UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5979
John Hancock California Tax-Free Income Fund
(Exact name of registrant as specified in charter)
601 Congress Street, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip code)
Alfred E. Ouellette
Senior Attorney & Assistant Secretary
601 Congress Street
Boston, Massachusetts 02210
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4324
Date of fiscal year end: August 31
Date of reporting period: August 31, 2005
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
California Tax-Free
Income Fund
8.31.2005
Annual Report
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Keith F. Hartstein, President and Chief Executive Officer,
flush left next to first paragraph.]
CEO CORNER
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
A look at performance
page 6
Growth of $10,000
page 7
Your expenses
page 8
Fund's investments
page 10
Financial statements
page 19
Trustees & officers
page 36
For more information
page 41
To Our Shareholders,
I am pleased to be writing to you as the new President and Chief Executive
Officer of John Hancock Funds, LLC, following the departure of James A.
Shepherdson to pursue other opportunities. In addition, on July 25, 2005,
your fund's Board of Trustees appointed me to the roles of President and
Chief Executive Officer of your fund.
As a means of introduction, I have been involved in the mutual fund industry
since 1985. I have been with John Hancock Funds for the last 15 years, most
recently as executive vice president of retail sales and marketing and a
member of the company's executive and investment committees. In my former
capacity, I was responsible for all aspects of the distribution and
marketing of John Hancock Funds' open-end and closed-end funds. Outside of
John Hancock, I have served as Chairman of the Investment Company Institute
(ICI) Sales Force Marketing Committee since September 2003.
It is an exciting time to be at John Hancock Funds, and I am grateful for
the opportunity to lead and shape its future growth. With the acquisition of
John Hancock by Manulife Financial Corporation in April 2004, we are
receiving broad support toward the goal of providing our shareholders with
excellent investment opportunities and a more complete lineup of choices for
the discerning investor.
As you may have read, John Hancock recently entered into an agreement with
GMO, a Boston-based institutional money manager, to acquire eight of its
mutual funds. In addition, we are in the process of adding five "Lifestyle
Portfolio" funds-of-funds that blend multiple fund offerings from internal
and external money managers to create a broadly diversified asset allocation
portfolio. Look for more information about these exciting additions to the
John Hancock family of funds in the near future.
Although there has been a change in executive-level management, rest assured
that the one thing that never wavers is John Hancock Funds' commitment to
placing the needs of shareholders above all else. We are all dedicated to
the task of working with you and your financial advisors to help you reach
your long-term financial goals.
Sincerely,
/S/ KEITH F. HARTSTEIN
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEO's views as of August 31, 2005. They are
subject to change at any time.
YOUR FUND
AT A GLANCE
The Fund seeks a
high level of current
income, consistent
with preservation of
capital, that is
exempt from federal
and California per-
sonal income taxes.
In pursuing this
goal, the Fund nor-
mally invests at least
80% of its assets in
securities of any
maturity exempt
from federal and
California personal
income tax.
Over the last twelve months
* Municipal bonds rallied, outpacing the broad taxable bond market;
California municipal bonds posted better results than the general municipal
market.
* The Fund's performance was due to favorable security selection and greater
interest rate sensitivity.
* Top-performing sectors included tobacco, education and transportation
bonds.
[Bar chart with heading "John Hancock California Tax-Free Income Fund."
Under the heading is a note that reads "Fund performance for the year ended
August 31, 2005." The chart is scaled in increments of 4% with 0% at the
bottom and 8% at the top. The first bar represents the 6.24% total return
for Class A. The second bar represents the 5.35% total return for Class B.
The third bar represents the 5.35% total return for Class C. A note below
the chart reads "Total returns for Fund are at net asset value with all
distributions reinvested. These returns do not reflect the deduction of the
maximum sales charge, which would reduce the performance shown above."]
Top 10 holdings
4.5% Foothill/Eastern Transportation Corridor Agency, 1-1-34, 6.000%
3.7% Santa Ana Financing Auth, 7-1-24, 6.250%
3.7% Sacramento Power Auth, 7-1-22, 6.000%
2.9% San Bernardino, County of, 8-1-17, 5.500%
2.8% Puerto Rico Aqueduct and Sewer Auth, 7-1-11, 9.120%
2.2% California, State of, 3-1-16, 6.824%
2.1% Puerto Rico, Commonwealth of, 7-1-15, 6.500%
1.9% Santa Clara County Financing Auth, 5-15-17, 5.500%
1.8% California, State of, 4-1-29, 4.750%
1.7% Puerto Rico, Commonwealth of, 7-1-18, 7.300%
As a percentage of net assets on August 31, 2005.
1
BY DIANNE SALES, CFA, AND BARRY EVANS, CFA, PORTFOLIO MANAGERS
MANAGERS'
REPORT
JOHN HANCOCK
California Tax-Free
Income Fund
Municipal bonds continued to perform well during the year ended August 31,
2005, outpacing the broad taxable bond market. The Lehman Brothers Municipal
Bond Index returned 5.31% for the 12-month period, while the broad Lehman
Brothers U.S. Aggregate Bond Index returned 4.15%.
The U.S. economy grew at a solid rate over the past year, reflecting
resilient consumer spending, increasing capital expenditures and improving
job growth. In view of this steady growth, the Federal Reserve raised
short-term interest rates eight times during the 12-month period, increasing
its federal funds rate target from 1.5% to 3.5%. Short-term bond yields rose
in concert with the Fed rate hikes, but longer-term yields remained
relatively low. Despite a dramatic swing in oil prices, long-term bond
investors grew confident that the Fed's measured approach would keep
inflation in check.
Lower-rated municipal bonds outperformed higher-quality issues during the
one-year period. A combination of strong demand from yield-hungry investors,
improving credit quality and a declining supply of lower-grade bonds
contributed to their outperformance. As a result, the gap between the yields
of high-quality and lower-quality bonds compressed significantly during the
12-month period.
"Municipal bonds continued
to perform well during the
year ended August 31, 2005,
outpacing the broad taxable
bond market."
California
California municipal bonds outperformed the national municipal market; the
Lehman Brothers California Municipal Bond Index returned 6.24%. Marked
improvement in the state's fiscal situation contributed positively to the
performance of California municipal bonds. The healthy economy provided a
lift to tax revenues, enabling the state to meet its aggressive budget
projections. Local municipalities also benefited as continued strength in
the housing
2
market boosted property tax revenues. In addition, both state and local
governments reduced interest costs by proactively refinancing a significant
amount of higher-yielding debt.
[Photos of Dianne Sales and Barry Evans flush right next to first
paragraph.]
Although the state has made excellent progress in its recovery -- which was
rewarded with a modest credit-rating upgrade in mid-2005 -- there is still
work to be done. We believe California's broad and diverse economy could
easily support an even higher credit rating, but we also recognize that the
state faces persistent budgetary challenges in the next year or two. Further
improvement in the state's credit quality is dependent on making the
necessary structural adjustments to get its fiscal house in order.
Fund performance
For the year ended August 31, 2005, John Hancock California Tax-Free Income
Fund's Class A, Class B and Class C shares posted total returns of 6.24%,
5.35% and 5.35%, respectively, at net asset value. By comparison, the
average California municipal debt fund returned 5.88%, according to Lipper,
Inc.,1 and the Lehman Brothers Municipal Bond Index returned 5.31%. 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. See pages six and seven for historical
performance information.
"The best-performing sector in
the portfolio was tobacco..."
The key to the Fund's performance was our continued emphasis on yield and
individual security selection. Diligent credit research enabled us to
identify attractively valued securities with above-average yields and strong
total-return prospects. Greater interest rate sensitivity also proved
valuable as longer-term bonds rallied during the period.
Tobacco bonds smoked
The best-performing sector in the portfolio was tobacco bonds backed by the
proceeds from a legal settlement between the state of California (in concert
with 45 other states) and the major tobacco companies. The Fund's tobacco
holdings, which gained more than 28% as a group, comprised about 5% of the
portfolio throughout the one-year period.
3
Tobacco bonds benefited from a series of favorable litigation outcomes and
the addition of another tobacco company to the settlement agreement. In
addition, as their yields declined, tobacco bonds became candidates for
refinancing -- California was the first state to pre-refund some of its
tobacco bonds, further elevating the sector's returns. In a pre-refunding, a
municipality issues new bonds and invests the proceeds in Treasury
securities until needed to pay off the older bonds. The Treasury-bond
backing typically enhances the credit quality of the old bonds, which in
turn has a positive impact on their value.
