---------------------------
The latest report from your
Fund's management team
---------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
High Yield
Tax-Free Fund
AUGUST 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-------------------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
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
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
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 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:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
- --------------------------------------------------------------------------------
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to third paragraph.]
- --------------------------------------------------------------------------------
These modifications and replacements for all mission-critical systems are done
and successfully compliance tested. The rest of 1999 will be spent completing
the few remaining non mission-critical systems, testing with our business
partners and continuing to participate in industry testing. We have also
established additional contingency plans beyond our regular ones to prepare for
any challenges that the Year 2000 might present. In the end, John Hancock will
spend approximately $90-$95 million to ensure we make a successful transition to
the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Frank A. Lucibella, CFA, Barry H. Evans, CFA, and
Dianne Sales, CFA, Portfolio Managers
John Hancock
High Yield Tax-Free Fund
Municipals decline, troubled by inflation worries
-------------------------------------------------
Municipal bonds posted weak returns over the last 12 months, as investors became
increasingly concerned that the strength of the U.S. economy would eventually
translate into inflationary pressures and higher interest rates. At the
beginning of the period last fall, the environment looked rather rosy. Many
observers forecasted at the time that protracted economic problems overseas -
namely in Asia and Latin America - would nip inflationary pressures in the bud.
Because the Federal Reserve Board was worried that the problems in
recession-wracked Asia and parts of Latin America would spill over into the
U.S., it cut short-term interest rates on three separate occasions last fall as
stimulative measures.
At the end of 1998 and early 1999, however, the Fed's stance and investor
sentiment began to shift. Rather than slowing as originally anticipated, the
U.S. economy continued to grow at a healthy pace, while much of Asia and Latin
America started to show signs of life.
In response, the Fed signaled that it was no longer inclined to lower interest
rates. In the months that followed, there was more and more evidence that
inflationary pressures were building. Oil prices pushed against an important
barrier of $20 per barrel, while key supplies for economic growth, such as
copper and lumber, moved higher. Labor markets were extremely tight and the
housing markets were on fire during the spring. It's important to note, however,
that investors reacted to their fears of inflation, more than to the reality of
it. To pull the reins in
- --------------------------------------------------------------------------------
[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock High Yield
Tax-Free Fund. Caption below reads "Fund management team members (l-r): "Barry
Evans, Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
- --------------------------------------------------------------------------------
"Municipal bonds posted weak returns over the last 12 months..."
3
<PAGE>
================================================================================
John Hancock Funds - High Yield Tax-Free Fund
"...health-care bonds were among the biggest disappointments..."
- --------------------------------------------------------------------------------
[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into eleven sections (from top to left): Other 22%, Authority
2%, Industrial Development 2%, Water & Sewer 2%, Education 3%, General
Obligation 4%, Housing 7%, Industrial Revenue 9%, Transportation 15%, Health 17%
and Pollution Control 17%. A note below the chart reads "As a percentage of net
assets on August 31, 1999."]
- --------------------------------------------------------------------------------
on potential inflation, the Fed raised interest rates in June and again in
August.
Against this deteriorating interest-rate environment, municipals fared
better than their taxable counterparts, although they still could not manage to
break even over the last year. Early on, municipals underperformed U.S.
Treasuries due to investors' general distaste for all bonds except "safe haven"
Treasuries. Further impeding municipals' progress was an overabundance of supply
stemming from issuers' appetite for issuing new, and refinancing old, debt at
low interest rates. The tide turned more favorable in 1999, in large part
because municipals were priced so attractively relative to Treasuries and
attracted buyers as a result. Furthermore, municipal supply fell by about 25%
compared to 1998, providing them with additional price support. As a group,
high-yield bonds performed better than lower-yielding bonds during the period.
- --------------------------------------------------------------------------------
[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 Marion
County, WV followed by a down arrow with the phrase "Weak paper prices spark
difficulty." The second listing is Premium-coupon bonds followed by an up arrow
with the phrase "Income helps cushion against price declines." The third listing
is Health-care bonds followed by a down arrow with the phrase "Federal
reimbursement cutbacks." A note below the table reads "See `Schedule of
Investments.' Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
Performance review
For the 12 months ended August 31, 1999, John Hancock High Yield Tax-Free Fund's
Class A and Class B shares posted total returns of -0.98% and -1.69%,
respectively, at asset value. By comparison, the average high-yield municipal
bond fund returned -0.49%, according to Lipper, Inc.1 Class C shares, which were
introduced on April 1, 1999, returned -2.70% from inception through August 31,
1999. Keep in mind that your net asset value return will be different from the
Fund's performance if you were not invested in the Fund for the entire period
and did not reinvest all distributions. Please see pages six and seven for
longer-term performance information.
The reason for the Fund's slight lag stemmed from the poor performance
of bonds issued by Marion County, West Virginia, for the purposes of helping to
fund a paper pulp mill. Because the price of pulp and paper has been very weak
during the past couple of years, this project came under severe pressure. With
no sign that paper prices would rebound enough to make this project profitable
over the near term, we sold the bonds back to the issuer, but for less money
than we paid for them.
Managing interest-rate sensitivity
One major positive for performance was our active management of duration, which
measures a bond's sensitivity to interest-rate changes. The longer the duration,
the more a bond's price rises when rates fall and falls when rates rise. From
September through December of 1998, we maintained a somewhat longer-than-average
duration posture, which provided gains as interest rates fell. Based on our view
that interest rates were potentially headed higher, we shortened our duration
beginning about six months ago.
4
<PAGE>
================================================================================
John Hancock Funds - High Yield Tax-Free Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended August 31, 1999." The chart is
scaled in increments of .5% with -3.0% at the bottom and 0% at the top. The
first bar represents the -0.98% total return for John Hancock High Yield
Tax-Free Fund Class A. The second bar represents the -1.69% total return for
John Hancock High Yield Tax-Free Fund Class B. The third bar represents the
- -2.70%* total return for John Hancock High Yield Tax-Free Fund Class C. The
fourth bar represents the -0.49% total return for 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, Inc.1 See the
following two pages for historical performance information. * From inception
April 1, 1999 through August 31, 1999."]
- --------------------------------------------------------------------------------
We maintained that more defensive posture through the end of the period, keeping
the Fund's duration slightly shorter than the average fund's. Having a shorter
duration as interest rates rose was a definite plus for performance.
Leaders and laggards
Although nearly all of our securities came under pressure because of the
unfavorable interest-rate backdrop, some held in better than others. Bonds that
received a credit upgrade - such as those issued by Farmington County, New
Mexico - were among the market's best performers. Premium-coupon bonds - those
that offer investors a relatively high rate of stated interest - generally fared
better than lower-coupon bonds. Their high levels of income helped cushion them
against price declines caused by rising interest rates. On the flip side,
health-care bonds were among the biggest disappointments during the year due to
last year's bankruptcy of a large Philadelphia-based hospital system and
cutbacks in Medicare and Medicaid reimbursements which put pressure on hospitals
and other facilities.
Outlook
Our outlook calls for continued expansion of the U.S. economy over the next six
months, although at a slower rate of growth. In our view, a moderate slowdown
should keep inflation in check and interest rates locked into a rather tight
range. From a technical market standpoint, we think municipals are poised to
gain further ground on their Treasury counterparts. Municipals still offer
attractive values relative to Treasuries, which should eventually foster
stronger demand. Better demand, coupled with the drop-off in supply we've
experienced in 1999, should provide firmer footing for the municipal market.
We'll continue to stay focused on bonds with good call protection, so that if
rates reverse course and begin to fall again we'll be insulated from having to
surrender high yielding bonds. We'll also continue to focus on more liquid,
well-known names because we believe that they will be poised to better withstand
any further market difficulty. As always, we'll be on the lookout for
opportunities to improve the Fund's diversification, yield and credit quality.
- --------------------------------------------------------------------------------
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 Fund's prospectus for a discussion of the risks of investing in
high-yield bonds.
1Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"Municipals still offer attractive values..."
5
<PAGE>
================================================================================
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). Class C
performance includes a contingent deferred sales charge (1% declining to 0%
after one year).
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, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/93)
------- ------- --------
Cumulative Total Returns (3.16%) 29.52% 26.07%
Average Annual Total Returns(1) (3.16%) 5.31% 4.31%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1999
ONE FIVE TEN
YEAR YEARS YEARS
------- ------- --------
Cumulative Total Returns (4.14%) 28.79% 82.62%
Average Annual Total Returns(1) (4.14%) 5.19% 6.21%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended June 30, 1999
SINCE
INCEPTION
(4/1/99)
--------
Cumulative Total Return (2.56%)
Average Annual Total Return(1) (2.56%)(2)
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1999
SEC 30-DAY
YIELD
--------
John Hancock High Yield Tax-Free Fund: Class A 4.99%
John Hancock High Yield Tax-Free Fund: Class B 4.47%
John Hancock High Yield Tax-Free Fund: Class C 4.47%
Notes to Performance
(1) The custodian fee was offset with balance credits during the year
ended August 31, 1999. Without the balance credits, the average annual
total return for the one-year period for Class A and Class B shares
would have been (3.18%) and (4.16%), respectively. The effect to the
average annual total return for the since inception period for Class C
shares would have been less than 0.01%.
(2) Not annualized.
6
<PAGE>
================================================================================
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 John Hancock 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 Lehman
Brothers Municipal Bond Index and is equal to $13,344 as of August 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock High Yield Tax-Free Fund on December 31, 1993, before sales
charge, and is equal to $13,064 as of August 31, 1999. The third line represents
the value of the same hypothetical investment made in the John Hancock High
Yield Tax-Free Fund, after sales charge, and is equal to $12,481 as of August
31, 1999.
Line chart with the heading John Hancock 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 Lehman
Brothers Municipal Bond Index and is equal to $20,307 as of August 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock High Yield Tax-Free Fund on August 31, 1989, before sales
charge, and is equal to $18,007 as of August 31, 1999.
Line chart with the heading John Hancock High Yield Tax-Free Fund Class C,
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 Lehman
Brothers Municipal Bond Index and is equal to $9,780 as of August 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock High Yield Tax-Free Fund on April 1, 1999, before sales charge,
and is equal to $9,730 as of August 31, 1999. The third line represents the
value of the same hypothetical investment made in the John Hancock High Yield
Tax-Free Fund, after sales charge, and is equal to $9,633 as of August 31, 1999.
* 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, 1999. 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, 1999
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $151,042,723).............. $158,219,182
Cash .......................................................... 2,056,511
Receivable for investments sold ............................... 435,094
Receivable for shares sold .................................... 206,651
Interest receivable ........................................... 2,596,207
Other assets .................................................. 93,107
-------------
Total Assets ......................... 163,606,752
----------------------------------------------------
Liabilities:
Payable for shares repurchased ................................ 114,387
Payable for investments purchased ............................. 1,329,297
Payable for futures variation margin - Note A ................. 34,900
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 141,224
Accounts payable and accrued expenses ......................... 43,245
-------------
Total Liabilities .................... 1,663,053
----------------------------------------------------
Net Assets:
Capital paid-in ............................................... 168,350,925
Accumulated net realized loss on investments and
financial futures contracts .................................. (13,576,777)
Net unrealized appreciation of investments .................... 7,176,459
Distributions in excess of net investment income .............. (6,908)
-------------
Net Assets ........................... $161,943,699
====================================================
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 - $48,860,731/5,408,953 ............................... $9.03
=============================================================================
Class B - $112,853,504/12,493,045 ............................. $9.03
=============================================================================
Class C* - $229,464/25,402 .................................... $9.03
=============================================================================
Maximum Offering Price Per Share**
Class A - ($9.03 x 104.71%) ................................... $9.46
=============================================================================
* Class C shares commenced operations on April 1, 1999.
