........................................... 7.700 07-01-11 AAA 465 511,956 6.99
Dallas-Fort Worth International Airport
Facility Improvement, Rev American
Airlines Inc. .................................... 7.250 11-01-30 BBB- 10,250 11,388,365 6.53
Rev Delta Air Lines Inc. ......................... 7.600 11-01-11 BBB- 3,000 3,313,140 6.88
Ector County Hospital District,
Hosp Rev 1992 .................................... 7.300 04-15-12 AAA 4,000 4,525,760 6.45
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds 1991
Ser A ............................................ 8.750 10-01-11 A2 435 483,785 7.87
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj ............ 7.750 03-01-12 B1 1,410 1,513,959 7.22
Harris County Health Facilities
Development Corp, Hosp Rev Ser 1988A
Saint Luke's Episcopal Hosp Proj ................. 8.250 02-15-08 AAA 2,475 2,633,994 7.75
Houston Independent School District,
Pub Facil Corp Lease Rev Cap Apprec
Ser A Cesar E Chavez ............................. Zero 09-15-16 AAA 1,000 409,580 5.01
Houston, City of, Spec Facil Rev Ser
C Continental Airline Inc. ........................ 6.125 07-15-27 BB 4,000 4,213,520 5.81
Wtr & Swr Sys Rev Ref Prior Lien
Ser B Preref ..................................... 6.750 12-01-08 A 180 199,321 6.10
Wtr & Swr Sys Rev Ref Prior Lien
Ser B Unref Bal .................................. 6.750 12-01-08 A 1,320 1,449,730 6.15
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Texas (continued)
North Central Texas Health Facilities
Development, Hospital Rev Baylor
Univ Medical Center Ser 1991A .................... 9.979%# 05-15-16 AA $1,000 $1,190,000 8.21%
Port of Corpus Christi, Ind'l
Development Corp Rev Ref Ser A
Valero Energy Corp. .............................. 5.450 04-01-27 BBB- 2,000 2,012,880 5.42
San Antonio, County of,
GO Ref Gen Imp Ser 1996 .......................... 6.000 08-01-08 AA 1,000 1,136,900 5.28
Texas, State of,
Veterans' Land Board GO .......................... 7.125 12-01-09 AA 1,000 1,059,000 6.73
Veterans' Land Board GO Preref ................... 8.250 12-01-10 AAA 610 645,093 7.80
-------------
41,503,939
-------------
Utah (1.00%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A East
Carbon Development Corp. ......................... 9.000 07-01-12 BBB- 1,000 1,091,630 8.24
Intermountain Power Agency Utah Pwr
Supply Rev, Ref-Ser A ** ......................... 5.000 07-01-19 AAA 3,500 3,398,465 5.15
Salt Lake City Hospital,
Ref IHC Hosp Inc VRDN/RIBS ....................... 9.678# 05-15-20 AAA 1,500 1,770,000 7.85
Rev Ref Ser A .................................... 8.125 05-15-15 AAA 1,000 1,308,170 6.21
Utah Housing Finance Agency,
Single Family Mtg Sr 1990 Iss B-2 ................ 7.700 07-01-15 AAA 140 145,338 7.42
Single Family Mtg Sr 1991 Iss B-1 ................ 7.500 07-01-16 AAA 140 147,402 7.12
-------------
7,861,005
-------------
Virgin Islands (0.33%)
Virgin Islands Public Finance Auth,
Rev Sub Lien Fund Ln Notes Ser 1998E ............. 5.875 10-01-18 BB+ 2,500 2,588,525 5.67
-------------
Virginia (1.33%)
Arlington County Industrial
Development Auth, Hosp Facil Rev
Arlington Hosp Ser 1991 A ........................ 7.125 09-01-21 AAA 500 555,880 6.41
Fairfax County Industrial Develpment
Auth, Rev RITES .................................. 9.663# 08-29-23 AA- 1,000 1,200,000 8.96
Fredericksburg Industrial Auth,
Hosp Facil Rev ................................... 9.519# 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 3,880,345 6.81
Pocahontas Parkway Assn,
Toll Road Rev Cap Apprec 1st Tier
Sub Ser C ........................................ Zero 08-15-24 BA1 4,800 997,728 6.08
Toll Road Rev Cap Apprec 1st Tier
Sub Ser C ........................................ Zero 08-15-25 BA1 5,000 977,750 6.08