[Table at top left-hand side of page entitled "Sector Distribution2." The
first listing is General obligation 15%, the second is Revenue bonds -
Transportation 14%, the third Revenue bonds - Correctional facilities 10%,
the fourth Revenue bonds - Health 9%, the fifth Revenue bonds - Special tax
8%, the sixth Revenue bonds - Water & sewer 7%, the seventh Revenue bonds -
Tobacco 7%, the eighth Revenue bonds - Electric 5%, the ninth Revenue bonds
- - Tax allocation 5%, the tenth Revenue bonds - Leasing contracts 4%, the
eleventh Revenue bonds - Education 4%, the twelfth Revenue bonds - Housing
2%, the thirteenth Revenue bonds - Certificate of participation 2%, and the
fourteenth Revenue bonds - All other revenue 7%.]
Tobacco bonds have been the performance leaders in the portfolio for the
past two years. Nonetheless, we believe that these securities continue to
provide attractive relative value, and we plan to maintain exposure to this
segment of the municipal market.
Education and land-based bonds posted strong gains
Other sectors of the portfolio that fared well during the period included
education bonds, whose structure allowed them to benefit substantially from
falling interest rates. In addition, some of the state university system
bonds issued under the California State Public Works program received a
credit-rating upgrade along with all other state-issued bonds.
[Pie chart at middle of page with heading "Portfolio diversification2." The
chart is divided into three sections (from top to left): Revenue bonds 84%,
General obligation bonds 15% and Short-term investments & other 1%. ]
The portfolio's special-tax bonds, which typically finance real estate and
other land-based transactions, enjoyed another period of strong returns. The
booming California real-estate market and high investor demand for yield
enhanced the performance of the portfolio's land-based bonds. However, we
have been selective in
4
adding to this sector because we do not want to invest in developments that
would falter if the economy weakens. Our emphasis remains on properties
located in solid employment centers.
[Table at top of page entitled "Scorecard." The header for the left column
is "Investment" and the header for the right column is "Period's
performance...and what's behind the numbers." The first listing is
Tobacco-related bonds followed by an up arrow with the phrase "Benefited
from favorable litigation outcomes and refinancing." The second listing is
Lower-quality bonds followed by an up arrow with the phrase "Boosted by
improving credit quality and increased demand." The third listing is
Shorter-term bonds followed by a down arrow with the phrase "Declined as
the Fed raised short-term interest rates."]
Outlook
The aftereffects of Hurricane Katrina are likely to dampen economic growth
in the coming months, which could lead the Fed to slow the pace of its rate
hikes. However, we would also expect a slower economy to restrain overall
inflation despite potential increases in the prices of oil and other
commodities. These are all factors that bode well for the bond market.
"Municipal bonds are attractively
valued relative to other segments of
the bond market."
Municipal bonds are attractively valued relative to other segments of the
bond market. As of August 31, 2005, the yield on a 30-year, AAA-rated
general obligation bond was 99% of the yield on a Treasury bond of
comparable maturity. This relative yield relationship provides strong value
for the tax-exempt investor and should sustain the healthy demand for
municipal securities by attracting non-traditional investors to the
municipal market.
This commentary reflects the views of the portfolio managers through the end
of the Fund's period discussed in this report. The managers' statements
reflect their own opinions. As such, they are in no way guarantees of future
events, and are not intended to be used as investment advice or a
recommendation regarding any specific security. They are also subject to
change at any time as market and other conditions warrant.
1 Figures from Lipper, Inc. include reinvested dividends and do not take
into account sales charges. Actual load-adjusted performance is lower.
2 As a percentage of net assets on August 31, 2005.
5
A LOOK AT
PERFORMANCE
For the period ended
August 31, 2005
Class A Class B Class C
Inception date 12-29-89 12-31-91 4-1-99
Average annual returns with maximum sales charge (POP)
One year 1.50% 0.35% 4.35%
Five years 4.66 4.43 4.73
Ten years 5.56 5.40 --
Since inception -- -- 4.01
Cumulative total returns with maximum sales charge (POP)
One year 1.50 0.35 4.35
Five years 25.60 24.19 26.02
Ten years 71.75 69.26 --
Since inception -- -- 28.70
SEC 30-day yield as of August 31, 2005
4.01 3.35 3.35
Performance figures assume all distributions are reinvested. Returns with
maximum sales charge reflect a sales charge on Class A shares of 4.50%, and
the applicable contingent deferred sales charge (CDSC) on Class B and Class
C shares. The returns for Class C shares have been adjusted to reflect the
elimination of the front-end sales charge effective July 15, 2004. The Class
B shares' CDSC declines annually between years 1-6 according to the
following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed
after the sixth year. Class C shares held for less than one year are subject
to a 1% CDSC.
The returns reflect past results and should not be considered indicative of
future performance. The return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than
their original cost. Due to market volatility, the Fund's current
performance may be higher or lower than the performance shown. For
performance data current to the most recent month-end, please call
1-800-225-5291 or visit the Fund's Web site at www.jhfunds.com.
The performance table above and the chart on the next page do not reflect
the deduction of taxes that a shareholder would pay on fund distributions or
the redemption of fund shares. 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.
The Fund's performance results reflect any applicable expense reductions,
without which the expenses would increase and results would have been less
favorable.
6
GROWTH OF
$10,000
This chart shows what happened to a hypothetical $10,000 investment in Class
A shares for the period indicated. For comparison, we've shown the same
investment in the Lehman Brothers Municipal Bond Index.
Lehman
Brothers
Cum Value Cum Value Municipal
of $10K of $10K Bond
Plot Date (No Load) (W/Load) Index
8-31-95 $10,000 $9,500 $10,000
9-30-95 10,057 9,605 10,063
2-29-96 10,642 10,163 10,487
8-31-96 10,758 10,274 10,524
2-28-97 11,278 10,771 11,064
8-31-97 11,803 11,272 11,497
2-28-98 12,432 11,873 12,076
8-31-98 12,900 12,319 12,491
2-28-99 13,189 12,595 12,818
8-31-99 12,914 12,333 12,563
2-29-00 12,834 12,256 12,533
8-31-00 13,680 13,064 13,399
2-28-01 14,294 13,651 14,100
8-31-01 14,947 14,274 14,770
2-28-02 15,062 14,384 15,064
8-31-02 15,623 14,920 15,692
2-28-03 15,997 15,277 16,219
8-31-03 15,699 14,992 16,184
2-29-04 16,897 16,136 17,240
8-31-04 16,930 16,168 17,335
2-28-05 17,442 16,656 17,750
8-31-05 17,985 17,175 18,255
[Line chart with the heading "GROWTH OF $10,000." Within the chart are
three lines. The first line represents the Lehman Brothers Municipal Bond
Index and is equal to $18,255 as of August 31, 2005. The second line
represents the value of the hypothetical $10,000 investment made in the
John Hancock California Tax-Free Income Fund Class A, without sales charge
(NAV), and is equal to $17,985 as of August 31, 2005. The third line
represents the value of the same hypothetical investment made in the John
Hancock California Tax-Free Income Fund Class A, with sales charge (POP),
and is equal to $17,175 as of August 31, 2005.]
Class B 1 Class C 1
Period beginning 8-31-95 4-1-99
California Tax-Free Income Fund $16,926 $12,870
Index 18,255 14,222
Assuming all distributions were reinvested for the period indicated, the
table above shows the value of a $10,000 investment in the Fund's Class B
and Class C shares, respectively, as of August 31, 2005. The Class C shares
investment with maximum sales charge has been adjusted to reflect the
elimination of the front-end sales charge effective July 15, 2004.
Performance of the classes will vary based on the difference in sales
charges paid by shareholders investing in the different classes and the fee
structure of those classes.
Lehman Brothers Municipal Bond Index is an unmanaged index that includes
municipal bonds and is commonly used as a measure of bond performance. It is
not possible to invest directly in an index. Index figures do not reflect
sales charges and would be lower if they did.
1 No contingent deferred sales charge applicable.
7
YOUR
EXPENSES
These examples are intended to help you understand your ongoing operating
expenses.