** 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, 1999
- --------------------------------------------------------------------------------
Investment Income:
Interest ...................................................... $11,441,668
-------------
Expenses:
Investment management fee - Note B ............................ 1,002,500
Distribution and service fee - Note B
Class A ..................................................... 114,759
Class B ..................................................... 1,231,434
Class C ..................................................... 703
Transfer agent fee - Note B ................................... 135,761
Custodian fee ................................................. 46,514
Auditing fee .................................................. 37,349
Registration and filing fees .................................. 29,782
Accounting and legal services fee - Note B .................... 26,787
Trustees' fees ................................................ 11,214
Printing ...................................................... 7,851
Miscellaneous ................................................. 6,452
Legal fees .................................................... 2,843
-------------
Total Expenses ....................... 2,653,949
----------------------------------------------------
Less Expense Reductions -
Note B ............................... (36,667)
----------------------------------------------------
Net Expenses ......................... 2,617,282
----------------------------------------------------
Net Investment Income ................ 8,824,386
----------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold ......................... (1,848,181)
Net realized loss on financial futures contracts .............. (393,139)
Change in net unrealized appreciation/depreciation
of investments ............................................... (9,050,854)
-------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts .......... (11,292,174)
----------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ............ ($2,467,788)
====================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1998 1999
------------------- --------------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ........................................................ $8,691,204 $8,824,386
Net realized loss on investments sold and financial futures contracts ........ (554,208) (2,241,320)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts ................................................. 6,172,597 (9,050,854)
---------------- ----------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............ 14,309,593 (2,467,788)
---------------- ----------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5394 and $0.5346 per share, respectively) ..................... (2,047,191) (2,592,579)
Class B - ($0.4683 and $0.4663 per share, respectively) ..................... (6,610,696) (6,228,402)
Class C** - (none and $0.1838 per share, respectively) ...................... - (3,404)
---------------- ----------------
Total Distributions to Shareholders ......................................... (8,657,887) (8,824,385)
---------------- ----------------
From Fund Share Transactions - Net : * ........................................ (5,014,174) 1,013,866
---------------- ----------------
Net Assets:
Beginning of period .......................................................... 171,584,474 172,222,006
---------------- ----------------
End of period (including distributions in excess of net investment income
of $9,567 and $6,908, respectively) ......................................... $172,222,006 $161,943,699
================ ================
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:
- --------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 31, 1993 NOVEMBER 1,
(COMMENCEMENT OF YEAR ENDED 1995 TO YEAR ENDED AUGUST 31,
OPERATIONS) TO OCTOBER 31, AUGUST 31, ---------------------------
OCTOBER 31, 1994 1995(2) 1996(6) 1997 1998 1999
---------------- ------------ ------------ -------- -------- -------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period.................... $9.85 $8.82 $9.47 $9.16 $9.34 $9.65
------- ------- -------- ------- ------- -------
Net Investment Income .................................. 0.48(1) 0.57 0.49(1) 0.56(1) 0.54(1) 0.53(1)
Net Realized and Unrealized Gain (Loss) on Investments
Sold and Financial Futures Contracts .................. (0.94) 0.70 (0.30) 0.18 0.31 (0.62)
------- ------- -------- ------- ------- -------
Total from Investment Operations ..................... (0.46) 1.27 0.19 0.74 0.85 (0.09)
------- ------- -------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .................. (0.48) (0.58) (0.50) (0.56) (0.54) (0.53)
Distributions in Excess of Net Investment Income ...... (0.09) (0.04) - - - -
------- ------- -------- ------- ------- -------
Total Distributions .................................. (0.57) (0.62) (0.50) (0.56) (0.54) (0.53)
------- ------- -------- ------- ------- -------
Net Asset Value, End of Period ......................... $8.82 $9.47 $9.16 $9.34 $9.65 $9.03
======= ======= ======== ======= ======= =======
Total Investment Return at Net Asset Value (3) ......... 4.96%(4) 14.85% 1.96%(4) 8.29% 9.34% (0.98%)
Total Adjusted Investment Return at Net Asset Value (3,9) - - - - - (1.00%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............... $15,401 $14,225 $23,663 $32,199 $40,725 $48,869
Ratio of Expenses to Average Net Assets ................ 1.15%(5) 1.06% 1.10%(5) 1.06% 1.00%(7) 1.00%(7)
Ratio of Net Investment Income to Average Net Assets ... 6.08%(5) 6.36% 6.39%(5) 6.00% 5.66% 5.65%(8)
Portfolio Turnover Rate ................................ 62% 64% 38% 51% 35% 39%
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.
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
YEAR ENDED
OCTOBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
------------------- NOVEMBER 1, 1995 TO ---------------------------
1994 1995(2) AUGUST 31, 1996(6) 1997 1998 1999
-------- --------- ------------------- ------- -------- -------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $9.98 $8.82 $9.47 $9.16 $9.34 $9.65
-------- -------- -------- -------- -------- --------
Net Investment Income .................................... 0.48 0.51 0.44(1) 0.49(1) 0.47(1) 0.47(1)
Net Realized and Unrealized Gain (Loss) on Investments
Sold and Financial Futures Contracts .................... (0.90) 0.69 (0.31) 0.18 0.31 (0.62)
-------- -------- -------- -------- -------- --------
Total from Investment Operations ....................... (0.42) 1.20 0.13 0.67 0.78 (0.15)
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .................... (0.48) (0.51) (0.44) (0.49) (0.47) (0.47)
Distributions in Excess of Net Investment Income ........ (0.07) (0.04) - - - -
Distributions from Net Realized Gain on Investments Sold (0.19) - - - - -
-------- -------- -------- -------- -------- --------
Total Distributions .................................... (0.74) (0.55) (0.44) (0.49) (0.47) (0.47)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........................... $8.82 $9.47 $9.16 $9.34 $9.65 $9.03
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ........... (4.44%) 13.99% 1.36%(4) 7.51% 8.53% (1.69%)
Total Adjusted Investment Return at Net Asset Value (3,9) - - - - - (1.71%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $151,069 $155,234 $147,669 $139,385 $131,497 $112,873
Ratio of Expenses to Average Net Assets .................. 1.85% 1.79% 1.81%(5) 1.81% 1.75%(7) 1.73%(7)
Ratio of Net Investment Income to Average Net Assets ..... 5.36% 5.61% 5.65%(5) 5.28% 4.92% 4.93%(8)
Portfolio Turnover Rate .................................. 62% 64% 38% 51% 35% 39%
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM
APRIL 1, 1999
(COMMENCEMENT OF
OPERATIONS) TO
AUGUST 31, 1999
---------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period......................... $9.47
--------
Net Investment Income (1) ................................... 0.18
Net Realized and Unrealized Loss on Investments
Sold and Financial Futures Contracts ....................... (0.44)
--------
Total from Investment Operations .......................... (0.26)
--------
Less Distributions:
Dividends from Net Investment Income ....................... (0.18)
--------
Net Asset Value, End of Period .............................. $9.03
========
Total Investment Return at Net Asset Value (3) .............. (2.70%)(4)
Total Adjusted Investment Return at Net Asset Value (3,9) ... (2.71%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................... $229
Ratio of Expenses to Average Net Assets ..................... 1.76%(5,7)
Ratio of Net Investment Income to Average Net Assets ........ 4.84%(5,8)
Portfolio Turnover Rate ..................................... 39%
(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 years ended August 31,
1998 and 1999 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 for the year ended August 31, 1998 and the ratio of expenses to average
net assets would have been 0.98%, 1.71% and 1.74% for Class A, Class B and Class
C shares, respectively, for the year ended August 31, 1999.
(8) The ratio of net investment includes the effect of balance credits described
in Note B. If the expense reductions were excluded, the effect to the ratio of
net investment income to average net assets would have been less than 0.01% for
Class A and Class B shares for the year ended August 31, 1998 and the ratio of
net investment income to average net assets would have been 5.63%, 4.91% and
4.82% for Class A, Class B and Class C shares, respectively, for the year ended
August 31, 1999.
(9) An estimated return that does not take into consideration fee reductions by
the Adviser during the periods shown.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
Schedule of Investments
August 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by High
Yield Tax-Free Fund on August 31, 1999. 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.
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
TAX-EXEMPT LONG-TERM BONDS
Alaska (0.58%)
Anchorage, City of,
Ice Rink Rev ............................................ 6.375% 01-01-20 BB+ $1,000 $940,350 6.78%
----------
Arizona (0.58%)
Peoria Arizona Industrial Development Auth,
Rev Ref-Sierra Winds Life-Ser A ......................... 6.250 08-15-20 BB+ 1,000 945,380 6.61
----------
California (18.10%)
ABAG Finance Authority for Nonprofit Corps.,
Cert of Part Nat'l Center for Int'l Schools Proj ........ 7.375 05-01-18 BB+ 1,000 1,047,380 7.04
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Sr Lien Cap Apprec Ser A .................... Zero 01-01-18 BBB- 7,950 2,847,213 5.68
Toll Rd Rev Ref Conv Cap Apprec ......................... Zero 01-15-23 BBB- 3,000 1,608,330 6.14
Toll Road Rev Ref Conf Cap Apprec ....................... Zero 01-15-29 BBB- 2,000 1,055,000 6.20
Los Angeles Community Facilities District,
Spec Tax No 3 Cascades Business Park Proj ............... 6.400 09-01-22 BB+ 1,000 1,011,400 6.33
Millbrae, City of,
Residential Facil Rev Ser 1997A Magnolia of Millbrae Proj 7.375 09-01-27 BB 1,000 1,032,310 7.14
Sacramento City Financing Auth,
Rev Convention Ctr Hotel Ser 1999A ...................... 6.250 01-01-30 BB+ 1,500 1,440,480 6.51
San Bernardino, County of,
Cert of Part Ref Medical Ctr Fin Proj ................... 5.500 08-01-17 A- 4,500 4,414,410 5.61
San Diego County Water Auth,
Water Rev Cert of Part Reg RITES ........................ 7.484# 04-23-08 AAA 1,000 1,120,000 6.68
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj .................... 8.500 12-01-26 BB 2,000 2,222,580 7.65
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Conv Cap Apprec Ser A ....................... Zero 01-15-19 BBB- 3,000 1,859,160 6.11
Toll Rd Rev Sr Lien ..................................... 5.000 01-01-33 BBB- 1,000 866,740 5.77
San Jose Unified School District,
GO Cap Apprec Ser 1997A ................................. Zero 08-01-21 AAA 2,830 806,069 5.81
South Orange County Public Financing Auth,
Spec Tax Rev Levrrs Inflows ............................. 8.320# 08-15-17 AAA 7,500 7,978,125 7.82
----------
29,309,197
----------
Colorado (2.33%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 ........................... 6.950 08-31-20 AAA 2,500 2,864,950 6.06
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Colorado (continued)
Black Hawk, City of,
Device Tax Rev .......................................... 5.625% 12-01-21 BB+ $1,000 $913,570 6.16%
----------
3,778,520
----------
Connecticut (1.48%)
Connecticut State Development Auth,
Aquarium Proj Rev Ser A Mystic MarineLife Aquarium Proj . 7.000 12-01-27 BB+ 1,000 1,026,240 6.82
Mashantucket (Western) Pequot Tribe,
Spec Rev Sub Ser A ....................................... 5.500 09-01-28 BBB- 1,500 1,374,495 6.00
----------
2,400,735
----------
District of Columbia (1.87%)
District of Columbia,
Cert of Part Ser 1993 .................................... 7.300 01-01-13 BBB- 1,000 1,056,890 6.91
GO 1996 Ser A ........................................... 6.375 06-01-16 AAA 1,780 1,972,240 5.75
----------
3,029,130
----------
Florida (5.93%)
Grand Haven Community Development District,
Spec Assessment Ser B .................................... 6.900 05-01-19 BB+ 750 758,063 6.83
Hillsborough County Aviation Auth,
Rev Special Purpose Facility Imp US Air Proj ............. 8.600 01-15-22 B+ 2,000 2,156,460 7.98
Homestead, City of,
Ind'l Development Rev Ser A Community Rehab Proj ......... 7.950 11-01-18 BB 3,470 3,666,645 7.52
Orlando, City of,
Spec Assessment Rev Conroy Rd Interchange Proj
Ser 1998A ............................................... 5.800 05-01-26 BB+ 1,000 925,420 6.27
South Indian River Water Control District,
Rev Egret Landing Proj Section 15 Phase 1 ................ 7.500 11-01-18 BB+ 2,000 2,108,740 7.11
----------
9,615,328
----------
Idaho (0.61%)
Power County Industrial Development Corp.,
Solid Waste Disposal Rev FMC Corp Proj ................... 6.450 08-01-32 BBB- 1,000 998,030 6.46
----------
Illinois (7.53%)
Bedford Park, City of,
Tax Increment Rev Ref 71st & Cicero Proj ................. 7.000 01-01-06 BBB- 650 678,269 6.71
Tax Increment Rev Ref 71st & Cicero Proj ................. 7.375 01-01-12 BBB- 1,000 1,050,830 7.02
Tax Increment Rev Sr Lien Mark IV Proj ................... 9.750 03-01-12 AAA 960 1,087,296 8.61
Chicago, City of,
Chicago-O'Hare Int'l Airport Spec Facil Rev Ref
American Airlines, Inc. ................................. 8.200 12-01-24 BBB- 1,500 1,700,835 7.23
Illinois Health Facilities Auth,
Rev Ser A Fairview Obligated Group Proj .................. 9.500 10-01-22 BB 2,500 2,894,450 8.21
Rev Ser B Fairview Obligated Group Proj .................. 9.000 10-01-22 BB 1,500 1,719,075 7.85
Metropolitan Pier & Exposition Auth,
Rev Ref McCormick Pl Expn Proj-Ser A** ................... 5.250 12-15-28 AAA 1,000 918,910 5.71
Round Lake Beach, City of,
Tax Increment Rev Ref .................................... 7.500 12-01-13 BBB- 2,000 2,146,600 6.99
----------
12,196,265
----------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Indiana (1.34%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj......... 7.500% 06-01-26 BB $2,000 $2,172,700 6.90%
----------
Iowa (0.57%)