Toll Road Rev Cap Apprec 1st Tier
Sub Ser C ........................................ Zero 08-15-26 BA1 5,500 1,011,780 6.08
-------------
10,408,483
-------------
Washington (1.42%)
Seattle, City of,
Municipal Light & Pwr Rev 1994 ................... 6.625 07-01-16 AA 3,600 4,136,112 5.77
Spokane County Industrial
Development Corp, Solid Waste
Disp Rev Kaiser Alum & Chem Corp Proj ............ 7.600 03-01-27 BB- 1,250 1,419,675 6.69
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond 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>
Washington (continued)
Tacoma Electric System,
Rev VRDN/RIBS Iss of 1991 ........................ 9.013%# 01-02-15 AAA $1,000 $1,155,000 7.66%
Washington Public Power Supply
System, Nuclear Proj No. 1 Ref
Rev Ser 1989A Unref Bal .......................... 7.500 07-01-15 AA- 455 478,746 7.13
Nuclear Proj No. 1 Ref Rev Ser
1989B ............................................ 7.125 07-01-16 AA- 1,500 1,881,315 5.68
Washington, State of,
GO Ser A of 1990 ................................. 6.750 02-01-15 AA+ 1,000 1,226,050 5.51
Washington, University of,
Hsg & Dining Rev Preref .......................... 7.000 12-01-21 AAA 595 663,955 6.27
Hsg & Dining Rev Preref .......................... 7.000 12-01-21 AAA 35 39,056 6.27
Hsg & Dining Rev Unref Bal ....................... 7.000 12-01-21 AAA 120 132,349 6.35
-------------
11,132,258
-------------
Wisconsin (0.69%)
Sturgeon Bay Combined Utilities,
Door County Combined Util Mtg Rev
Ser 1990 Preref .................................. 7.500 01-01-10 AAA 770 830,199 6.96
Door County Combined Util Mtg
Rev Ser 1990 Unref Bal ........................... 7.500 01-01-10 AAA 230 247,193 6.98
Wisconsin Public Power,
Pwr Supply Sys Rev Ser 1990A ..................... 7.400 07-01-20 AAA 4,000 4,337,040 6.82
-------------
5,414,432
-------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $684,096,285) (98.79%) 775,511,961
--------- -------------
OTHER ASSETS AND LIABILITIES, NET (1.21%) 9,478,452
--------- -------------
TOTAL NET ASSETS (100.00%) $784,990,413
========= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
NOTES TO THE SCHEDULE OF INVESTMENTS
(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 MARKET
PERCENTAGE VALUE
ACQUISITION ACQUISITION OF FUND'S AS OF AUGUST 31,
ISSUER, DESCRIPTION DATE COST NET ASSETS 1998
- ------------------- ----------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Puerto Rico Highway and Transportation Auth,
Highway Rev Ser Y Res Int Tax-Exempt Sec
Rec'ts Ser PA-114 7.961%, 07-01-11..................... 04-02-96 $14,925,160 2.19% $17,157,496
</TABLE>
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investors Service, Fitch or John Hancock Advisers,
Inc. where Standard & Poor's ratings are not available.
** These securities having an aggregate value of $7,649,187 or 0.97% of the
Fund's net assets, 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
$525,411 of County of Madera, 6.50%, 03-15-15 and $7,566,038 of
Commonwealth of Puerto Rico, 8.073%, 07-01-11 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, 1998.
The percentage 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 (Unaudited)
- --------------------------------------------------------------------------------
The Tax-Free Bond Fund invests primarily in securities issued by the various
states and their various political subdivisions. The performance of the Fund is
closely tied to economic conditions within the applicable states and the
financial condition of the states and their agencies and municipalities. The
concentration of investments by states and credit ratings for individual
securities held by the Fund are shown in the schedule of investments. In
addition, the concentration of investments can be aggregated by various sector
categories.