Understanding fund expenses
As a shareholder of the Fund, you incur two types of costs:
* Transaction costs which include sales charges (loads) on purchases or
redemptions (varies by share class), minimum account fee charge, etc.
* Ongoing operating expenses including management fees, distribution and
service fees (if applicable) and other fund expenses.
We are going to present only your ongoing operating expenses here.
Actual expenses/actual returns
This example is intended to provide information about your fund's actual
ongoing operating expenses, and is based on your fund's actual return. It
assumes an account value of $1,000.00 on February 28, 2005, with the same
investment held until August 31, 2005.
Account value Expenses paid
$1,000.00 Ending value during period
on 2-28-05 on 8-31-05 ended 8-31-05 1
Class A $1,031.30 $4.47
Class B 1,026.90 8.82
Class C 1,026.90 8.82
Together with the value of your account, you may use this information to
estimate the operating expenses that you paid over the period. Simply divide
your account value at August 31, 2005 by $1,000.00, then multiply it by the
"expenses paid" for your share class from the table above. For example, for
an account value of $8,600.00, the operating expenses should be calculated
as follows:
Example
-- -- -- --
| My account value / | | "expenses paid" | My
| / $1,000.00 = 8.6 | X $| | = actual
| $8,600.00 / | | from table | expenses
-- -- -- --
8
Hypothetical example for comparison purposes
This table allows you to compare your fund's ongoing operating expenses with
those of any other fund. It provides an example of the Fund's hypothetical
account values and hypothetical expenses based on each class's actual
expense ratio and an assumed 5% annual return before expenses (which is not
your fund's actual return). It assumes an account value of $1,000.00 on
February 28, 2005, with the same investment held until August 31, 2005. Look
in any other fund shareholder report to find its hypothetical example and
you will be able to compare these expenses.
Account value Expenses paid
$1,000.00 Ending value during period
on 2-28-05 on 8-31-05 ended 8-31-05 1
Class A $1,020.80 $4.45
Class B 1,016.50 8.77
Class C 1,016.50 8.77
Remember, these examples do not include any transaction costs, such as sales
charges; therefore, these examples will not help you to determine the
relative total costs of owning different funds. If transaction costs were
included, your expenses would have been higher. See the prospectus for
details regarding transaction costs.
1 Expenses are equal to the Fund's annualized expense ratio of 0.88%, 1.73%
and 1.73% for Class A, Class B and Class C shares, respectively, multiplied
by the average account value over the period, multiplied by number of days
in most recent fiscal half-year/365 or 366 (to reflect the one-half year
period).
9
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
August 31, 2005
This schedule is divided into two main categories: tax-exempt long-term
bonds and short-term investments. Tax-exempt long-term bonds are broken down
by state or territory. Under each state or territory is a list of securities
owned by the Fund. Short-term investments, which represent the Fund's cash
position, are listed last.
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
Tax-exempt long-term bonds 98.95% $341,996,125
(Cost $307,587,627)
California 87.94% 303,932,420
ABAG Finance Authority for Nonprofit Corps,
Rev Cert of Part Nat'l Ctr for Int'l
Schools Proj (G) 7.375% 05-01-18 BB+ $4,300 4,452,822
Rev San Diego Hosp Assn Ser 2001A 6.125 08-15-20 BBB+ 2,000 2,196,740
Anaheim Public Financing Auth,
Rev Lease Cap Apprec Sub Pub Imp Proj
Ser 1997C Zero 09-01-18 AAA 3,000 1,732,140
Anaheim, City of,
Rev Ref Cert of Part Reg
Convention Ctr (P) 10.090 07-16-23 AAA 2,000 2,308,440
Antioch Public Financing Auth,
Rev Ref Reassessment Sub Ser 1998B (G) 5.850 09-02-15 BB+ 1,400 1,494,612
Belmont Community Facilities District,
Rev Spec Tax Dist No. 2000 1 Library
Proj Ser 2004A 5.750 08-01-24 Aaa 1,000 1,226,110
California County Tobacco
Securitization Agency,
Rev Asset Backed Bond Fresno County
Fdg Corp 6.000 06-01-35 BBB 1,765 1,890,139
Rev Asset Backed Bond Kern County
Corp Ser 2002A 6.125 06-01-43 BBB 5,000 5,391,150
Rev Asset Backed Bond Stanislaus Fdg
Ser 2002A 5.500 06-01-33 Baa3 1,000 1,036,370
California Department of
Water Resources,
Rev Pwr Supply Ser 2002A 5.375 05-01-21 BBB+ 4,000 4,376,600
See notes to
financial statements.
10
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
California Educational Facilities Auth,
Rev Ref Pooled College & Univ Financing
Ser 1993B 6.125% 06-01-09 Baa2 $20 $20,111
Rev Univ of San Diego Ser 2002A 5.500 10-01-32 A1 1,435 1,542,309
California Health Facilities Financing Auth,
Rev Catholic Healthcare West
Ser 2004G 5.250 07-01-23 A- 1,000 1,060,840
Rev Ref Cedars Sinai Med Ctr 5.000 11-15-34 A3 3,000 3,100,110
Rev Ref Insd de Las Companas
Ser 1995A 5.750 07-01-15 AAA 2,000 2,044,580
Rev Ref Insd Hlth Facil-Small Facil
Ser 1994B 7.500 04-01-22 A 1,595 1,632,068
California Infrastructure & Economic
Development Bank,
Rev J David Gladstone Inst Proj 5.250 10-01-34 A- 1,000 1,041,700
Rev Kaiser Hosp Asst I LLC Ser 2001A 5.550 08-01-31 A+ 3,000 3,214,830
California Pollution Control Financing Auth,
Rev Poll Control Pacific Gas & Electric
Ser 1996A 5.350 12-01-16 AAA 1,000 1,088,890
Rev Poll Control Southern Calif Edison Co 6.900 12-01-17 BBB+ 500 500,405
Rev Poll Control Southern Calif Edison Co
Ser 1985A 2.000 03-01-08 BBB+ 1,500 1,488,435
Rev Solid Waste Disposal Keller Canyon
Landfill Co Proj 6.875 11-01-27 BB- 2,000 2,030,000
California Rural Home Mortgage Finance Auth,
Rev Single Family Mtg Backed Sec's Prog
Ser 1996A 7.750 05-01-27 AAA 10 10,061
Rev Single Family Mtg Backed Sec's Prog
Ser 1996A 7.550 11-01-26 AAA 15 15,088
California State Economic Recovery Auth,
Gen Oblig Unltd Ser 2004B 5.000 07-01-23 AA- 2,000 2,102,780
California State Public Works Board,
Rev Lease Dept of Corrections Ser 1996A 5.500 01-01-15 AAA 5,145 5,292,764
Rev Lease Dept of Corrections Ser 1996A 5.250 01-01-21 AAA 4,500 4,531,950
Rev Lease Dept of Corrections Ser 2003C 5.500 06-01-18 A- 5,000 5,578,100
Rev Ref Lease Dept of Corrections State
Prisons Ser 1993A 5.000 12-01-19 AAA 5,000 5,493,800
Rev Ref Lease Various Univ of Calif Projs
Ser 1993A 5.500 06-01-21 AA- 1,250 1,251,438
See notes to
financial statements.