Iowa Finance Auth,
Health Care Facil Rev Ref Care Initiatives Proj Ser B ... 5.750 07-01-18 BB 715 663,742 6.19
Hlth Care Facil Rev Ref Care Initiatives Proj ........... 9.250 07-01-25 BB 200 252,912 7.31
----------
916,654
----------
Kansas (1.92%)
Kansas Development Finance Auth,
Multifamily Hsg Rev Ref Ser Y ........................... 6.125 12-01-28 BBB- 1,000 941,750 6.50
Prairie Village, City of,
Rev Ser A Claridge Court Proj ........................... 8.750 08-15-23 BBB- 2,000 2,165,700 8.08
----------
3,107,450
----------
Kentucky (3.22%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Inc Ser 1985 .............. 7.800 12-01-15 BBB- 2,500 2,566,850 7.60
Rev Spec Facil Delta Airlines Proj Ser B ................ 7.250 02-01-22 BBB- 2,500 2,646,400 6.85
----------
5,213,250
----------
Louisiana (0.58%)
Louisiana Public Facilities Auth,
Progressive Hlthcare Rev ................................ 6.375 10-01-20 BB- 1,000 931,570 6.84
----------
Maryland (1.39%)
Baltimore, County of,
Poll Control Rev Ref Bethlehem Steel Corp Proj .......... 7.500 06-01-15 B+ 1,000 1,062,770 7.06
Maryland Economic Development Corp.,
Student Rev Collegiate Hsg Courtyard Proj Ser 1999A ..... 5.750 06-01-24 Baa3 1,250 1,187,475 6.05
----------
2,250,245
----------
Massachusetts (3.91%)
Massachusetts Development Finance Agency,
Rev Lasell Village Proj Ser 1998A ....................... 6.375 12-01-25 BBB- 1,000 927,050 6.88
Massachusetts Industrial Finance Agency,
Rev Ser A Southeastern Mass Proj ........................ 9.000 07-01-15 BB 2,800 3,041,584 8.29
Massachusetts Port Auth,
Spec Proj Rev Harborside Hyatt Hotel .................... 10.000 03-01-26 BBB- 2,200 2,359,896 9.32
----------
6,328,530
----------
Michigan (2.87%)
Waterford, Township of,
Economic Dev Corp Rev Ref Canterbury Hlth ............... 6.000 01-01-39 BB- 3,620 3,488,775 6.23
Wayne Charter, County of,
Spec Airport Facil Rev Ref Ser 1995
Northwest Airlines, Inc. ............................... 6.750 12-01-15 BB+ 1,120 1,157,352 6.53
----------
4,646,127
----------
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Minnesota (0.59%)
Minneapolis, City of,
Rev Ref Walker Methodist Sr Servs Ser 1998A ............. 6.000% 11-15-28 BB+ $1,000 $950,220 6.31%
----------
Mississippi (0.81%)
Mississippi Business Finance Corp.,
Mississippi Poll Control Rev Ref
Sys Energy Resources Inc Proj .......................... 5.900 05-01-22 BBB- 1,400 1,311,954 6.30
----------
Missouri (0.65%)
Lees Summit Industrial Development Auth,
Hlth Facil Rev Ref & Imp John Knox Vlg Proj ............. 7.125 08-15-12 A- 1,000 1,045,030 6.82
----------
New Hampshire (2.06%)
New Hampshire Business Finance Auth,
Poll Control Rev Ref Ser D Pub Serv Co .................. 6.000 05-01-21 BBB- 1,000 941,100 6.38
New Hampshire Higher Educational and
Health Facilities Auth, Rev Littleton Hosp Assn-Ser A ... 5.900 05-01-18 BB- 1,500 1,395,690 6.34
Rev New Hampshire College ............................... 6.375 01-01-27 BBB- 1,000 1,000,240 6.37
----------
3,337,030
----------
New Jersey (5.73%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj ......... 9.875 01-01-21 BB- 1,500 1,777,080 8.34
New Jersey Economic Development Auth,
Rev Ref Ind'l Development Newark Airport
Marriott Hotel Proj .................................... 7.000 10-01-14 BBB- 2,500 2,659,250 6.58
Rev Ref Ser J Holt Hauling Proj ......................... 8.500 11-01-23 BBB 2,500 2,774,225 7.66
New Jersey Health Care Facilities Financing Auth,
Rev Care Institute Inc Cherry Hill Proj ................. 8.000 07-01-27 BB+ 2,000 2,068,360 7.74
----------
9,278,915
----------
New Mexico (0.94%)
Farmington, County of,
Poll Control Rev Ref Ser A Pub Serv Co of New Mexico
San Juan Proj .......................................... 6.400 08-15-23 BBB- 1,500 1,516,920 6.33
----------
New York (4.17%)
Glen Cove Housing Auth,
Rev Sr Living Facil The Mayfair Proj .................... 8.250 10-01-26 BB+ 1,425 1,561,885 7.53
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of Technology Proj ... 7.500 03-01-26 BB- 2,000 2,138,060 7.02
New York City Industrial Development Agency,
Rev Ref LaGuardia Assoc LP Proj ......................... 6.000 11-01-28 BB+ 1,000 952,530 6.30
New York, City of,
GO Fiscal 1994 Ser B1 Preref ............................ 7.300 08-15-11 A- 950 1,074,117 6.46
GO Fiscal 1997 Ser J .................................... 6.000 08-01-17 A- 1,000 1,021,670 5.87
----------
6,748,262
----------
Ohio (5.40%)
Bedford, County of,
Rev Ref Community Hosp Bedford Inc. ..................... 8.500 05-15-09 AA 1,200 1,246,260 8.18
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Ohio (continued)
Cleveland, City of,
Parking Facil Imp Rev ................................... 8.000% 09-15-12 AAA $1,000 $1,119,640 7.15%
Parking Facil Imp Rev ................................... 8.100 09-15-22 AAA 2,000 2,244,800 7.22
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj ................ 8.625 02-01-22 AA 3,300 3,672,636 7.75
Ohio, State of,
Environmental Imp Rev Ref USX Corp Proj ................. 5.625 05-01-29 BBB- 500 453,650 6.20
----------
8,736,986
----------
Oklahoma (1.33%)
Tulsa Municipal Airport Trust, Trustees of,
Rev American Airlines, Inc. ............................. 7.350 12-01-11 BBB- 2,000 2,155,700 6.82
----------
Oregon (2.53%)
Oregon, State of,
Economic Development Rev Ref Ser 183
Georgia-Pacific Corp Proj .............................. 5.700 12-01-25 Baa2 1,000 952,880 5.98
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj .................. 7.125 01-01-21 BBB- 3,000 3,149,610 6.79
----------
4,102,490
----------
Pennsylvania (8.46%)
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 2,772,875 6.99
Poll Control Rev Ref Cleveland Elec Proj ................ 7.625 05-01-25 BB+ 1,600 1,755,360 6.95
Chester County Industrial Development Auth,
Rev 1st Mtg Rha/Pa Nursing Home ......................... 10.125 05-01-19 B- 193 159,596 12.24
Lehigh County General Purpose Auth,
Rev Ref KidsPeace Oblig Group ........................... 6.000 11-01-18 BB 1,000 949,740 6.32
Montgomery County Redevelopment Auth,
Multifamily Hsg Rev Ser A KBF Assoc L.P. Proj ........... 6.500 07-01-25 BBB+ 2,500 2,553,100 6.36
Pennsylvania Economic Development Finance Auth,
Ser B Qualified Residential
RSI Properties/Greensburg LLC Proj ..................... 8.000 09-01-27 BB 1,000 950,560 8.42
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj ... 8.625 07-01-21 BBB 2,300 2,514,958 7.89
Philadelphia Industrial Development Auth,
Commercial Devel Rev Ref Ser A Doubletree Proj .......... 6.500 10-01-27 BB+ 2,000 2,040,760 6.37
----------
13,696,949
----------
Rhode Island (1.40%)
Providence Redevelopment Agency,
Cert of Part Ser 1994A .................................. 8.000 09-01-24 BBB- 2,135 2,274,415 7.51
----------
South Carolina (0.99%)
Piedmont Municipal Power Agency,
Elec Rev Ref Ser 1986A .................................. 5.750 01-01-24 BBB- 1,730 1,597,447 6.23
----------
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - High Yield Tax-Free Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
Utah (2.99%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A East Carbon
Development Corp ...................................... 9.000% 07-01-12 BBB- $2,000 $2,112,240 8.52%
Solid Waste Disp Rev Ref Sunnyside Cogeneration Proj ... 9.250 07-01-18 B 1,900 1,140,000 15.42
Tooele, County of,
Poll Control Rev Ref Ser A Laidlaw Environmental Proj .. 7.550 07-01-27 BBB- 1,500 1,595,445 7.10
----------
4,847,685
----------
Virgin Islands (0.62%)
Virgin Islands Public Finance Auth,
Rev Sub Lien Fd Ln Notes Ser E ......................... 6.000 10-01-22 BB+ 1,000 1,000,340 6.00
----------
Virginia (2.82%)
Hopewell Industrial Development Auth,
Resource Recovery Rev Ref Stone Container Corp Proj .... 8.250 06-01-16 BB 2,400 2,582,016 7.67
Pocahontas Parkway Association,
Toll Rd Rev Cap Apprec-1st Tier-Sub-Ser C .............. Zero 08-15-20 Ba1 4,000 1,013,480 6.66
Toll Rd Rev Cap Apprec-1st Tier-Sub-Ser C .............. Zero 08-15-21 Ba1 4,100 972,930 6.66
----------
4,568,426
----------
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 1,326,962 7.16
----------
West Virginia (0.58%)
South Charleston, City of,
Poll Control Rev Ref Union Carbide Corp Proj ........... 5.100 01-01-12 BBB 1,000 943,990 5.40
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $151,042,723) (97.70%) 158,219,182
------- -----------
OTHER ASSETS AND LIABILITIES, NET (2.30%) 3,724,517
------- -----------
TOTAL NET ASSETS (100.00%) $161,943,699
======== ============
* 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.
** This security having an aggregate value of $918,910 or 0.57% of the Fund's
net asset value, has been purchased on a when-issued basis. The purchase price
and the interest rate of such security is fixed at trade date, although the Fund
does not earn any interest on such security until settlement date. The Fund has
instructed its Custodian Bank to segregate assets with a current value at least
equal to the amount of its when-issued commitments. Accordingly, the market
value of $1,063,750 of South Orange County Public Financing Authority, 8.32%,
08-15-17, has been segregated to cover the when-issued 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, 1999.
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.
19
<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,
1999, assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ---------------
General Obligation ....................................... 3.86%
Revenue Bonds - Authority ................................ 2.49
Revenue Bonds - Economic Development ..................... 1.18
Revenue Bonds - Education ................................ 3.32
Revenue Bonds - Electric ................................. 0.99
Revenue Bonds - Facility ................................. 1.40
Revenue Bonds - General Purpose .......................... 0.59
Revenue Bonds - Health ................................... 16.89
Revenue Bonds - Highway .................................. 1.23
Revenue Bonds - Housing .................................. 6.82
Revenue Bonds - Improvement .............................. 0.28
Revenue Bonds - Industrial Development ................... 1.79
Revenue Bonds - Industrial Revenue ....................... 8.60
Revenue Bonds - Lease .................................... 0.65
Revenue Bonds - Multi-Family ............................. 0.58
Revenue Bonds - Other .................................... 11.33
Revenue Bonds - Pollution Control Facilities ............. 16.93
Revenue Bonds - Recreation Facility ...................... 0.58
Revenue Bonds - Special Assessment ....................... 1.04
Revenue Bonds - Tax & Revenue Anticipation ............... 0.56
Revenue Bonds - Transportation ........................... 14.60
Revenue Bonds - Water & Sewer ............................ 1.99
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS 97.70%
==========
SEE NOTES TO FINANCIAL STATEMENTS.
20
<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 Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A, Class B and Class C shares. The Fund issued
Class C shares for the first time on April 1, 1999. 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $9,410,341 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 - $2,239,021, August 31, 2003 - $205,838, August 31, 2004 -
$3,207,633, August 31, 2005 - $716,668 and August 31, 2006 - $3,041,181.
Additionally, net capital losses of $2,898,289 attributable to security
transactions incurred after October 31, 1998 are treated as arising on the first
day (September 1, 1999) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or
21
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - High Yield Tax-Free Fund
to next call date, if applicable. The Fund accretes original issue discount from
par value on securities purchased from either the date of issue or the date of
purchase over the life of the security, as required by the Internal Revenue
Code. The Fund records market discount on bonds purchased after April 30, 1993
at time of disposition.
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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreement previously in effect was terminated. This agreement enables
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each Fund, based on its borrowing. In
addition, a commitment fee, 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, 1999.
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, 1999, there were no open positions in financial futures
contracts.
OPTIONS The Fund may buy or sell options contracts. Listed options will be
valued at the last quoted sales price on the exchange on which they are
primarily traded. Over-the-counter options are valued at the mean between the
last bid and asked prices. 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.
22
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - High Yield Tax-Free Fund
The Fund may use option 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 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 Funds 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 Funds are 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 options contracts, the Funds 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, 1999, 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 $36,667
of custodian fees have been reduced by balance credits applied during the year
ended August 31, 1999. If the Fund had not entered into this agreement the
assets not invested, on which these balance credits were earned, could have
produced taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the year ended
August 31, 1999, net sales charges received with regard to sales of Class A
shares amounted to $270,239. Out of this amount, $23,778 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$226,143 was paid as sales commissions to unrelated broker-dealers and $20,318
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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 5.00% 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, 1999,
contingent deferred sales charges paid to JH Funds amounted to $256,863.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% 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 C shares. There were
no contingent deferred sales charges received by JH Funds for the year ended
August 31, 1999.
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, Class B and Class C 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
23
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - High Yield Tax-Free Fund
expenses, at an annual rate not to exceed 0.25% of Class A average daily net
assets and 1.00% of Class B and Class C 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.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal 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., Mr. Stephen L. Brown, Ms. Anne C. Hodsdon
and Mr. Richard S. Scipione are trustees 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. The investment had no
impact on the operations of the Fund.
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, 1999, aggregated $66,683,781 and $72,503,451,
respectively. There were no purchases or sales of obligations of the U.S.
government and its agencies during the fiscal year ended August 31, 1999.