The table below shows the percentages of the Fund's investments at August 31,
1998 assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- -----------------
General Obligation.......................................... 8.09%
Revenue Bonds - Airport..................................... 0.75
Revenue Bonds - Authority................................... 0.46
Revenue Bonds - Bridge & Toll Road.......................... 0.89
Revenue Bonds - Building.................................... 0.16
Revenue Bonds - Combined.................................... 0.22
Revenue Bonds - Education................................... 2.68
Revenue Bonds - Electric.................................... 15.33
Revenue Bonds - Environment................................. 0.50
Revenue Bonds - Facility.................................... 0.39
Revenue Bonds - Financial................................... 0.17
Revenue Bonds - General Purpose............................. 0.26
Revenue Bonds - Health...................................... 14.45
Revenue Bonds - Highway..................................... 0.38
Revenue Bonds - Hospital.................................... 0.62
Revenue Bonds - Housing..................................... 3.09
Revenue Bonds - Industrial.................................. 7.37
Revenue Bonds - Lease....................................... 0.12
Revenue Bonds - Other....................................... 6.02
Revenue Bonds - Pollution Control Facilities................ 12.86
Revenue Bonds - School...................................... 0.70
Revenue Bonds - Special Tax................................. 0.63
Revenue Bonds - Transportation.............................. 19.14
Revenue Bonds - Water & Sewer............................... 3.51
---------
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.79%
=========
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,
Inc., may participate in a joint repurchase agreement. Aggregate cash balances
are invested in one or more repurchase agreements, whose underlying securities
are obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $12,768,595 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 -- $7,117,054 and August 31, 2003 -- $5,651,541.
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 the 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 unsecured
lines of credit with banks which permit borrowings up to $1 billion,
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
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the line of credit, is allocated among the participating funds. At
August 31, 1998, 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
Fund's gains and/or losses can be affected as a result of futures contracts.
At August 31, 1998, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
DEC 98 175 U.S. TREASURY BONDS LONG $151,758
=========
At August 31, 1998, the Fund has deposited $1,200,000 par value of County
of Clark, 6.50%, 12-01-33 in a segregated account to cover margin requirements
on open financial futures contracts.
OPTIONS The Fund may buy options contracts. 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
27
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Tax-Free Bond Fund
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 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 year-end
Statement of Assets and Liabilities.
There were no written option transactions for the year ended August 31,
1998.
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, 1998, 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 $147,165. 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,
1998, net sales charges received with regard to sales of Class A shares amounted
to $645,689. Out of this amount, $79,967 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $181,204 was
paid as sales commissions to unrelated broker-dealers and $384,518 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, 1998
the contingent deferred sales charges received by JH Funds amounted to $287,462.
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
28
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Tax-Free Bond Fund
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock 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 an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At August 31, 1998 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, 1998, aggregated $205,305,328 and $268,831,328, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1998.
The cost of investments owned at August 31, 1998 for federal income tax
purposes was $684,101,479. Gross unrealized appreciation and depreciation of
investments aggregated $91,563,794 and $153,312 respectively, resulting in net
unrealized appreciation of $91,410,482.
NOTE D -
REORGANIZATION
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, 1998, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments and
financial futures contracts of $7,535,869, an increase in undistributed net
investment income of $1,322,844 and an increase in capital paid-in of
$6,213,025. This represents the amount necessary to report these balances on a
tax basis, excluding certain temporary differences, as of August 31, 1998.
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.
29
<PAGE>
================================================================================
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, 1998, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers, and other
auditing procedures where 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 the John Hancock Tax-Free Bond Trust at
August 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 9, 1998
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,
1998.
None of the 1998 income dividends qualify for the corporate dividends
received deduction. Shareholders, who are not subject to the alternative minimum
tax, received income dividends which are 97.42% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 17.88%
The Fund designated distributions to shareholders of $917,656 as long-term
capital gain dividends of which the entire amount is a 20% rate gain
distribution.
For specific information on exemption provisions in your state, consult
your local state tax office or your tax adviser.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV
in January 1999. This will reflect the total of all distributions which are
taxable for calendar year 1998.
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John Hancock Funds - Tax-Free Bond Fund
31
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