11
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
California Statewide Communities
Development Auth,
Rev Cert of Part Catholic
Healthcare West 6.500% 07-01-20 A- $4,365 $4,896,482
Rev Ref Cert of Part Univ Corp Calif
State Univ 6.000 04-01-26 AAA 1,620 1,662,703
California Statewide Financing Auth,
Rev Tobacco Settlement Asset Backed
Bond 2002A 6.000 05-01-37 Baa3 2,500 2,675,850
Rev Tobacco Settlement Asset Backed
Bond 2002B 6.000 05-01-37 Baa3 4,000 4,281,360
California, State of,
Gen Oblig Unltd 5.125 04-01-23 A 2,000 2,156,000
Gen Oblig Unltd 5.125 11-01-24 A 3,500 3,751,685
Gen Oblig Unltd (P) 2.210 05-01-34 AA 2,400 2,400,000
Gen Oblig Unltd Ref (P) 6.824 03-01-16 AAA 6,255 7,470,221
Gen Oblig Unltd Ref 4.750 04-01-29 AAA 6,000 6,111,000
Capistrano Unified School District,
Rev Spec Tax Cmty Facil Dist
No. 90 2 (G) 6.000 09-01-33 BB 750 804,060
Rev Spec Tax Cmty Facil Dist
No. 90 2 (G) 5.875 09-01-23 BB 500 537,765
Rev Spec Tax Cmty Facil Dist
No. 92 1 (G) 7.100 09-01-21 AA 2,090 2,271,579
Rev Spec Tax Cmty Facil Dist
No. 98 2 (G) 5.750 09-01-29 BB+ 2,470 2,758,150
Carson, City of,
Rev Spec Assessment Imp Bond
Act of 1915 Dist No. 2001 1 (G) 6.375 09-02-31 BB+ 1,375 1,434,565
Center Unified School District,
Gen Oblig Unltd Ref Cap Apprec
Ser 1997C Zero 09-01-16 AAA 2,145 1,369,625
Contra Costa County Public Financing Auth,
Rev Ref Lease Various Cap
Facil Ser 1999 A 5.000 06-01-28 AAA 3,000 3,109,020
Corona Community Facilities District,
Rev Special Tax Escrow 97 2 (G) 5.875 09-01-23 BB+ 1,385 1,450,968
Costa Mesa Public Financing Auth,
Rev Local Agency Ser 1991A (G) 7.100 08-01-21 BBB 200 202,386
Culver City Redevelopment Finance Auth,
Rev Ref Tax Alloc Sub Ser 1999B (G) 6.200 11-01-18 BBB- 2,000 2,032,920
See notes to
financial statements.
12
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
Del Mar Race Track Auth,
Rev Ref Ser 1996 (G) 6.200% 08-15-11 BBB $1,865 $1,957,485
Rev Ref Ser 1996 (G) 6.000 08-15-06 BBB 500 514,135
Rev Ref Ser 2005 (N) 5.000 08-15-25 BBB- 1,000 1,047,110
Foothill/Eastern Transportation
Corridor Agency,
Rev Ref Toll Rd Cap Apprec Zero 01-15-25 BBB- 6,615 2,186,853
Rev Ref Toll Rd Cap Apprec Zero 01-15-36 BBB- 30,000 5,068,500
Rev Ref Toll Rd Sr Lien Ser 1995A 6.500 01-01-32 AAA 1,665 1,746,335
Rev Ref Toll Rd Sr Lien Ser 1995A 6.000 01-01-34 AAA 14,775 15,400,721
Fresno Joint Powers Financing Auth,
Rev Ref Ser 1994A 6.550 09-02-12 BBB+ 1,500 1,518,195
Fresno, City of,
Rev Swr Ser A 1 5.250 09-01-19 AAA 1,000 1,145,750
Fullerton Community Facilities District,
Rev Spec Tax Amerige Heights
Dist No. 1 (G) 6.200 09-01-32 BB 1,000 1,062,510
Golden State Tobacco Securitization Corp,
Rev Asset Backed Bond Ser 2003A 6.250 06-01-33 BBB 3,000 3,348,360
Rev Asset Backed Bond Ser 2003B 5.375 06-01-28 A- 3,000 3,287,070
Irvine, City of,
Rev Meadows Mobile Home Park
Ser 1998A (G) 5.700 03-01-28 BBB- 3,975 4,077,515
Irwindale Community Redevelopment Agency,
Rev Ref Tax Alloc Sub Lien
Ind'l Dev Proj (G) 7.050 06-01-26 BBB 2,750 2,891,790
Laguna Salada Union School District,
Gen Oblig Unltd Ser 2000C Zero 08-01-26 AAA 1,000 389,420
Lancaster School District,
Rev Ref Cert of Part Cap Apprec Zero 04-01-19 AAA 1,730 960,911
Rev Ref Cert of Part Cap Apprec Zero 04-01-22 AAA 1,380 659,957
Lee Lake Water District,
Rev Spec Tax Cmty Facil Dist No. 2
Montecito Ranch (G) 6.125 09-01-27 BB 1,200 1,250,508
Long Beach, City of,
Rev Ref Harbor Ser 1998A 6.000 05-15-18 AAA 2,660 3,124,649
Rev Spec Tax Cmty Facil
Dist No. 6 Pike (G) 6.250 10-01-26 BB- 2,500 2,616,075
See notes to
financial statements.
13
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
Los Angeles Community Facilities District,
Rev Spec Tax No. 3 Cascades Business
Park Proj (G) 6.400% 09-01-22 BB+ $1,000 $1,051,340
Los Angeles Community Redevelopment
Rev MultiFamily Grand Central Square
Ser 1993A 5.850 12-01-26 BBB- 2,000 2,001,660
Los Angeles Unified School District,
Gen Oblig Unltd Election of 1997
Ser 2002E 5.500 07-01-17 AAA 1,500 1,699,350
Millbrae, City of,
Rev Magnolia of Milbrae
Proj Ser 1997A (G) 7.375 09-01-27 BB 2,500 2,564,750
New Haven Unified School District,
Gen Oblig Unltd Cap Apprec Ser 1998B Zero 08-01-22 AAA 14,200 5,882,634
Northern California Transmission Agency,
Rev Ref Calif-Oregon Transm Proj
Ser 1990A 7.000 05-01-13 AAA 100 120,328
Orange Cove Irrigation District,
Rev Ref Cert of Part Rehab Proj 5.000 02-01-17 AAA 2,045 2,102,117
Orange, County of,
Rev Ref Cert of Part Recovery Ser 1996A 5.800 07-01-16 AAA 2,000 2,088,420
Rev Spec Assessment Imp Bond Act 1915
Ltd Oblig (G) 5.750 09-02-33 BB+ 1,570 1,615,593
Rev Spec Tax Cmty Facil Dist No. 1 Ladera
Ranch Ser 2000A (G) 6.250 08-15-30 BB+ 1,000 1,070,110
Paramount Unified School District,
Gen Oblig Unltd Cap Apprec Bonds
Ser 2001B Zero 09-01-25 AAA 4,735 1,923,594
Pasadena, City of,
Cert of Part Ref Old Pasadena
Parking Facil Proj 6.250 01-01-18 AA- 1,100 1,282,314
Poway, City of,
Rev Ref Cmty Facil Dist
No. 88 1 Pkwy Business Ctr (G) 6.750 08-15-15 BB 1,000 1,099,610
Rancho Santa Fe Community
Services District,
Rev Spec Tax Cmty Facil Dist No. 1 (G) 6.700 09-01-30 BB 1,000 1,055,500
Redondo Beach Public Financing Auth,
Rev South Bay Center Redevel Proj (G) 7.000 07-01-16 BBB+ 950 988,675
See notes to
financial statements.
14
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
Riverside County Asset Leasing Corp,
Rev Leasehold Linked Ctfs Riverside
County Ser 1993A 6.500% 06-01-12 A+ $1,000 $1,160,320
Sacramento City Financing Auth,
Rev Convention Ctr Hotel Sr
Ser 1999A (G) 6.250 01-01-30 BB+ 5,000 5,268,300
Sacramento County Sanitation District,
Rev Ref Ser 2000A 5.875 12-01-27 AA 1,500 1,525,560
Sacramento Municipal Utility District,
Rev Ref Electric Ser 2001P 5.250 08-15-21 AAA 1,000 1,085,490
Sacramento Power Auth,
Rev Cogeneration Proj 6.000 07-01-22 BBB 12,000 12,553,200
San Bernardino, County of,
Rev Cert of Part Cap Facil Proj Ser 1992B 6.875 08-01-24 AAA 350 468,307
Rev Ref Cert of Part Med Ctr Fin Proj 5.500 08-01-17 AAA 8,750 9,893,800
San Bruno Park School District,
Gen Oblig Unltd Cap Apprec Ser 2000B Zero 08-01-21 AAA 1,015 505,338
Gen Oblig Unltd Cap Apprec Ser 2000B Zero 08-01-23 AAA 1,080 485,730
San Diego County Water Auth,
Rev Ref Cert of Part Inverse Floater (P) 9.007 04-23-08 AAA 1,000 1,136,000
Rev Ref Cert of Part Inverse Floater (P) 9.007 04-22-09 AAA 400 470,816
San Diego Redevelopment Agency,
Rev Ref Tax Alloc Cap Apprec
Ser 1999B (G) Zero 09-01-17 BB 1,600 877,184
Rev Ref Tax Alloc Cap Apprec
Ser 1999B (G) Zero 09-01-18 BB 1,700 872,967
Rev Ref Tax Alloc City Heights Proj
Ser 1999A (G) 5.800 09-01-28 BB 1,395 1,438,622
Rev Tax Alloc City Heights Proj
Ser 1999A (G) 5.750 09-01-23 BB 1,000 1,034,220
San Diego Unified School District,
Gen Oblig Unltd Cap Apprec Ser 1999A Zero 07-01-21 AAA 2,500 1,249,225
Gen Oblig Unltd Election of 1998
Ser 2000B 5.000 07-01-25 AAA 2,450 2,647,078
San Francisco City & County
Redevelopment Agency,
Rev Cmty Facil Dist No. 6
Mission Ser 2001A (G) 6.000 08-01-25 BB 2,500 2,638,175
Rev Spec Tax Cmnty Facil Dist No. 6
Ser 2005A (G) 5.150 08-01-35 BB 1,250 1,267,000
See notes to
financial statements.