The cost of investments owned at August 31, 1999 for federal income tax
purposes was $151,042,723. Gross unrealized appreciation and depreciation of
investments aggregated $9,927,702 and $2,751,243, respectively, resulting in net
unrealized appreciation of $7,176,459.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1999, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $594, a
decrease in distributions in excess of net investment income of $2,658 and a
decrease in capital paid-in of $3,252. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of August 31, 1999. 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.
24
<PAGE>
================================================================================
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, 1999, 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, 1999, 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, 1999, 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 8, 1999
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,
1999.
None of the 1999 income dividends qualify for the corporate dividends
received deduction. Shareholders who are not subject to the alternative minimum
tax received income dividends which are 99.94% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 15.14%.
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 1999 U.S. Treasury Department Form 1099-DIV
in January 2000. This will reflect the total of all distributions which are
taxable for calendar year 1999.
25
<PAGE>
=====================================NOTES======================================
John Hancock Funds - High Yield Tax-Free Fund
26
<PAGE>
=====================================NOTES======================================
John Hancock Funds - High Yield Tax-Free Fund
27
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS --------------------
A Global Investment Management Firm Bulk Rate
U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713)(TDD) Randolph, MA
INTERNET: www.jhfunds.com Permit No. 75
--------------------
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
High Yield Tax-Free Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[LOGO] Printed on Recycled Paper 5900A 8/99
10/99
<PAGE>
---------------------------
The latest report from your
Fund's management team
---------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Tax-Free
BondFund
AUGUST 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-------------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
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
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
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 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:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
- --------------------------------------------------------------------------------
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to third paragraph.]
- --------------------------------------------------------------------------------
These modifications and replacements for all mission-critical systems are done
and successfully compliance tested. The rest of 1999 will be spent completing
the few remaining non mission-critical systems, testing with our business
partners and continuing to participate in industry testing. We have also
established additional contingency plans beyond our regular ones to prepare for
any challenges that the Year 2000 might present. In the end, John Hancock will
spend approximately $90-$95 million to ensure we make a successful transition to
the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Dianne Sales, CFA, Barry H. Evans, CFA, and
Frank A. Lucibella, CFA, Portfolio Managers
John Hancock
Tax-Free Bond Fund
Municipal bonds come under pressure as interest rates rise
----------------------------------------------------------
Growing inflationary fears and rising interest rates muted municipal bond
returns over the last 12 months. While significant price rises have yet to
appear, the fear of inflation has engineered a turnaround in interest rates
since last August. Although the period began amid a favorable interest-rate
environment, late 1998 signaled a change in both investor sentiment and the bond
market's direction. The three interest-rate cuts by the Federal Reserve last
fall appeared to have worked as intended: U.S. economic growth rebounded, while
much of Asia and Latin America started to show signs of life. But then,
better-than-expected global economic growth, combined with occasional spikes in
commodity prices and a tight labor market, fanned fears that inflation was on
the rise. Nervous investors pushed bond yields higher and bond prices lower in
response. To help choke off inflation and calm the bond markets, the Fed
reversed course by raising short-term interest rates in June and again in
August.
Relative to their taxable counterparts, municipals fared reasonably
well, although they were unable to produce positive results over the last year.
Early on, municipals lagged U.S. Treasuries, suffering from a flood of supply as
issuers refinanced old or issued new debt at low interest rates. So far in 1999,
however, municipals have significantly outpaced Treasuries as supply dropped
between 20% and 25%.
Fund performance
For the 12 months ended August 31, 1999, John Hancock Tax-Free Bond Fund's Class
A and Class
- --------------------------------------------------------------------------------
[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Tax-Free
Bond Fund. Caption below reads "Fund management team members (l-r): "Barry
Evans, Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
- --------------------------------------------------------------------------------
"...the fear of inflation has engineered a turnaround in interest rates since
last August."
3
<PAGE>
================================================================================
John Hancock Funds - Tax-Free Bond Fund
"The Fund benefited from continued refunding activity over the year..."
- --------------------------------------------------------------------------------
[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into nine sections (from top to left): Housing 3%, Water &
Sewer 3%, General Obligation 7%, Industrial Development 8%, Pollution Control
13%, Health 15%, Other 17% and Transportation 20%. A note below the chart reads
"As a percentage of net assets on August 31, 1999."]
- --------------------------------------------------------------------------------
B shares returned -0.93% and -1.67%, respectively, at net asset value. By
comparison, the average general municipal bond fund returned -1.63%, according
to Lipper, Inc.1 Class C shares, which were introduced on April 1, 1999,
returned -2.86% from inception through August 31, 1999. Keep in mind that your
net asset value return will be different from the Fund's performance if you were
not invested in the Fund for the entire period and did not reinvest all
distributions. Please see pages six and seven for longer-term performance
information.
Performance review
The Fund benefited from continued refunding activity over the year, resulting in
significant credit upgrades and improved price performance. For example, our
holdings the Foothill/Eastern Transportation Corridor Agency were upgraded as a
result of a refinancing in 1999.
- --------------------------------------------------------------------------------
[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 High-coupon
bonds followed by an up arrow with the phrase "Prices fell less as rates rose."
The second listing is Foothill/Eastern Trans. Agency followed by an up arrow
with the phrase "Credit upgrade." The third listing is Hospital bonds followed
by a down arrow with the phrase "Government cutbacks hurt reimbursements." A
note below the
- --------------------------------------------------------------------------------
Bonds that offered high amounts of current income - and were somewhat
cushioned from price declines as rates rose - held up relatively well. In
contrast, many of the Fund's health-care holdings were disappointments. Recent
reductions in Medicare and Medicaid reimbursements, along with rising labor
costs, have reduced operation margins, casting a pall over the entire
health-care sector.
Managing interest-rate sensitivity
The Fund was also well served by opportune shifts in duration throughout the
year. Duration measures a bond's sensitivity to interest-rate changes. The
longer the duration, the more a bond's price rises when rates fall and falls
when rates rise. From September through December of 1998, we maintained a
somewhat longer duration posture, which provided gains as interest rates fell.
That slightly longer duration was a slight disadvantage when interest rates
suddenly increased in early 1999, although we moved to shorten duration late in
the first quarter. During most of the spring and summer, we maintained a more
defensive posture, keeping the Fund's duration slightly shorter than the average
fund based on our view that interest rates were headed higher.
Market shift presents opportunities
As interest rates rose, the municipal market presented us with attractive
opportunities to do some minor restructuring of the Fund's holdings. Rising bond
yields allowed us to swap some lower-yielding bonds for some comparably rated
higher-yielding securities with similar maturities at relatively cheap prices.
In addition, we continued to focus on adding call protection at a time
when investors were focused on other bond attributes. Call protection
4
<PAGE>
================================================================================
John Hancock Funds - Tax-Free Bond Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended August 31, 1999." The chart is
scaled in increments of .5% with -3.0% at the bottom and 1.0% at the top. The
first bar represents the -0.93% total return for John Hancock Tax-Free Bond Fund
Class A. The second bar represents the -1.67% total return for John Hancock
Tax-Free Bond Fund Class B. The third bar represents the -2.86%* total return
for John Hancock Tax-Free Bond Fund Class C. The fourth bar represents the
- -1.63% return for 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, Inc.1 See the following two pages for historical performance
information. * From inception April 1, 1999 through August 31, 1999."]
- --------------------------------------------------------------------------------
guards against a bond being redeemed by its issuer for a certain period of time.
Good call protection is especially important in periods when interest rates are
falling, because 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.
With rates on the rise during the past six months, however, investors
generally weren't as concerned about call protection and tended to favor
higher-yielding callable bonds. But since call-protected bonds insulate us from
"re-investment risk" if rates resume their decline, and they do no worse than
callable bonds when rates are on the rise, we jumped at the chance to add them
at relatively cheap prices. In addition, we believe that given relative
scarcity, there is typcially improved liquidity and demand for these structures.
Outlook
Looking ahead, the macro environment is somewhat murky. Although the Fed raised
interest rates to rein in the U.S. economy, the intended slowdown hasn't yet
materialized. Our view is that inflationary pressures have indeed increased, as
demonstrated by rising commodity prices and tight labor markets. Without
definitive signs of a slowdown, there is still a chance that the Fed could raise
interest rates again.
Beyond that, however, we're more optimistic. We feel it's reasonable to
assume that higher interest rates and Y2K fears will slow economic growth by
year end. However, slower U.S. growth may be offset by strong growth overseas.
So for now, we plan to keep the Fund's duration a bit shorter than average and
emphasize bonds with high coupons that provide a cushion against price declines
when rates are on the rise.
As for the municipal market, technical factors continue to be
favorable. Since 1998, the supply of municipals has dwindled. In addition,
municipal bonds offer attractive values relative to U.S. Treasuries. Issuance is
down, tax revenues are up and credits are generally improving. For investors
looking to capitalize on solid fundamental values, as well as maximizing
tax-free income, the municipal bond market will offer plenty of opportunity.
- --------------------------------------------------------------------------------
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.
1Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"As for the municipal market, technical factors continue to be favorable."
5
<PAGE>
================================================================================
John Hancock Funds - Tax-Free Bond 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 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). Class C
performance includes a contingent deferred sales charge (1% declining to 0%
after one year).
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, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/5/90)
------- ------- --------
Cumulative Total Returns (2.89%) 32.38% 92.69%
Average Annual Total Returns(1) (2.89%) 5.77% 7.16%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
------- ------- --------
Cumulative Total Returns (3.93%) 31.51% 56.72%
Average Annual Total Returns(1) (3.93%) 5.63% 6.17%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended June 30, 1999
SINCE
INCEPTION
(4/1/99)
--------
Cumulative Total Return (3.06%)
Average Annual Total Return(1) (3.06%)(2)
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1999
SEC 30-DAY
YIELD
--------
John Hancock Tax-Free Bond Fund: Class A 4.60%
John Hancock Tax-Free Bond Fund: Class B 4.06%
John Hancock Tax-Free Bond Fund: Class C 3.93%
Notes to Performance
(1) The Adviser voluntarily reduced a portion of the management fee, the
Distributor reduced the distribution and service fees and the custodian fee was
offset with balance credits during the periods shown. Without the reductions of
expenses and the offset, the average annual total return for the one-year,
five-year and since inception periods for Class A shares would have been
(2.99%), 5.60% and 6.84%, respectively. The average annual total returns for the
one-year, five-year and since inception periods for Class B shares would have
been (4.03%), 5.46% and 5.95%, respectively. The average annual total return for
the since inception period for Class C shares would have been (3.06%).
(2) Not annualized.
6
<PAGE>
================================================================================
John Hancock Funds - Tax-Free Bond Fund
- --------------------------------------------------------------------------------
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 John Hancock 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 John Hancock Tax-Free Bond
Fund on January 5, 1990, before sales charge, and is equal to $20,046 as of
August 31, 1999. The second line represents the Lehman Brothers Municipal Bond
Index and is equal to $19,616 as of August 31, 1999. The third line represents
the value of the same hypothetical investment made in the John Hancock Tax-Free
Bond Fund, after sales charge, and is equal to $19,147 as of August 31, 1999.
Line chart with the heading John Hancock 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 Lehman
Brothers Municipal Bond Index and is equal to $16,304 as of August 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock Tax-Free Bond Fund on December 31, 1991, before sales charge,
and is equal to $15,552 as of August 31, 1999.
Line chart with the heading John Hancock Tax-Free Bond Fund Class C,
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 Lehman
Brothers Municipal Bond Index and is equal to $9,780 as of August 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock Tax-Free Bond Fund on April 1, 1999, before sales charge, and
is equal to $9,714 as of August 31, 1999. The third line represents the value of
the same hypothetical investment made in the John Hancock Tax-Free Bond Fund,
after sales charge, and is equal to $9,617 as of August 31, 1999.
* 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, 1999. 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, 1999
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $651,966,870).............. $697,498,005
Cash .......................................................... 7,270,983
Receivable for investments sold ............................... 5,000
Receivable for shares sold .................................... 69,556
Interest receivable ........................................... 10,039,177
Other assets .................................................. 138,078
--------------
Total Assets ......................... 715,020,799
-----------------------------------------------------
Liabilities:
Payable for shares repurchased ................................ 134,639
Payable for investments purchased ............................. 5,127,080
Dividend payable .............................................. 70,425
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 540,195
Accounts payable and accrued expenses ......................... 86,371
--------------
Total Liabilities .................... 5,958,710
-----------------------------------------------------
Net Assets:
Capital paid-in ............................................... 682,439,289
Accumulated net realized loss on investments and
financial futures contracts .................................. (20,027,567)
Net unrealized appreciation of investments .................... 45,531,135
Undistributed net investment income ........................... 1,119,232
--------------
Net Assets ........................... $709,062,089
=====================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $564,877,471/54,514,254 ............................. $10.36
==============================================================================
Class B - $143,830,377/13,880,542 ............................. $10.36
==============================================================================
Class C* - $354,241/34,186 .................................... $10.36
==============================================================================
Maximum Offering Price Per Share**
Class A - ($10.36 x 104.71%) .................................. $10.85
==============================================================================
* Class C shares commenced operations on April 1, 1999.
** 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, 1999
- --------------------------------------------------------------------------------
Investment Income:
Interest ...................................................... $45,661,481
--------------
Expenses:
Investment management fee - Note B ........................... 4,058,587
Distribution and service fee - Note B
Class A ..................................................... 1,475,911
Class B ..................................................... 1,712,862
Class C ..................................................... 665
Transfer agent fee - Note B .................................. 792,552
Custodian fee ................................................ 163,161
Accounting and legal services fee - Note B ................... 118,257
Miscellaneous ................................................ 63,850
Trustees' fees ............................................... 49,790
Registration and filing fees ................................. 43,376
Auditing fee ................................................. 40,308
Printing ..................................................... 30,744
Interest expense - Note A .................................... 28,496
Legal fees ................................................... 6,968
Less: Distribution and service fee reduction - Note B
Class A ..................................................... (590,364)
Class B ..................................................... (171,286)
--------------
Total Expenses ....................... 7,823,877
-----------------------------------------------------
Less Expense Reductions -
Note B ............................... (59,116)
-----------------------------------------------------
Net Expenses ......................... 7,764,761
-----------------------------------------------------
Net Investment Income ................ 37,896,720
-----------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized gain on investments sold ......................... 2,385,456
Net realized loss on financial futures contracts .............. (1,535,475)
Change in net unrealized appreciation/depreciation
of investments ............................................... (45,888,965)
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................... (151,757)
-----------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts .......... (45,190,741)
-----------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ............ ($7,294,021)
=====================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------
1998 1999
------------------- --------------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ...................................................... $39,308,327 $37,896,720
Net realized gain on investments sold and financial futures contracts ...... 3,421,148 849,981
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts ............................... 24,618,507 (46,040,722)
--------------- ---------------
Net Increase (Decrease) in Net Assets Resulting from Operations ........... 67,347,982 (7,294,021)
--------------- ---------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5609 and $0.5574 per share, respectively) ................... (30,751,765) (30,376,771)
Class B - ($0.4794 and $0.4762 per share, respectively) ................... (8,591,825) (7,517,041)
Class C** - (none and $0.1924 per share, respectively) .................... - (2,908)
--------------- ---------------
Total Distributions to Shareholders ....................................... (39,343,590) (37,896,720)
--------------- ---------------
From Fund Share Transactions - Net:* ........................................ (37,820,203) (30,737,583)
--------------- ---------------
Net Assets:
Beginning of period ........................................................ 794,806,224 784,990,413
--------------- ---------------
End of period (including undistributed net investment income
of $1,118,337 and $1,119,232, respectively) ............................... $784,990,413 $709,062,089
=============== ===============
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
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1998 1999
-------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ---------------- ------------- ---------------
CLASS A
Shares sold ........................ 9,452,430 $102,833,221 29,957,288 $323,426,503
Shares reinvested .................. 2,056,575 22,345,666 2,025,165 21,893,127
------------ ---------------- ------------ ----------------
11,509,005 125,178,887 31,982,453 345,319,630
Less shares repurchased ............ (12,463,378) (135,519,593) (32,044,727) (345,890,290)
------------ ---------------- ------------ ----------------
Net decrease ....................... (954,373) ($10,340,706) (62,274) ($570,660)
============ ================ ============ ================
CLASS B
Shares sold ........................ 1,812,250 $19,737,401 2,216,028 $24,165,631
Shares reinvested .................. 419,825 4,561,374 393,735 4,252,442
------------ ---------------- ------------ ----------------
2,232,075 24,298,775 2,609,763 28,418,073
Less shares repurchased ............ (4,765,668) (51,778,272) (5,448,577) (58,948,184)
------------ ---------------- ------------ ----------------
Net decrease ....................... (2,533,593) ($27,479,497) (2,838,814) ($30,530,111)
============ ================ ============ ================
CLASS C**
Shares sold ........................ - - 34,495 $366,449
Shares reinvested .................. - - 170 1,789
------------ ---------------- ------------ ----------------
- - 34,665 368,238
Less shares repurchased ............ - - (479) (5,050)
------------ ---------------- ------------ ----------------
Net increase ....................... - - 34,186 $363,188
============ ================ ============ ================
** Class C shares commenced operations on April 1, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<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:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
---------------------- JANUARY 1, 1996 TO --------------------------
1994(1) 1995 AUGUST 31, 1996(8) 1997 1998 1999
-------- -------- ------------------ ------- ------ -------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period....................... $10.96 $9.39 $10.67 $10.27 $10.63 $11.01
-------- -------- -------- -------- -------- --------
Net Investment Income ..................................... 0.58 0.57(2) 0.40 0.59 0.56(2) 0.56(2)
Net Realized and Unrealized Gain (Loss) on Investments .... (1.58) 1.28 (0.41) 0.36 0.38 (0.65)
-------- -------- -------- -------- -------- --------
Total from Investment Operations ......................... (1.00) 1.85 (0.01) 0.95 0.94 (0.09)
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ...................... (0.57) (0.57) (0.39) (0.59) (0.56) (0.56)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ............................ $9.39 $10.67 $10.27 $10.63 $11.01 $10.36
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ............ (9.28%) 20.20% (0.01%)(4) 9.44% 9.08% (0.93%)
Total Adjusted Investment Return at Net Asset Value (3,5) . (9.39%) 20.08% (0.09%)(4) 9.38% 9.06% (1.04%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................$114,539 $118,797 $560,863 $590,185 $600,905 $564,877
Ratio of Expenses to Average Net Assets ................... 0.85% 0.85% 0.85%(7) 0.85% 0.85% 0.86%(11)
Ratio of Adjusted Expenses to Average Net Assets (6) ...... 0.96% 0.97% 0.98%(7) 0.91% 0.87% 0.96%
Ratio of Net Investment Income to Average Net Assets ...... 5.72% 5.67% 5.75%(7) 5.61% 5.16% 5.14%
Ratio of Adjusted Net Investment Income to
Average Net Assets (6) ................................... 5.61% 5.55%(7) 5.62% 5.55% 5.14% 5.03%
Portfolio Turnover Rate ................................... 107% 113% 116%(9) 46%(9) 24% 13%
Fee Reduction Per Share ................................... $0.01 $0.01(2) $0.01(2) $0.01 $0.01(2) 0.00(10)
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.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM YEAR ENDED AUGUST 31,
---------------------- JANUARY 1, 1996 TO --------------------------
1994(1) 1995 AUGUST 31, 1996(8) 1997 1998 1999
-------- -------- ------------------ ------- ------ -------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $10.96 $9.38 $10.67 $10.27 $10.63 $11.01
-------- -------- -------- -------- -------- --------
Net Investment Income .................................... 0.50 0.50(2) 0.34 0.51 0.48(2) 0.48(2)
Net Realized and Unrealized Gain (Loss) on Investments ... (1.58) 1.28 (0.40) 0.36 0.38 (0.65)
-------- -------- -------- -------- -------- --------
Total from Investment Operations ........................ (1.08) 1.78 (0.06) 0.87 0.86 (0.17)
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ..................... (0.50) (0.49) (0.34) (0.51) (0.48) (0.48)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........................... $9.38 $10.67 $10.27 $10.63 $11.01 $10.36
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ........... (10.05%) 19.41% (0.51%)(4) 8.63% 8.27% (1.67%)
Total Adjusted Investment Return at Net Asset Value (3,5) (10.16%) 19.29% (0.59%)(4) 8.57% 8.25% (1.78%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $70,243 $76,824 $81,177 $204,621 $184,085 $143,830
Ratio of Expenses to Average Net Assets .................. 1.60% 1.60% 1.60%(7) 1.60% 1.60% 1.61%(11)
Ratio of Adjusted Expenses to Average Net Assets (6) ..... 1.71% 1.72% 1.73%(7) 1.66% 1.62% 1.71%
Ratio of Net Investment Income to Average Net Assets ..... 4.97% 4.90% 4.91%(7) 4.85% 4.41% 4.39%
Ratio of Adjusted Net Investment Income to
Average Net Assets (6) ................................. 4.86% 4.78% 4.78%(7) 4.79% 4.39% 4.28%
Portfolio Turnover Rate .................................. 107% 113% 116%(9) 46%(9) 24% 13%
Fee Reduction Per Share .................................. $0.01 $0.01(2) $0.01(2) $0.01 $0.01(2) 0.00(10)
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM
APRIL 1, 1999
(COMMENCEMENT OF
OPERATIONS)
TO AUGUST 31, 1999
--------------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................... $10.86
----------
Net Investment Income (2)............................................... 0.19
Net Realized and Unrealized Loss on Investments ........................ (0.50)
----------
Total from Investment Operations ...................................... (0.31)
----------
Less Distributions:
Dividends from Net Investment Income ................................... (0.19)
----------
Net Asset Value, End of Period ......................................... $10.36
==========
Total Investment Return at Net Asset Value (3) ......................... (2.86%)(4)
Total Adjusted Investment Return at Net Asset Value (3,5) .............. (2.86%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $354
Ratio of Expenses to Average Net Assets ................................ 1.71%(7,11)
Ratio of Adjusted Expenses to Average Net Assets (6) ................... 1.71%(7)
Ratio of Net Investment Income to Average Net Assets ................... 4.29%(7)
Ratio of Adjusted Net Investment Income to
Average Net Assets (6) ............................................... 4.28%(7)
Portfolio Turnover Rate ................................................ 13%
Fee Reduction Per Share ................................................ 0.00(10)
(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 excludes merger activity.
(10) Less than $0.01 per share.
(11) For the period ended August 31, 1999, the ratio of expenses to average net
assets for the Fund excludes the effect of expense reductions. If expense
reductions were included, the ratio of expenses to average net assets would have
been 0.85% for Class A and 1.60% for Class B.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
Schedule of Investments
August 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Tax-Free Bond Fund on August 31, 1999. 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.
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
TAX-EXEMPT LONG-TERM BONDS
Alabama (0.67%)
Alabama State Docks Department,
Docks Facil Rev Ref Ser 1998 ..................... 5.250% 10-01-12 AAA $4,245 $4,228,911 5.27%
Citronelle Industrial Development Board,
Poll Control Rev Stauffer Chemical Co Proj 1982 .. 8.000 12-01-12 A1 500 518,950 7.71
----------
4,747,861
----------
Alaska (0.31%)
Alaska Housing Finance Corp,
Coll Home Mtg Ser B-1 GNMA Coll .................. 7.650 06-01-24 AAA 1,050 1,098,993 7.31
Valdez Alaska Marine Terminal,
Rev Ref Sohio Pipe Line Co Proj Ser 1985 ......... 7.125 12-01-25 AA+ 1,000 1,077,230 6.61
----------
2,176,223
----------
Arizona (2.15%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj ...... 8.200 06-01-21 BB 2,150 2,212,027 7.97
Arizona Municipal Financing Program,
Cert of Part Ser 25 .............................. 7.875 08-01-14 AAA 1,000 1,230,930 6.40
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 2,125,420 6.59
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A
Public Service Co Palo Verde Proj ............... 6.375 08-15-23 BBB- 8,550 8,631,652 6.31
Navajo County Industrial Development Auth,
Ind'l Devel Rev Stone Container Corp Proj ........ 7.200 06-01-27 B 1,000 1,065,590 6.76
----------
15,265,619
----------
Arkansas (0.05%)
Arkansas Development Finance Auth,
Single Family Mtg Rev Ref Ser 1991 A ............. 8.000 08-15-11 AA 315 326,189 7.73
----------
California (16.21%)
California Statewide Communities Development Auth,