15
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
San Francisco State Building Auth,
Rev Ref Lease Dept of Gen Serv
Ser 1993A 5.000% 10-01-13 A- $2,145 $2,343,713
San Joaquin Hills Transportation
Corridor Agency,
Rev Ref Toll Rd Conv Cap Apprec
Ser 1997A Step Coupon
(5.750%, 01-15-07) (O) Zero 01-15-21 BB 5,000 4,730,600
Rev Toll Rd Sr Lien Zero 01-01-14 AAA 5,000 3,656,700
Rev Toll Rd Sr Lien Zero 01-01-22 AAA 6,500 3,270,410
San Marcos Public Facilities Auth,
Rev Sub Tax Increment Proj Area 3
Ser 1999A (G) 6.000 08-01-31 BB 1,305 1,452,295
San Mateo County Joint Power Auth,
Rev Ref Lease Cap Proj Prog 5.000 07-01-21 AAA 1,815 2,028,553
Santa Ana Financing Auth,
Rev Lease Police Admin & Hldg Facil
Ser 1994A 6.250 07-01-19 AAA 1,790 2,210,292
Rev Lease Police Admin & Hldg Facil
Ser 1994A 6.250 07-01-24 AAA 10,000 12,622,700
Rev Ref Mainplace Proj Ser 1998D (G) 5.600 09-01-19 BBB- 1,000 1,111,140
Santa Clara County Financing Auth,
Rev Ref Lease Multiple Facil Projs
Ser 2000B 5.500 05-15-17 AAA 6,000 6,616,560
Santa Margarita Water District,
Rev Spec Tax Cmty Facil
Dist No. 99 1 (G) 6.000 09-01-30 BB+ 500 536,725
Santaluz Community Facilities District,
Rev Spec Tax Dist No. 2
Imp Area No. 1 (G) 6.375 09-01-30 BB 1,495 1,526,829
Southern California Home
Financing Auth,
Rev Single Family GNMA & FNMA Mtg
Backed Secs Ser 1992A 6.750 09-01-22 AAA 25 25,000
Southern California Public Power Auth,
Rev Ref Southern Transm Proj Zero 07-01-13 AAA 4,400 3,288,956
See notes to
financial statements.
16
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
State, issuer, description rate date rating (A) (000) Value
California (continued)
Tobacco Securitization Authority of
Northern California,
Rev Asset Backed Bond Ser 2001A 5.375% 06-01-41 BBB $1,000 $1,025,890
Torrance, City of,
Rev Ref Hosp Torrance
Mem Med Ctr Ser 2001A 5.500 06-01-31 A+ 2,000 2,122,980
Tustin Unified School District,
Rev Spec Tax Cmty Facil Dist No. 97 1 6.375 09-01-35 AAA 1,000 1,115,750
Vallejo Sanitation and Flood Control District,
Rev Ref Cert of Part 5.000 07-01-19 AAA 2,500 2,786,050
West Covina Redevelopment Agency,
Rev Ref Cmty Facil Dist Fashion
Plaza Proj 6.000 09-01-22 AA 3,000 3,562,380
Florida 0.79% 2,751,400
Capital Trust Agency,
Rev Seminole Tribe Convention
Ser 2002A (G) 10.000 10-01-33 BB 2,500 2,751,400
Puerto Rico 10.22% 35,312,305
Puerto Rico Aqueduct and Sewer Auth,
Rev Ref Inverse Floater (Gtd) (P) 9.120 07-01-11 AAA 7,500 9,530,100
Puerto Rico Highway &
Transportation Auth,
Rev Ref Ser 1996Z 6.250 07-01-14 AAA 3,250 3,929,380
Rev Ref Ser 1998A 5.000 07-01-38 AAA 5,000 5,256,800
Puerto Rico Ind'l, Tourist, Ed'l,
Med & Environmental Control Facilities
Financing Auth,
Rev Hosp de La Concepcion
Ser 2000A 6.500 11-15-20 AA 500 569,835
Puerto Rico Public Finance Corp,
Rev Commonwealth Approp Ser 2002E 5.700 08-01-25 BBB- 2,500 2,760,100
Puerto Rico, Commonwealth of,
Gen Oblig Unltd 6.500 07-01-15 BBB 6,000 7,280,040
Gen Oblig Unltd Ser 975 (P) 7.300 07-01-18 Aaa 5,000 5,986,050
See notes to
financial statements.
17
FINANCIAL STATEMENTS
Interest Par value
Issuer, description, maturity date rate (000) Value
Short-term investments 0.27% $935,000
(Cost $935,000)
Joint Repurchase Agreement 0.27% 935,000
Investment in a joint repurchase agreement
transaction with Morgan Stanley --
Dated 8-31-05, due 9-1-05 (secured
by U.S. Treasury Inflation Indexed
Note 1.875%, due 7-15-13) 3.550% $935 935,000
Total investments 99.22% $342,931,125
Other assets and liabilities, net 0.78% $2,696,502
Total net assets 100.00% $345,627,627
(A) Credit ratings are unaudited and are rated by Moody's Investors Service
or Fitch where Standard & Poor's ratings are not available, unless
indicated otherwise.
(G) Security rated internally by John Hancock Advisers, LLC.
(N) This security having an aggregate value of $1,047,110 or 0.30% of the
Fund's net assets, has 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
commitment. Accordingly, the market value of $1,146,585 of Foothill/Eastern
Transportation Corridor Agency, 6.000%, 1-1-34 has been segregated to cover
the when-issued commitment.
(O) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(P) Represents rate in effect on August 31, 2005.
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.
18
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
August 31, 2005
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of
what the Fund
owns, is due
and owes. You'll
also find the net
asset value and
the maximum
offering price
per share.
Assets
Investments at value (cost $308,522,627) $342,931,125
Cash 63
Receivable for shares sold 57,304
Interest receivable 4,257,586
Other assets 94,666
Total assets 347,340,744
Liabilities
Payable for investments purchased 1,037,990
Payable for shares repurchased 263,296
Dividends payable 40,443
Payable to affiliates
Management fees 171,482
Distribution and service fees 8,629
Other 18,266
Other payables and accrued expenses 173,011
Total liabilities 1,713,117
Net assets
Capital paid-in 315,740,327
Accumulated net realized loss on investments
and swap contracts (4,560,077)
Net unrealized appreciation of investments 34,408,498
Accumulated net investment income 38,879
Net assets $345,627,627
Net asset value per share
Based on net asset values and shares outstanding --
the Fund has an unlimited number of shares
authorized with no par value
Class A ($306,275,074 [DIV] 27,633,844 shares) $11.08
Class B ($32,450,924 [DIV] 2,928,053 shares) $11.08
Class C ($6,901,629 [DIV] 622,716 shares) $11.08
Maximum offering price per share
Class A 1 ($11.08 [DIV] 95.5%) $11.60
1 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.
See notes to
financial statements.
19
FINANCIAL STATEMENTS
OPERATIONS
For the year ended
August 31, 2005
This 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.
Investment income
Interest $19,136,507
Total investment income 19,136,507
Expenses
Investment management fees 1,931,969
Class A distribution and service fees 460,238
Class B distribution and service fees 374,354
Class C distribution and service fees 70,061
Transfer agent fees 154,002
Miscellaneous 100,824
Custodian 86,466
Accounting and legal services fees 83,356
Professional fees 48,062
Printing 41,560
Trustees' fees 21,259
Registration and filing fees 13,074
Interest 6,715
Total expenses 3,391,940
Less expense reimbursements (185)
Net expenses 3,391,755
Net investment income 15,744,752
Realized and unrealized gain (loss)
Net realized gain (loss) on
Investments 1,278,225
Swap contracts (1,882,862)
Change in net unrealized appreciation (depreciation) of
Investments 5,136,423
Swap contracts 906,726
Net realized and unrealized gain 5,438,512
Increase in net assets from operations $21,183,264
See notes to
financial statements.
20
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
These Statements
of Changes in Net
Assets show how
the value of the
Fund's net assets
has changed
during the last
two periods. The
difference reflects
earnings less
expenses, any
investment
gains and losses,
distributions, if
any, paid to
shareholders and
the net of Fund
share transactions.
Year Year
ended ended
8-31-04 8-31-05
Increase (decrease) in net assets
From operations
Net investment income $16,929,825 $15,744,752
Net realized gain (loss) 704,505 (604,637)
Change in net unrealized
appreciation (depreciation) 9,643,079 6,043,149
Increase in net assets resulting
from operations 27,277,409 21,183,264
Distributions to shareholders
From net investment income
Class A (14,521,794) (13,877,944)
Class B (1,897,914) (1,376,242)
Class C (300,970) (256,995)
(16,720,678) (15,511,181)
From Fund share transactions (24,356,932) (17,981,803)
Net assets
Beginning of period 371,737,548 357,937,347
End of period 1 $357,937,347 $345,627,627
1 Includes accumulated net investment income of $39,250 and $38,879,
respectively.
See notes to
financial statements.
21
FINANCIAL HIGHLIGHTS
FINANCIAL
HIGHLIGHTS
CLASS A SHARES
The Financial Highlights show how the Fund's net asset value for a share
has changed since the end of the previous period.
Period ended 8-31-01 1 8-31-02 1,2 8-31-03 8-31-04 8-31-05
Per share operating performance
Net asset value,
beginning of period $10.69 $11.11 $11.06 $10.60 $10.91
Net investment income 3 0.54 0.54 0.53 0.52 0.51
Net realized and unrealized
gain (loss) on investments 0.42 (0.06) (0.47) 0.30 0.16
Total from
investment operations 0.96 0.48 0.06 0.82 0.67
Less distributions
From net investment income (0.54) (0.53) (0.52) (0.51) (0.50)
Net asset value, end of period $11.11 $11.06 $10.60 $10.91 $11.08
Total return 4 (%) 9.26 5 4.52 5 0.48 7.84 6.24
Ratios and supplemental data
Net assets, end of period
(in millions) $331 $347 $308 $308 $306
Ratio of expenses
to average net assets (%) 0.80 0.84 0.84 0.83 0.86
Ratio of adjusted expenses
to average net assets 6 (%) 0.82 0.84 -- -- --
Ratio of net investment income
to average net assets (%) 5.01 4.95 4.79 4.72 4.59
Portfolio turnover (%) 14 15 18 21 13
See notes to
financial statements.
22
FINANCIAL HIGHLIGHTS
CLASS B SHARES
Period ended 8-31-01 1 8-31-02 1,2 8-31-03 8-31-04 8-31-05
Per share operating performance
Net asset value,
beginning of period $10.69 $11.11 $11.06 $10.60 $10.91
Net investment income 3 0.46 0.45 0.44 0.42 0.41
Net realized and unrealized
gain (loss) on investments 0.42 (0.06) (0.47) 0.31 0.16
Total from
investment operations 0.88 0.39 (0.03) 0.73 0.57
Less distributions
From net investment income (0.46) (0.44) (0.43) (0.42) (0.40)
Net asset value, end of period $11.11 $11.06 $10.60 $10.91 $11.08
Total return 4 (%) 8.45 5 3.67 5 (0.37) 6.93 5.35
Ratios and supplemental data
Net assets, end of period
(in millions) $80 $65 $55 $43 $32
Ratio of expenses
to average net assets (%) 1.55 1.65 1.69 1.69 1.71
Ratio of adjusted expenses
to average net assets 6 (%) 1.67 1.69 -- -- --
Ratio of net investment income
to average net assets (%) 4.26 4.14 3.95 3.87 3.75
Portfolio turnover (%) 14 15 18 21 13
See notes to
financial statements.
23
FINANCIAL HIGHLIGHTS
CLASS C SHARES
Period ended 8-31-01 1 8-31-02 1,2 8-31-03 8-31-04 8-31-05
Per share operating performance
Net asset value,
beginning of period $10.69 $11.11 $11.06 $10.60 $10.91
Net investment income 3 0.45 0.45 0.43 0.42 0.41
Net realized and unrealized
gain (loss) on investments 0.42 (0.06) (0.47) 0.31 0.16
Total from
investment operations 0.87 0.39 (0.04) 0.73 0.57
Less distributions
From net investment income (0.45) (0.44) (0.42) (0.42) (0.40)
Net asset value, end of period $11.11 $11.06 $10.60 $10.91 $11.08
Total return 4 (%) 8.34 5 3.64 5 (0.37) 6.93 5.35
Ratios and supplemental data
Net assets, end of period
(in millions) $4 $8 $9 $7 $7
Ratio of expenses
to average net assets (%) 1.65 1.69 1.69 1.69 1.71
Ratio of adjusted expenses
to average net assets 6 (%) 1.67 1.69 -- -- --
Ratio of net investment income
to average net assets (%) 4.16 4.10 3.93 3.87 3.74
Portfolio turnover (%) 14 15 18 21 13
1 Audited by previous auditor.
2 As required, effective 9-1-01 the Fund has adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies, as revised,
relating to the amortization of premiums and accretion of discounts on debt
securities. The effect of this change on per share amounts for the year
ended 8-31-02 was to increase net investment income per share by $0.01,
increase net realized and unrealized losses per share by $0.01 and, had the
Fund not made these changes to amortization and accretion, the ratio of net
investment income to average net assets would have been 4.88%, 4.07% and
4.03% for Class A, Class B and Class C shares, respectively. Per share
ratios and supplemental data for the periods prior to 9-1-01 have not been
restated to reflect this change in presentation.
3 Based on the average of the shares outstanding.
4 Assumes dividend reinvestment and does not reflect the effect of sales
charges.
5 Total returns would have been lower had certain expenses not been reduced
during the periods shown.
6 Does not take into consideration expense reductions during the periods
shown.
See notes to
financial statements.
24
NOTES TO
STATEMENTS
Note A
Accounting policies
John Hancock California Tax-Free Income Fund (the "Fund") is a
non-diversified open-end management investment company registered under the
Investment Company Act of 1940. (The Fund was diversified prior to
September 7, 2004.) The Fund seeks a high level of current income,
consistent with the preservation of capital, that is exempt from federal
and California personal income taxes. Since the Fund invests primarily in
California issuers, the Fund may be affected by political, economic or
regulatory developments in the state of California.
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 shares of
each class represent an interest in the same portfolio of investments of
the Fund and have equal rights as 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 that bears distribution
and service expenses under the 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 which have a remaining maturity
of 60 days or less may be 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, LLC (the
"Adviser"), a wholly owned subsidiary of John Hancock Financial Services,
Inc., may participate in a joint repurchase agreement transaction.
Aggregate cash balances are invested in one or more large 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
25
realized gains and losses on sales of investments are determined on the
identified cost basis. Some securities may be purchased on a "when-issued"
or "forward commitment" basis, which means that the securities will be
delivered to the Fund at a future date, usually beyond the customary
settlement date.
Discount and premium
on securities
The Fund accretes discount and amortizes premium from par value on
securities from either the date of issue or the date of purchase over the
life of the security.
Class allocations
Income, common expenses and realized and unrealized gains (losses) are
determined at the fund level and allocated daily to each class of shares
based on the appropriate net asset value of the respective classes.
Distribution and service fees, if any, are calculated daily at the class
level based on the appropriate net asset value of each class and the
specific expense rate(s) applicable to each class.
Expenses
The majority of expenses are directly identifiable to an individual fund.
Expenses that 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.