Ins Rev Ref Cert of Part Hlth Facil Eskaton, Inc. 5.875 05-01-20 A+ 4,000 4,019,680 5.85
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993 6.200 07-01-20 BBB- 6,000 6,509,340 5.71
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
California (continued)
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A...... Zero 01-01-19 BBB- $36,600 $12,347,742 5.70%
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A ..... Zero 01-01-20 BBB- 10,000 3,170,400 5.73
Toll Rd Rev Fixed Rate Current Int Ser 1995A .... 6.000% 01-01-16 BBB- 19,800 21,514,482 5.52
Toll Road Rev Ref Cap Apprec .................... Zero 01-15-25 BBB- 5,000 1,040,400 6.28
Madera, County of,
Cert of Part Valley Childrens Hosp .............. 6.500 03-15-15 AAA 13,185 14,800,822 5.79
Millbrae, City of,
Residential Facil Rev Ser 1997A Magnolia of
Millbrae Proj .................................. 7.375 09-01-27 BB 1,000 1,032,310 7.14
Sacramento City Financing Auth,
Rev Convention Ctr Hotel Ser 1999A .............. 6.250 01-01-30 BB+ 4,000 3,841,280 6.51
Sacramento Cogeneration Auth,
Cogeneration Proj Rev Procter & Gamble Proj .... 6.500 07-01-21 BBB- 3,750 4,192,725 5.81
Sacramento Municipal Utilities District,
Ind'l Devel Rev Ref San Diego Gas &
Electric Ser C Inflos .......................... 9.375# 08-15-18 AAA 1,000 1,116,250 8.40
San Bernardino, County of,
Cert of Part Ref Medical Center Fin Proj ........ 5.500 08-01-17 AAA 9,130 9,181,311 5.47
Cert of Part Ref Medical Center Fin Proj ........ 5.500 08-01-22 A- 2,500 2,411,575 5.70
San Diego Redevelopment Agency,
Tax Alloc City Heights Proj Ser 1999A ........... 5.750 09-01-23 BB 1,025 936,840 6.29
San Francisco, City of,
Resid Facil Ser A Coventry Park Proj ............ 8.500 12-01-26 BB 2,000 2,222,580 7.65
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec .................. Zero 01-01-10 AAA 6,250 3,673,375 5.21
Toll Rd Rev Ref Conv Cap Apprec Ser 1997A ....... Zero 01-15-17 BBB- 10,000 6,255,000 2.72
Toll Rd Rev Sr Lien Cap Apprec .................. Zero 01-01-14 AAA 5,000 2,290,950 5.52
Toll Rd Rev Sr Lien Cap Apprec .................. Zero 01-01-17 AAA 4,900 1,862,245 5.66
Toll Rd Rev Sr Lien Cap Apprec .................. Zero 01-01-19 AAA 15,510 5,232,609 5.70
Toll Rd Rev Sr Lien Cap Apprec .................. Zero 01-01-20 AAA 2,000 634,080 5.73
Toll Rd Rev Sr Lien Cap Apprec .................. Zero 01-01-23 AAA 7,500 1,984,500 5.78
San Jose Financing Auth,
Rev Ser B Community Facil Proj .................. 5.625 11-15-18 A+ 2,500 2,495,400 5.64
Santa Ana Financing Auth,
Lease Rev Police Admin & Holding Facil Ser A .... 6.250 07-01-19 AAA 2,000 2,187,220 5.72
-----------
114,953,116
-----------
Colorado (2.44%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470 ................... 6.950 08-31-20 AAA 5,000 5,729,900 6.06
Colorado Housing Finance Auth,
Single Family Prog Sr Iss A-2 ................... 7.625 08-01-17 AAA 300 307,314 7.44
Denver, City and County of,
Airport Sys Rev Ser 1992A Preref ................ 7.250 11-15-25 AAA 1,980 2,188,989 6.56
Airport Sys Rev Ser 1994A Preref ................ 7.500 11-15-23 BBB+ 535 615,566 6.52
Airport Sys Rev Ser 1994A Unref Bal ............. 7.500 11-15-23 BBB+ 2,565 2,835,325 6.78
Douglas County School District No. Re. 1,
Douglas and Elbert Counties Imp Ser 1994A ....... 6.400 12-15-11 AAA 1,400 1,536,990 5.83
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Colorado (continued)
Metropolitan Football Stadium,
Dist Sales Tax Rev Cap Apprec Ser 1999A .......... Zero 01-01-10 AAA $5,250 $3,045,525 5.34%
Dist Sales Tax Rev Cap Apprec Ser 1999A .......... Zero 01-01-12 AAA 2,000 1,021,800 5.52
----------
17,281,409
----------
Connecticut (0.15%)
Connecticut Health and Educational Facilities Auth,
Rev Ser D Univ of Hartford ....................... 6.800% 07-01-22 BBB- 1,000 1,030,490 6.60
----------
Delaware (0.98%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj ..... 6.750 05-01-19 AAA 6,500 6,924,320 6.34
----------
Florida (4.94%)
Dade, County of,
Professional Sports Franchise Facil
Tax Rev Cap Apprec .............................. Zero 10-01-27 AAA 5,500 1,082,070 5.87
Florida State Board of Education,
Cap Outlay Rev Ref Pub Ed Ser 2000A** ............ 5.750 06-01-22 AA+ 4,000 3,952,040 5.82
Hernando County Industrial Development Auth,
Rev Ref 2nd Fla Crushed Stone Co ................. 8.500 12-01-14 BBB- 200 219,374 7.75
Hernando, County of,
Rev Criminal Justice Complex Fin Proj ............ 7.650 07-01-16 AAA 500 620,770 6.16
Hillsborough County Aviation Auth,
Rev Ser B Tampa International Airport ............ 6.000 10-01-17 AAA 5,880 6,227,743 5.66
Hillsborough, County of,
Ref Util Rev Ser 1991A ........................... 7.000 08-01-14 BBB+ 1,245 1,308,109 6.66
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A ............................. 5.250 10-01-28 AA 9,000 8,367,390 5.65
Lee, County of,
Hosp Board of Directors Hosp Rev Inflos .......... 9.570# 04-01-20 AAA 2,000 2,210,000 8.66
Orange County Health Facilities Auth,
Hosp Orlando Regional Medical Center Rev Inflos .. 9.050# 10-29-21 AAA 1,000 1,121,250 8.07
Orange County School Board,
Cert of Part Ref Ser 1997A ....................... Zero 08-01-13 AAA 10,365 4,838,382 5.55
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D ..................... 6.750 10-01-17 AA- 2,200 2,514,424 5.91
Orlando, City of,
Spec Assessment Rev Ser 1998A
Conroy Rd Interchange Proj ...................... 5.800 05-01-26 BB+ 1,000 925,420 6.27
Tampa, City of,
Health Sys Rev Ref Ser 1998A-1
Catholic Health East Oblig Group ................ 5.500 11-15-14 AAA 1,615 1,631,457 5.44
----------
35,018,429
----------
Georgia (3.63%)
Atlanta, City of,
Atlanta Water & Wastewater Rev Ref Ser 1999A ..... 5.500 11-01-22 AAA 2,000 1,986,880 5.54
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Georgia (continued)
Georgia Municipal Electric Auth,
Power Rev Ser Y ................................. 6.500% 01-01-17 AAA $3,500 $3,883,390 5.86%
Pwr Rev Ref Ser BB .............................. 5.700 01-01-19 A 1,000 1,008,550 5.65
Pwr Rev Ser C ................................... 5.700 01-01-19 AAA 5,000 5,081,850 5.61
Pwr Rev Ser EE .................................. 7.250 01-01-24 AAA 2,000 2,426,240 5.98
Pwr Rev Ser Z ................................... 5.500 01-01-20 AAA 5,840 5,858,046 5.48
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr
Corp Scherer Proj .............................. 6.800 01-01-12 A 1,000 1,115,970 6.09
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj ................. 7.000 01-01-23 Ba1 4,000 4,371,080 6.41
----------
25,732,006
----------
Illinois (3.35%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport
Rev 1990 Ser A ................................. 7.500 01-01-16 A+ 2,000 2,056,960 7.29
Chicago-O'Hare Int'l Airport Int'l Terminal
Spec Rev Ser 1992 .............................. 6.750 01-01-12 AAA 3,000 3,166,110 6.40
Chicago-O'Hare Int'l Airport Spec Facil
Rev Ser 1990A
American Airlines Proj ......................... 7.875 11-01-25 BBB- 3,000 3,148,500 7.50
Skyway Toll Bridge Rev Ref Ser 1994 ............. 6.750 01-01-17 AAA 2,000 2,209,040 6.11
Godfrey, City of,
United Methodist Village Rev Ser 1999A .......... 5.875 11-15-29 BB+ 1,825 1,630,765 6.57
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj 5.850 01-15-14 BBB+ 3,000 2,917,470 6.02
Rev Ref Ser A Columbus Cuneo Cabrini Proj ....... 8.500 02-01-15 AA 2,150 2,233,893 8.18
Illinois Health Facilities Auth,
Rev Methodist Hlth Serv Corp Ser 1991 B ......... 9.922# 05-01-21 AAA 1,000 1,118,750 8.87
Rev Ref Friendship Vlg Schamburg ................ 6.750 12-01-08 A- 1,640 1,696,186 6.53
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj 7.000 01-01-07 BBB 1,500 1,582,365 6.64
Rev Swedish-American Hosp ....................... 7.400 04-01-20 AAA 750 780,292 7.11
Illinois Industrial Pollution Control Financing Auth,
Rev Great Lakes Carbon Corp Proj ................ 7.125 10-01-01 BB+ 705 705,451 7.12
Robbins, County of,
Res Recovery Rev Ser A Robbins Res Recovery Partners 8.375 10-15-16 BB 1,000 537,500 15.58
----------
23,783,282
----------
Indiana (0.31%)
Wabash, County of,
Solid Waste Disp Rev Jefferson Smurfit Corp Proj 7.500 06-01-26 BB 2,000 2,172,700 6.90
----------
Iowa (0.13%)
Iowa Finance Auth,
Health Care Facil Rev Ref Care Initiatives Proj
Ser B .......................................... 5.750 07-01-18 BB 1,000 928,310 6.19
----------
Kentucky (0.89%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A .... 6.750 02-01-02 BBB- 2,000 2,067,380 6.53
Rev Spec Facil Delta Airlines Proj Ser 1992A .... 7.500 02-01-12 BBB- 2,000 2,121,520 7.07
Rev Spec Facil Delta Airlines Proj Ser 1992A .... 7.125 02-01-21 BBB- 2,000 2,111,520 6.75
----------
6,300,420
----------
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Louisiana (2.26%)
Calcasieu Parish Industrial Development Board,
Poll Control Rev Ref Ser 1992
Gulf States Util Co Proj ........................ 6.750% 10-01-12 BB+ $2,975 $3,078,173 6.52%
De Soto, Parish of,
Rev Environ Imp Rev Int'l Paper Co Proj Ser A .... 7.700 11-01-18 BBB+ 2,750 3,070,018 6.90
Louisiana Public Facilities Auth,
Progressive Hlthcare Rev Ser 1998B ............... 6.375 10-01-20 BB- 1,245 1,159,805 6.84
Rev Ser B Alton Ochsner Medical Funding Proj ..... 6.500 05-15-22 AAA 3,405 3,603,580 6.14
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr &
Light Co Proj ................................... 7.500 06-01-21 BBB 4,000 4,195,080 7.15
West Feliciana, Parish of,
Poll Control Rev Ser D Gulf States Utilities Co .. 5.800 12-01-15 BB+ 1,000 944,150 6.14
----------
16,050,806
----------
Maryland (0.56%)
Municipal Mortgage & Equity, LLC, Ser A (R) ....... 6.875 06-30-09 BBB- 4,000 3,992,760 6.89
----------
Massachusetts (5.20%)
Massachusetts Development Finance Agency,
Concord-Assabet Family Servs Rev Ref ............. 6.000 11-01-28 Ba2 2,000 1,869,760 6.42
Rev Boston Univ Ser 1999P ........................ 6.000 05-15-59 BBB+ 2,000 1,986,920 6.04
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D ............. 6.750 07-01-24 AAA 2,450 2,607,510 6.34
Rev Lowell Gen Hosp Iss Ser A .................... 8.400 06-01-11 AAA 1,100 1,197,020 7.72
Rev New England Deaconess Hosp Iss Ser D ......... 6.625 04-01-12 AAA 3,500 3,763,095 6.16
Rev New England Deaconess Hosp Iss Ser D ......... 6.875 04-01-22 AAA 5,960 6,444,071 6.36
Rev St Elizabeth's Hosp of Boston Ser E .......... 9.846# 08-15-21 AAA 1,000 1,108,750 8.88
Rev Worcester Polytechnic Institute Ser E ........ 6.750 09-01-11 AAA 3,840 4,178,496 6.20
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A ....................... 6.900 11-15-24 AAA 2,700 2,867,508 6.50
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B Pub Corp of the
Commonwealth of Mass ............................ 6.750 07-01-17 BBB+ 4,405 4,608,555 6.45
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 1,071,150 5.95
Massachusetts, Commonwealth of,
GO Consol Ln of 1994 Ser B ....................... 6.000 08-01-14 AA- 2,000 2,163,980 5.55
Plymouth, County of,
Cert of Part Ser A ............................... 7.000 04-01-22 AA- 2,750 3,013,312 6.39
----------
36,880,127
----------
Michigan (1.89%)
Detroit, City of,
GO Unltd Ser 1995 A .............................. 6.800 04-01-15 A- 1,315 1,466,856 6.10
Michigan Housing Development Auth,
Single Family Mtg Rev Ser A ...................... 7.500 06-01-15 AA+ 900 924,714 7.30
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1990A Bay Medical Center Hosp Proj 8.250 07-01-12 A3 2,160 2,273,724 7.84
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group 8.100 10-01-13 AAA 3,000 3,585,840 6.78
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Michigan (continued)
Wayne Charter, County of,
Spec Airport Facil Rev Ref Ser
1995 Northwest Airlines Inc. .................... 6.750% 12-01-15 BB+ $4,975 $5,140,916 6.53%
----------
13,392,050
----------
Minnesota (0.95%)
Minneapolis, City of,
Rev Ref Walker Methodist Sr Servs Ser 1998A ...... 5.875 11-15-18 BB+ 1,500 1,421,400 6.20
Rev Ref Walker Methodist Sr Servs Ser 1998A ...... 6.000 11-15-28 BB+ 1,500 1,425,330 6.31
Southern Minnesota Municipal Power Agency,
Pwr Supply Sys Rev Cap Apprec Ser A .............. Zero 01-01-23 AAA 15,000 3,892,350 5.87
----------
6,739,080
----------
Mississippi (1.59%)
Mississippi Business Finance Corp.,
Miss Poll Control Rev Ref
Sys Energy Resource Inc Proj .................... 5.900 05-01-22 BBB- 4,000 3,748,440 6.30
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A ............... 9.250 03-01-12 AAA 55 57,627 8.83
Mississippi Hospital Equipment and Facilities Auth,
Rev Ser A Rush Memorial Foundation Proj .......... 8.750 01-01-16 Baa3 2,000 2,153,220 8.13
Washington, County of,
Poll Control Rev Ref Mississippi Pwr &
Light Co Proj ................................... 7.000 04-01-22 Baa3 5,000 5,322,350 6.58
----------
11,281,637
----------
Nebraska (0.18%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B .......................... 6.200 02-01-17 Aa2 1,200 1,294,476 5.75
----------
Nevada (1.58%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj 6.500 12-01-33 BBB- 10,000 10,313,900 6.30
Nevada Housing Division,
Single Family Proj Sr Rev Ser 1989 Iss A-1 ....... 7.350 04-01-16 AA 650 661,297 7.22
Single Family Proj Sr Rev Ser 1990 Iss C-1 ....... 7.850 10-01-15 AA 195 200,372 7.64
Nevada, State of,
GO Ltd Tax Municipal Bond Bank Proj No. 38
Ser A Unref Bal ................................. 6.750 07-01-09 AA 25 26,727 6.31
----------
11,202,296
----------
New Jersey (1.57%)