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. The Fund has entered into a
syndicated line of credit agreement with various banks. This agreement
enables the Fund to participate, with other funds managed by the Adviser,
in an unsecured line of credit with banks, which permits borrowings of up
to $250 million, collectively. Interest is charged to each fund based on
its borrowing. In addition, a commitment fee is charged to each fund based
on the average daily unused portion of the line of credit, and is allocated
among the participating funds. The Fund had no borrowing activity under the
line of credit during the year ended August 31, 2005.
Swap contracts
The Fund may enter into swap transactions in order to hedge the value of
the Fund's portfolio against interest rate fluctuations or to enhance the
Fund's income. Interest rate swaps represent an agreement between two
counterparties to exchange cash flows based on the difference in the two
interest rates, applied to the notional principal amount for a specified
period. The payment flows are usually netted against each other, with the
difference being paid by one party to the other. The Fund settles accrued
net receivable or payable under the swap contracts on a periodic basis.
The Fund records changes in the value of the swaps as unrealized gains or
loss es on swap contracts. Accrued interest receivable or payable on the
swap contracts is recorded as realized gain (loss).
Swap contracts are subject to risks related to the counterparty's ability
to perform under the contract, and may decline in value if the
counterparty's creditworthiness deteriorates. The risks may arise from
unanticipated movement in interest rates. The Fund may also suffer losses
if it is unable to terminate outstanding swap contracts or reduce its
exposure through offsetting transactions.
The Fund had no interest rate swap contracts open on August 31, 2005.
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 fed eral income tax on taxable in come that is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $3,168,360 of a capital loss
carryforward available, to the extent provided by regulations, to
26
offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gain distributions will be
made. The loss carry for ward expires as follows: August 31, 2006 --
$339,297, August 31, 2008 -- $968,588, August 31, 2011 -- $1,269,779 and
August 31, 2012 -- $590,696. Net capital losses of $949,916, that are
attributable to security transactions incurred after October 31, 2004, are
treated as arising on September 1, 2005, the first day of the Fund's next
taxable year.
Interest and distributions
Interest income on investment securities is recorded on the accrual basis.
The Fund records distributions to shareholders from net investment income
and net realized gains, if any, on the ex-dividend date. The Fund's net
investment income is declared daily as dividends to shareholders of record
as of the close of business on the preceding day, and distributed monthly.
During the year ended August 31, 2004, the tax character of distributions
paid was as follows: ordinary income $88,951 and $16,631,727 exempt income.
During the year ended August 31, 2005, the tax character of distributions
paid was as follows: ordinary income $22,959 and $15,488,222 exempt income.
Distributions paid by the Fund with respect to each class of shares are
calculated in the same manner, at the same time and are in the same amount,
except for the effect of expenses that may be applied differently to each
class.
As of August 31, 2005, the components of distributable earnings on a tax
basis included $146,769 of undistributed exempt income.
Such distributions and distributable earnings, on a tax basis, are
determined in conformity with income tax regulations, which may differ from
accounting principles generally accepted in the United States of America.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Use of estimates
The preparation of these financial statements, in accordance with
accounting principles generally accepted in the United States of America,
incorporates estimates made by management in determining the reported
amount of assets, liabilities, revenues and expenses of the Fund. Actual
results could differ from these estimates.
Note B
Management fee and
transactions with
affiliates and others
The Fund has an investment management contract with the Adviser. Under the
investment management contract, the Fund pays a monthly management fee to
the Adviser 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 and (b)
0.50% of the Fund's average daily net asset value in excess of
$500,000,000.
The Fund has an agreement with its custodian bank under which custody fees
are reduced by balance credits applied during the year. Accordingly, the
expense reductions related to custody fee offsets amounted to $185, which
had no impact on the Fund's ratio of expenses to average net assets, for
the year ended August 31, 2005. 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 Distribution Plans with John Hancock Funds, LLC ("JH Funds"),
a wholly owned subsidiary of the Adviser. 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, to reimburse JH Funds for the
services it provides as distributor of shares of the Fund. Accordingly, the
Fund makes monthly payments to JH Funds at an annual rate not to exceed
0.15% of Class A average daily net asset
27
value and 1.00% of Class B and Class C average daily net asset value. A
maximum of 0.25% of such payments may be service fees, as defined by the
Conduct Rules of the National Association of Securities Dealers. Under the
Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could
occur under certain circumstances.
Class A shares are assessed up-front sales charges. During the year ended
August 31, 2005, JH Funds received net up-front sales charges of $250,259
with regard to sales of Class A shares. Of this amount, $33,013 was
retained and used for printing prospectuses, advertising, sales literature
and other purposes, $203,385 was paid as sales commissions to unrelated
broker-dealers and $13,861 was paid as sales commissions to sales personnel
of Signator Investors, Inc. ("Signator Investors"), a related
broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance
Company ("JHLICo"), is the indirect sole shareholder of Signator Investors.
Class B shares that are redeemed within six years of purchase are 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.
Class C shares that are redeemed within one year of purchase are 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 CDSCs 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 and Class C
shares. During the year ended August 31, 2005, CDSCs received by JH Funds
amounted to $42,660 for Class B shares and $272 for Class C shares.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo.
The Fund pays a monthly transfer agent fee at an annual rate of 0.01% of
each class's average daily net asset values, plus a fee based on the number
of shareholder accounts and reimbursement for certain out-of-pocket
expenses, aggregated and allocated to each class on the basis of its
relative net asset value. Signature Services agreed to voluntarily reduce
the Fund's asset-based portion of the transfer agent fee if the total
monthly transfer agent fee exceeds the Lipper, Inc. median transfer agency
fee for comparable mutual funds by 0.05%. There were no transfer agent fee
reductions during the year ended August 31, 2005. Signature Services
reserves the right to terminate this limitation at any time.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Fund. The compensation for the year
amounted to $83,356. The Fund also paid the Adviser the amount of $364 for
certain publishing services, included in the printing fees and the amount
of $5,135 for certain compliance costs, included in the miscellaneous
expenses.
Mr. James R. Boyle is an officer of certain affiliates of the Adviser, as
well as an affiliated Trustee of the Fund, and is compensated by the
Adviser and/or its affiliates. The compensation of other 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
28
a periodic basis to reflect any income earned by the investments, as well
as any unrealized gains or losses. The Deferred Compensation Plan
investments had no impact on the operations of the Fund.
Note C
Fund share transactions
This listing illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding
dollar value.
Year ended 8-31-04 Year ended 8-31-05
Shares Amount Shares Amount
Class A shares
Sold 2,600,800 $28,211,100 1,835,453 $20,153,842
Distributions reinvested 750,912 8,150,608 689,490 7,582,188
Repurchased (4,120,760) (44,765,031) (3,151,735) (34,610,300)
Net decrease (769,048) ($8,403,323) (626,792) ($6,874,270)
Class B shares
Sold 187,844 $2,038,740 85,824 $944,688
Distributions reinvested 98,139 1,065,569 64,621 710,249
Repurchased (1,583,501) (17,204,330) (1,131,286) (12,430,218)
Net decrease (1,297,518) ($14,100,021) (980,841) ($10,775,281)
Class C shares
Sold 42,843 $463,748 129,415 $1,420,917
Distributions reinvested 19,754 214,347 12,434 136,593
Repurchased (234,550) (2,531,683) (171,648) (1,889,762)
Net decrease (171,953) ($1,853,588) (29,799) ($332,252)
Net decrease (2,238,519) ($24,356,932) (1,637,432) ($17,981,803)
Note D
Investment
transactions
Purchases and proceeds from sales or maturities of securities, other than
short-term securities and obligations of the U.S. government, during the
year ended August 31, 2005, aggregated $46,134,842 and $67,077,944,
respectively.
The cost of investments owned on August 31, 2005 including short-term
investments, for federal income tax purposes, was $307,180,610. Gross
unrealized appreciation and depreciation of investments aggregated
$35,767,788 and $17,273, respectively, resulting in net unrealized
appreciation of $35,750,515. The difference between book basis and tax
basis net unrealized appreciation of investments is attributable primarily
to the accretion of discounts on debt securities.