Camden County Improvement Auth,
Lease Rev Ser A Holt Hauling & Warehousing Proj .. 9.875 01-01-21 BB- 1,100 1,303,192 8.34
New Jersey Economic Development Auth,
1st Mtg Rev Ser A Winchester Gardens ............. 8.500 11-01-16 BB+ 100 111,284 7.64
Rev Ref Ind'l Development Newark Airport
Marriott Hotel Proj ............................. 7.000 10-01-14 BBB- 4,000 4,254,800 6.58
Rev Ref Ser J Holt Hauling Proj .................. 8.500 11-01-23 BBB 2,500 2,774,225 7.66
New Jersey Health Care Facilities Financing Auth,
Rev Care Institute Inc Cherry Hill Proj .......... 8.000 07-01-27 BB+ 1,370 1,416,827 7.74
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 ............................ 10.375 01-01-03 AAA 1,140 1,265,571 9.35
----------
11,125,899
----------
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
New Mexico (0.30%)
Farmington, City of,
Poll Control Rev 1997 Ser A Tucson Elec Pwr Co
San Juan Proj .................................. 6.950% 10-01-20 B $2,000 $2,092,760 6.64%
----------
New York (10.62%)
Dutchess County Resource Recovery Agency,
Rev Solid Waste Sys Ser A** ..................... 5.350 01-01-12 AAA 1,235 1,226,516 5.39
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of
Technology Proj ................................ 7.500 03-01-26 BB- 2,500 2,672,575 7.02
Long Island Power Auth,
Elec Sys Rev Cap Apprec Ser 1998A ............... Zero 12-01-17 AAA 1,965 704,531 5.70
New York City Industrial Development Agency,
Rev Ref LaGuardia Assoc LP Proj ................. 6.000 11-01-28 BB+ 2,500 2,381,325 6.30
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 1,619,100 5.78
New York Local Government Assistance Corp,
Rev Ref Cap Apprec Ser 1993 C ................... Zero 04-01-14 AAA 7,210 3,254,233 5.53
Ser 1992 A Pub Benefit Corp ..................... 6.875 04-01-19 A+ 5,000 5,411,250 6.35
New York State Dormitory Auth,
City Univ Sys Consol Rev 2nd Generation Ser 1993A 5.750 07-01-09 BBB+ 1,000 1,028,650 5.59
Cornell Univ Rev Ser 1990A ...................... 7.375 07-01-30 AA 1,000 1,045,800 7.05
State Univ Ed Facil Rev Iss Ser 1990B ........... 7.500 05-15-11 A 500 578,870 6.48
State Univ Ed Facil Rev Ser 1993A ............... 5.500 05-15-19 A 1,000 982,610 5.60
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990A Preref ................. 7.150 06-01-20 A- 1,370 1,489,738 6.58
New York State Environmental Facilities Corp,
State Wtr Poll Control Rev Rites Ser PA-174 ..... 9.692# 06-15-11 AAA 2,000 2,455,000 7.90
State Wtr Poll Control Revolving Fund
Rev Ser 1990A .................................. 7.500 06-15-12 AA 2,370 2,478,262 7.17
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A .......... 8.000 05-01-11 AAA 2,000 2,460,060 6.50
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B Preref 7.875 08-15-08 AAA 345 364,879 7.45
Mental Hlth Serv Facil Imp Rev 1990 Ser B Preref 7.875 08-15-20 AAA 420 444,200 7.45
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal 7.875 08-15-20 A3 35 36,807 7.49
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal 7.875 08-15-08 A3 155 163,254 7.48
Mental Hlth Serv Facil Imp Rev 1991 Ser A Preref 7.750 08-15-11 AAA 1,795 1,920,058 7.25
Mental Hlth Serv Facil Imp Rev 1991 Ser A Unref Bal 7.750 08-15-11 A3 205 217,716 7.30
New York, City of,
GO Cap Apprec Ref Fiscal 1998 Ser G ............. Zero 08-01-08 A- 6,000 3,806,160 5.17
GO Fiscal 1991 Ser D Preref ..................... 8.000 08-01-04 A- 185 200,692 7.37
GO Fiscal 1991 Ser D Unref Bal .................. 8.000 08-01-04 A- 10 10,773 7.43
GO Fiscal 1991 Ser F Preref ..................... 8.200 11-15-03 AAA 1,145 1,258,275 7.46
GO Fiscal 1991 Ser F Unref Bal .................. 8.200 11-15-03 A- 105 114,487 7.52
GO Fiscal 1992 Ser A Preref ..................... 7.750 08-15-12 A- 2,000 2,163,900 7.16
GO Fiscal 1992 Ser D Preref ..................... 7.700 02-01-09 A- 985 1,076,447 7.05
GO Fiscal 1992 Ser D Unref Bal .................. 7.700 02-01-09 A- 15 16,246 7.11
GO Fiscal 1992 Ser H Preref ..................... 7.000 02-01-08 A- 1,840 1,979,766 6.51
GO Fiscal 1992 Ser H Unref Bal .................. 7.000 02-01-08 A- 160 170,754 6.56
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
New York (continued)
New York, City of (continued),
GO Fiscal 1995 Ser B Preref ...................... 7.000% 08-15-16 A- $3,000 $3,360,900 6.25%
GO Fiscal 1996 Ser J ............................. 5.500 02-15-26 A- 2,000 1,898,580 5.79
GO Rev Ref Ad Valorem Property Tax Ser D ......... 5.750 08-15-13 A- 3,170 3,217,709 5.66
Port Auth of New York and New Jersey,
Spec Proj KIAC Partners Proj Ser 4 ............... 6.750 10-01-19 BBB 11,000 11,843,920 6.27
Triborough Bridge & Tunnel Auth,
Gen Purpose Rev Ser 1993 ......................... Zero 01-01-22 AAA 20,755 5,844,193 5.76
Gen Purpose Rev Ser R ............................ 7.375 01-01-16 AAA 1,600 1,643,600 7.18
Gen Purpose Rev Ser X ............................ 6.500 01-01-19 A+ 1,250 1,319,600 6.16
Spec Oblig Ref Ser 1991B ......................... 6.875 01-01-15 A- 2,300 2,414,609 6.55
----------
75,276,045
----------
North Carolina (1.74%)
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 ........................ 5.750 01-01-15 AAA 7,410 7,451,644 5.72
Catawba Elec Rev Ser 1993 ........................ 5.000 01-01-15 AAA 5,220 4,874,645 5.35
----------
12,326,289
----------
Ohio (4.33%)
Akron, City of,
Cert of Part Akron Municipal Baseball Stadium Proj Zero 12-01-16 BBB 1,000 943,880 0.34
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser 1994A ................... 7.000 11-15-16 AAA 5,860 6,634,340 6.18
Elec Sys Rev 1st Mtg Ser A ....................... 7.000 11-15-24 AAA 4,200 4,754,988 6.18
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B
Riverside United Methodist Hosp Proj ............ 7.600 05-15-20 AAA 1,000 1,046,320 7.26
Lorain, County of,
Health Care Fac Rev Ref Ser A Kendal At Oberlin Proj 5.250 02-01-21 BBB 2,000 1,735,840 6.05
Rev 1st Mtg Ser A Kendal At Oberlin Proj ......... 8.625 02-01-22 AA 3,865 4,301,436 7.75
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj .............. 6.250 12-01-20 Baa1 4,500 4,572,090 6.15
Rev Ref Ohio Pwr Co Ser 1999C .................... 5.150 05-01-26 AAA 1,500 1,379,790 5.60
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1995
Cleveland Elec Co Proj .......................... 7.700 08-01-25 BB+ 2,800 3,077,088 7.01
Ohio, State of,
Solid Waste Rev Ref CSC Ltd Proj ................. 8.500 08-01-22 BB 1,825 1,841,772 8.42
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan ....... 8.875 08-01-08 BBB- 415 426,014 8.65
----------
30,713,558
----------
Oklahoma (0.48%)
Oklahoma Development Finance Auth,
Rev Ref Hillcrest Hlth Sys Ser 1999A ............. 5.625 08-15-29 BBB+ 1,500 1,344,360 6.28
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc ............... 7.375 12-01-20 BBB- 2,000 2,084,920 7.07
----------
3,429,280
----------
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Oregon (0.50%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj .......... 7.125% 01-01-21 BBB- $3,400 $3,569,558 6.79%
----------
Pennsylvania (8.22%)
Allegheny County Hospital Development Auth,
Rev Hlth & Ed Rehab Institute of Pitt ........... 7.000 06-01-22 AA 1,500 1,628,085 6.45
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj 6.700 12-01-20 BBB- 10,000 10,337,300 6.48
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 2,440,130 6.99
Delaware County Auth,
1st Mtg Rev Riddle Village Proj ................. 7.000 06-01-26 BBB- 1,250 1,265,525 6.91
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A
Philadelphia Elec Co Proj ...................... 7.375 04-01-21 A 5,095 5,397,439 6.96
Lehigh County General Purpose Auth,
Rev KidsPeace Oblig Group ....................... 6.000 11-01-18 BB 2,000 1,899,480 6.32
Northumberland County Auth,
Commonwealth Lease Rev Ser 1991 ................. 6.250 10-15-09 AAA 1,000 1,042,800 5.99
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A ............................... 6.700 09-01-14 BBB 4,950 5,320,359 6.23
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj ..... 7.125 12-01-15 BBB- 7,000 7,558,810 6.60
Resource Recovery Rev Ser 1994 D Colver Proj .... 7.150 12-01-18 BBB- 1,500 1,621,425 6.61
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N .............................. 6.500 12-01-13 AA- 2,840 3,008,497 6.14
Philadelphia Hospitals and
Higher Education Facilities Auth,
Hosp Rev 1991 Ser A
Philadelphia Protestant Home Proj .............. 8.625 07-01-21 AA 2,700 2,952,342 7.89
Hosp Rev 1992 Ser A Childrens Seashore House Proj 7.000 08-15-12 A- 1,250 1,324,575 6.61
Philadelphia Industrial Development Auth,
Commercial Devel Rev Ref Ser A Doubletree Proj .. 6.500 10-01-27 BB+ 1,000 1,020,380 6.37
Commercial Devel Rev Ser 1995 Philadelphia
Airport Hotel Proj ............................. 7.750 12-01-17 B+ 3,250 3,527,615 7.14
Philadelphia, City of,
Wtr & Swr Rev 16th Ser .......................... 7.500 08-01-10 AAA 3,000 3,240,390 6.94
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj 7.600 07-15-20 BBB- 3,525 3,774,887 7.10
Westmoreland County Industrial Development Auth,
Rev Valley Landfill Proj ........................ 5.100 05-01-18 BBB 1,000 933,230 5.46
----------
58,293,269
----------
Puerto Rico (6.44%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the
Commonwealth of Puerto Rico .................... 6.000 07-01-11 AAA 200 215,454 5.57
Ref Pars & Inflos Ser 1995 Gtd by the
Commonwealth of Puerto Rico .................... 8.270# 07-01-11 AAA 6,500 7,499,375 7.17
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Puerto Rico (continued)
Puerto Rico Highway and Transportation Auth,
Highway Rev Ser Y Res Int Tax-Exempt
Sec Rec'ts Ser PA-114 (r) ...................... 8.145%# 07-01-11 A- $13,130 $15,280,431 7.00%
Puerto Rico, Commonwealth of,
GO Cap Apprec Ref Pub Imp Ser 1998 .............. Zero 07-01-14 A 4,000 1,768,160 5.58
GO Pub Imp Inverse Floater 1992A ................ 8.084# 07-01-08 AAA 2,700 2,916,000 7.49
GO Pub Imp Inverse Rate Securities Ser 1996 ..... 7.939# 07-01-11 AAA 14,000 16,152,500 7.17
Puerto Rico Infrastructure Financing Auth,
Spec Tax Rev Ref Ser 1998A ...................... 5.500 07-01-08 AAA 1,750 1,842,382 5.22
----------
45,674,302
----------
South Carolina (1.36%)
Florence, County of,
Ind'l Dev Rev Stone Container Proj .............. 7.375 02-01-07 BB- 3,915 4,088,278 7.06
Richland, County of,
Poll Control Rev Union Camp Corp Proj Ser 1992 B 6.625 05-01-22 BBB+ 2,460 2,569,495 6.34
Poll Control Rev Union Camp Corp Proj Ser 1992 C 6.550 11-01-20 BBB+ 1,000 1,032,970 6.34
South Carolina Jobs-Economic Development Auth,
Solid Waste Recycling Rev
Santee River Rubber Proj Ser A ................ 8.000 12-01-14 BB- 2,000 1,928,020 8.30
----------
9,618,763
----------
Tennessee (3.06%)
Eastside Utility District of Hamilton,
Waterworks Rev Iss .............................. 6.750 11-01-11 A 1,000 1,072,870 6.29
Humphreys County Industrial Development Board,
Solid Waste Disposal Rev E.I. Dupont
Denemours and Co Proj .......................... 6.700 05-01-24 AA- 6,500 6,950,775 6.27
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj ............................... 6.500 09-01-24 A 9,000 9,453,150 6.19
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp .................... 6.750 09-01-12 BBB 4,000 4,245,640 6.36
----------
21,722,435
----------
Texas (4.98%)
Austin, City of,
Combined Util Sys Rev Ref Ser 1998 .............. 6.750 11-15-10 AAA 3,125 3,552,094 5.94
Corpus Christi Housing Finance Corp,
Single Family Mtg Sr Rev Ref Ser 1991 A ......... 7.700 07-01-11 AAA 360 384,484 7.21
Dallas-Fort Worth International Airport
Facility Improvement, Rev American Airlines Inc . 7.250 11-01-30 BBB- 10,250 10,897,902 6.82
Rev Delta Air Lines Inc ......................... 7.600 11-01-11 BBB- 3,000 3,180,750 7.17
Ector County Hospital District,
Hosp Rev 1992 ................................... 7.300 04-15-12 AAA 4,000 4,366,920 6.69
El Paso Housing Finance Corp,
Single Family Mtg Rev Ref Bonds 1991 Ser A ...... 8.750 10-01-11 A2 335 357,103 8.21
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj ........... 7.750 03-01-12 B1 1,410 1,475,932 7.40
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Texas (continued)
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj 8.250% 02-15-08 AAA $2,475 $2,525,391 8.09%
Houston Independent School District,
Pub Facil Corp Lease Rev Cap Apprec
Ser A Cesar E Chavez............................ Zero 09-15-16 AAA 1,000 374,380 5.85
Houston, City of,
Spec Facil Rev Ser C Continental Airline Inc .... 6.125 07-15-27 BB 4,000 3,820,000 6.41
Wtr & Swr Sys Rev Ref Prior Lien Ser B Preref ... 6.750 12-01-08 Aaa 180 193,061 6.29
Wtr & Swr Sys Rev Ref Prior Lien Ser B Unref Bal 6.750 12-01-08 A+ 1,320 1,402,540 6.35
North Central Texas Health Facilities Development,
Hospital Rev Baylor Univ Medical Center Ser 1991A 10.029# 05-15-16 AA 1,000 1,118,750 8.96
Texas, State of,
Veterans' Land Board GO ......................... 7.125 12-01-09 AA 1,000 1,027,360 6.94
Veterans' Land Board GO Preref .................. 8.250 12-01-10 AAA 610 616,930 8.16
----------
35,293,597
----------
Utah (0.33%)
Carbon, County of,
Solid Waste Disp Rev Ref Ser A
East Carbon Development Corp ................... 9.000 07-01-12 BBB- 1,000 1,056,120 8.52
Salt Lake City Hospital,
Rev Ref Ser A ................................... 8.125 05-15-15 AAA 1,000 1,227,470 6.62
Utah Housing Finance Agency,
Single Family Mtg Sr 1990 Iss B-2 ............... 7.700 07-01-15 AAA 35 35,716 7.55
Single Family Mtg Sr 1991 Iss B-1 ............... 7.500 07-01-16 AAA 35 36,196 7.25
----------
2,355,502
----------
Virgin Islands (0.48%)
Virgin Islands Public Finance Auth,
Rev Sub Lien Fund Ln Notes Ser 1998E ............ 5.875 10-01-18 BB+ 2,500 2,480,050 5.92
Virgin Islands Water & Power Auth,
Wtr Sys Rev Ref ................................. 5.500 07-01-17 BB+ 1,000 918,940 5.99
----------
3,398,990
----------
Virginia (1.38%)
Arlington County Industrial Development Auth,
Hosp Facil Rev Arlington Hosp Ser 1991 A ........ 7.125 09-01-21 AAA 500 537,480 6.63
Fairfax County Industrial Develpment Auth,
Rev RITES ....................................... 9.877# 08-29-23 AA 1,000 1,127,500 8.76
Fredericksburg Industrial Auth,
Hosp Facil Rev .................................. 9.773# 08-15-23 AAA 1,500 1,680,000 8.73
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil .......................... 7.550 01-01-19 BB 3,500 3,735,410 7.07
Pocahontas Parkway Assn,
Toll Road Rev Cap Apprec 1st Tier Sub Ser C ..... Zero 08-15-24 Ba1 4,800 913,488 6.76
Toll Road Rev Cap Apprec 1st Tier Sub Ser C ..... Zero 08-15-25 Ba1 5,000 890,350 6.76
Toll Road Rev Cap Apprec 1st Tier Sub Ser C ..... Zero 08-15-26 Ba1 5,500 916,355 6.76
----------
9,800,583
----------
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000s MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- -------- -------- ------- --------- ------ --------
Washington (1.42%)
Seattle, City of,
Municipal Light & Pwr Rev 1994 ................... 6.625% 07-01-16 AA $3,600 $3,983,472 5.99%
Spokane County Industrial Development Corp,
Solid Waste Disp Rev Kaiser Alum & Chem Corp Proj 7.600 03-01-27 BB- 1,250 1,326,962 7.16
Tacoma Electric System,
Rev VRDN/RIBS Iss of 1991 ........................ 9.246# 01-02-15 AAA 1,000 1,092,500 8.46
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989B ............. 7.125 07-01-16 AA- 1,500 1,743,330 6.13
Washington, State of,
GO Ser A of 1990 ................................. 6.750 02-01-15 AA+ 1,000 1,138,860 5.93
Washington, University of,
Hsg & Dining Rev Preref .......................... 7.000 12-01-21 AAA 595 642,267 6.48
Hsg & Dining Rev Preref .......................... 7.000 12-01-21 AAA 35 37,780 6.48
Hsg & Dining Rev Unref Bal ....................... 7.000 12-01-21 AAA 120 128,346 6.54
----------
10,093,517
----------
Wisconsin (0.74%)
Sturgeon Bay Combined Utilities,
Door County Combined Util Mtg Rev Ser 1990 Preref 7.500 01-01-10 AAA 770 802,633 7.20
Door County Combined Util Mtg Rev Ser 1990 Unref Bal 7.500 01-01-10 AAA 230 239,419 7.20
Wisconsin Public Power,
Pwr Supply Sys Rev Ser 1990A ..................... 7.400 07-01-20 AAA 4,000 4,198,000 7.05
----------
5,240,052
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $651,966,870) (98.37%) 697,498,005
------- -----------
OTHER ASSETS AND LIABILITIES, NET (1.63%) 11,564,084
------- -----------
TOTAL NET ASSETS (100.00%) $709,062,089
======== ============
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Tax-Free Bond Fund
NOTES TO SCHEDULE OF INVESTMENTS
(r) Direct placement security is restricted as to resale. This security
has 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 bylaws 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 this
restricted security. Additional information on this security is as
follows:
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE
ACQUISITION ACQUISITION OF FUND'S AS OF
ISSUER, DESCRIPTION DATE COST NET ASSETS AUGUST 31, 1999
- ------------------- ----------- ----------- ---------- ---------------
Puerto Rico Highway and Transportation Auth,
Highway Rev Ser Y Res Int Tax-Exempt Sec Rec'ts Ser PA-114
8.145%, 07-01-11 ............................................. 04-02-96 $14,925,160 2.16% $15,280,431
</TABLE>
(R) This security is exempt from registration under rule 144A of the
Securities Act of 1933. Such security may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $3,992,760 or 0.56% of
net assets as of August 31, 1999.
* 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 $5,178,556 or 0.73% of
the Fund's net assets, have been purchased on a when-issued basis. The
purchase price and the 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 its when-issued commitments. Accordingly, the market value of
$5,323,979 of Commonwealth of Puerto Rico, 7.939%, 07-01-11, has been
segregated to cover the when-issued 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, 1999.
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.
26
<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,
1999 assigned to the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ---------------
General Obligation........................................... 7.26%
Revenue Bonds - Airport ..................................... 0.80
Revenue Bonds - Authority ................................... 1.19
Revenue Bonds - Bridge & Toll Road .......................... 0.88
Revenue Bonds - Building .................................... 0.09
Revenue Bonds - Combined .................................... 0.64
Revenue Bonds - Education ................................... 3.01
Revenue Bonds - Electric .................................... 14.48
Revenue Bonds - Environment ................................. 0.35
Revenue Bonds - Facility .................................... 0.43
Revenue Bonds - Financial ................................... 0.17
Revenue Bonds - General Purpose ............................. 0.27
Revenue Bonds - Health ...................................... 14.87
Revenue Bonds - Highway ..................................... 0.38
Revenue Bonds - Hospital .................................... 0.48
Revenue Bonds - Housing ..................................... 2.63
Revenue Bonds - Industrial Development ...................... 7.75
Revenue Bonds - Lease ....................................... 0.13
Revenue Bonds - Other ....................................... 4.65
Revenue Bonds - Pollution Control ........................... 13.48
Revenue Bonds - Recreational Facility ....................... 0.57
Revenue Bonds - Special Tax ................................. 0.26
Revenue Bonds - School ...................................... 0.74
Revenue Bonds - Solid Waste Disposal ........................ 0.44
Revenue Bonds - Special Assessment .......................... 0.13
Revenue Bonds - Transportation .............................. 19.54
Revenue Bonds - Water & Sewer ............................... 2.75
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.37%
==========
SEE NOTES TO FINANCIAL STATEMENTS.
27
<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, Class B and Class C shares. The Fund issued
Class C shares for the first time on April 1, 1999. 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $12,097,999 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 - $6,942,366 and August 31, 2003 -$5,155,633.
Availability of a certain amount of these loss carryforwards which were acquired
on December 6, 1996 in the merger with John Hancock Managed Tax-Exempt Fund, may
be limited in a given year. Additionally, net capital losses of $1,397,050
attributable to security transactions incurred after October 31, 1998 are
treated as arising on the first day (September 1, 1999) of the Fund's next
taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
28
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Tax-Free Bond Fund
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at time of disposition.
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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing. In
addition, a commitment fee based on the average daily unused portion of the line
of credit is allocated among the participating funds. The maximum loan balance
outstanding during the year amounted to $11,000,000. The annualized interest
rate charged during the period ranged from 5.1875% thru 5.8750%. At August 31,
1999, 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.
There were no open positions in financial futures contracts for the
year ended August 31, 1999.
OPTIONS The Fund may buy or sell options contracts. Listed options will be
valued at the last quoted sales price on the exchange on which they are
primarily traded. Over-the-counter options will be valued at the average of the
mean between the last bid and asked prices. 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.
29
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Tax-Free Bond Fund
The Fund may use option contracts to manage its exposure to the price
volatility of financial instruments. Writing puts and buying calls will tend to
increase the Fund's exposure to the underlying instrument and buying puts and
writing calls will tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset a contract
with a counterparty on a timely basis ("liquidity risk"). Exchange-traded
options have minimal credit risk as the exchanges act as counterparties to each
transaction, and only present liquidity risk in highly unusual market
conditions. To minimize credit and liquidity risks in over-the-counter option
contracts, the Fund will continuously monitor the creditworthiness of all its
counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's year-end
Statement of Assets and Liabilities.
There were no written option transactions for the year ended August 31,
1999.
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%, 1.60% and 1.70%
of the average net assets attributable to Class A and Class B and Class C,
respectively. This limitation may be discontinued at any time.
The Fund has an agreement with its custodian bank under which $59,116
of custodian fees have been reduced by balance credits applied during the year
ended August 31, 1999. If the Fund had not entered into this agreement, the
assets not invested, on which these balance credits were earned, could have
produced taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the year ended
August 31, 1999, net sales charges received with regard to sales of Class A
shares amounted to $672,963. Out of this amount, $21,505 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$301,766 was paid as sales commissions to unrelated broker-dealers and $349,692
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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 5.00% 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, 1999
the contingent deferred sales charges received by JH Funds amounted to $339,999.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% 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 C shares. There were no contingent
deferred sales charges received by JH Funds for the year ended August 31, 1999.
30
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Tax-Free Bond Fund
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, Class B and Class C 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 and Class C
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. Accordingly, the reduction in the distribution and service fee
amounted to $590,364 and $171,286 for Class A and Class B, respectively, for the
year ended August 31, 1999. This limitation may be discontinued at any time. 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.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Fund. 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., Mr. Stephen L. Brown, 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. The investment had no
impact on the operations of the Fund.
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, 1999, aggregated $98,777,066 and $137,759,519, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended August 31, 1999.
The cost of investments owned at August 31, 1999 for federal income tax
purposes was $651,966,870. Gross unrealized appreciation and depreciation of
investments aggregated $50,328,831 and $4,797,696 respectively, resulting in net
unrealized appreciation of $45,531,135.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended August 31, 1999, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $2,645, an
increase in undistributed net investment income of $895 and a decrease in
capital paid-in of $3,540. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of August
31, 1999. 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.
31
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John Hancock Funds - Tax-Free Bond Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Tax-Free Bond 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, 1999, 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, 1999, 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, 1999, 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 8, 1999
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,
1999.
None of the 1999 income dividends qualify for the corporate dividends
received deduction. Shareholders who are not subject to the alternative minimum
tax received income dividends which are 99.92% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 16.79%.
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 be mailed a 1999 U.S. Treasury Department Form
1099-DIV in January 2000. This will reflect the total of all distributions which
are taxable for calendar year 1999.
32
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John Hancock Funds - Tax-Free Bond Fund
33
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John Hancock Funds - Tax-Free Bond Fund
34
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John Hancock Funds - Tax-Free Bond Fund
35
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