Note E
Reclassification
of accounts
During the year ended August 31, 2005, the Fund reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of
$2,713, a decrease in accumulated net investment income of $233,942 and an
increase in capital paid-in of $231,229. This represents the amounts
necessary to report these balances on a tax basis, exclud ing certain
temporary differences, as of August 31, 2005. 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
29
account ing principles generally accepted in the United States of America,
book and tax differences in accounting for deferred compensation, accretion
of discounts on debt securities. The calculation of net investment income
per share in the Fund's Financial Highlights excludes these adjustments.
Shareholder meeting (unaudited)
On December 1, 2004, a Special Meeting of shareholders of the Fund was held
to elect nine Trustees effective January 1, 2005.
Proxies covering 24,723,343 shares of beneficial interest were voted at the
meeting.
The shareholders elected the following Trustees to serve until their
respective successors are duly elected and qualified, with the votes
tabulated as follows:
WITHHELD
FOR AUTHORITY
- ----------------------------------------------------------
James F. Carlin 24,483,702 239,641
Richard P. Chapman, Jr. 24,487,828 235,515
William H. Cunningham 24,475,436 247,907
Ronald R. Dion 24,481,243 242,100
Charles L. Ladner 24,488,401 234,942
Dr. John A. Moore 24,492,622 230,721
Patti McGill Peterson 24,460,756 262,587
Steven R. Pruchansky 24,481,243 242,100
James A. Shepherdson* 24,483,702 239,641
* Mr. James A. Shepherdson resigned effective July 15, 2005.
Change in
Independent Auditor
(unaudited)
Based on the recommen dation of the Audit Committee of the Fund, the Board
of Trustees has determined not to retain Deloitte & Touche LLP as the
Fund's Independent Registered Public Accounting Firm and voted to appoint
PricewaterhouseCoopers LLP for the fiscal year ending August 31, 2006.
During the two most recent fiscal years, Deloitte & Touche LLP's audit
reports contained no adverse opinion or disclaimer of opinion; nor were
their reports qualified as to uncertainty, audit scope or accounting
principles. Further, there were no disagreements between the Fund and
Deloitte & Touche LLP on accounting principles, financial statements
disclosure or audit scope, which, if not resolved to the satisfaction of
Deloitte & Touche LLP, would have caused them to make reference to the
disagreement in their reports.
30
AUDITORS'
REPORT
Report of Deloitte
& Touche LLP,
Independent
Registered Public
Accounting Firm
To the Board of Trustees and Shareholders of John Hancock
California Tax-Free Income Fund,
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of John Hancock California Tax-Free
Income Fund (the "Fund"), including the schedule of investments as of
August 31, 2005, and the related statement of operations for the year then
ended, and the statements of changes in net assets for the years ended
August 31, 2004 and 2005 and the financial highlights for each of the years
in the three-year period ended August 31, 2005. 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. The financial highlights for
each of the years in the two-year period ended August 31, 2002, were
audited by other auditors whose report dated October 4, 2002, expressed an
unqualified opinion on such financial highlights.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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. The Fund is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned at August 31, 2005, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed
other auditing procedures. 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 Fund as of August 31, 2005, and the results of its operations and
the changes in its net assets and its financial highlights for the
respective stated periods is in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 2005
31
TAX
INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund, if any, paid during its
taxable year ended August 31, 2005.
None of the 2005 income dividends qualify for the corporate
dividends-received deduction. Shareholders who are not subject to the
alternative minimum tax received income dividends that are 99.85%
tax-exempt. The percentage of income dividends from the Fund subject to the
alternative minimum tax is 3.60%. None of the income dividends were derived
from U.S. Treasury Bills.
For specific information on exception provisions in your state, consult
your local state tax officer or your tax adviser. Shareholders will be
mailed a 2005 U.S. Treasury Department Form 1099-DIV in January 2006. This
will reflect the total of all distributions that are taxable for calendar
year 2005.
32
Board Consideration
of and Continuation
of Investment
Advisory Agreement:
John Hancock
California Tax-Free
Income Fund
Section 15(c) of the Investment Company Act of 1940 (the "1940 Act")
requires the Board of Trustees (the "Board") of John Hancock California
Tax-Free Income Fund (the "Fund"), including a majority of the Trustees who
have no direct or indirect interest in the investment advisory agreement
and are not "interested persons" of the Fund, as defined in the 1940 Act
(the "Independent Trustees"), annually to review and consider the
continuation of the investment advisory agreement (the "Advisory
Agreement") with John Hancock Advisers, LLC (the "Adviser") for the Fund.
At meetings held on May 19-20 and June 6-7, 2005, the Board, including the
Independent Trustees, considered the factors and reached the conclusions
described below relating to the selection of the Adviser and the
continuation of the Advisory Agreement. During such meetings, the Board's
Contracts/Operations Committee and the Independent Trustees also met in
executive sessions with their independent legal counsel. In evaluating the
Advisory Agreement, the Board, including the Contracts/Operations Committee
and the Independent Trustees, reviewed a broad range of information
requested for this purpose by the Independent Trustees, including but not
limited to the following: (i) the investment performance of the Fund and a
broader universe of relevant funds (the "Universe") selected by Lipper Inc.
("Lipper"), an independent provider of investment company data, for a range
of periods, (ii) advisory and other fees incurred by, and the expense
ratios of, the Fund and a peer group of comparable funds selected by Lipper
(the "Peer Group"), (iii) the advisory fees of comparable portfolios of
other clients of the Adviser, (iv) the Adviser's financial results and
condition, including its and certain of its affiliates' profitability from
services performed for the Fund, (v) breakpoints in the Fund's and the Peer
Group's fees and a study undertaken at the direction of the Independent
Trustees as to the allocation of the benefits of economies of scale between
the Fund and the Adviser, (vi) the Adviser's record of compliance with
applicable laws and regulations, with the Fund's investment policies and
restrictions, and with the Fund's Code of Ethics and the structure and
responsibilities of the Adviser's compliance department, (vii) the
background and experience of senior management and investment
professionals, and (viii) the nature, cost and character of advisory and
non-investment management services provided by the Adviser and its
affiliates.
Nature, extent and quality
of services
The Board considered the ability of the Adviser, based on its resources,
reputation and other attributes, to attract and retain qualified investment
professionals, including research, advisory, and supervisory personnel. The
Board further considered the compliance programs and compliance records of
the Adviser. In addition, the Board took into account the administrative
services provided to the Fund by the Adviser and its affiliates.
Based on the above factors, together with those referenced below, the Board
concluded that, within the context of its full deliberations, the nature,
extent and quality of the investment advisory services provided to the Fund
by the Adviser were sufficient to support renewal of the Advisory
Agreement.
Fund performance
The Board considered the performance results for the Fund over various time
periods. The Board also considered these results in comparison to the
performance of the Universe,
33
as well as the Fund's benchmark indexes. Lipper determined the Universe for
the Fund. The Board reviewed with a repre sentative of Lipper the
methodology used by Lipper to select the funds in the Universe and the Peer
Group.
The Board noted that the performance of the Fund was higher than or not
appreciably below the median and average performance of its Universe and
the performance of its benchmark indexes, the Lipper California Municipal
Debt Funds Index and the Lehman Municipal Bond Index, for the time periods
under review.
Investment advisory fee
rates and expenses
The Board reviewed and considered the contractual investment advisory fee
rate payable by the Fund to the Adviser for investment advisory services
(the "Advisory Agreement Rate"). The Board received and considered
information comparing the Advisory Agreement Rate with the advisory fees
for the Peer Group. The Board noted that the Advisory Agreement Rate was
not appreciably higher than the median rate of the Peer Group. The Board
concluded that the Advisory Agreement Rate was reasonable in relation to
the services provided.
The Board received and considered information regarding the Fund's total
operating expense ratio and its various components, including contractual
advisory fees, actual advisory fees, non-management fees, Rule 12b-1 and
non-Rule 12b-1 service fees, transfer agent fees and custodian fees,
including and excluding Rule 12b-1 and non-Rule 12b-1 service fees. The
Board also considered comparisons of these expenses to the expense
information for the Peer Group and the Universe. The Board noted that the
total operating expense ratio of the Fund was lower than the Peer Group's
but higher than Universe's median total operating expense ratio. The Board
also noted that the most significant contributor to such difference was the
Fund's other non-management fees. The Board favorably considered the
Adviser's commitment to developing initiatives designed to reduce its
overall fees and expenses.
The Adviser also discussed the Lipper data and rankings, and other relevant
information, for the Fund. Based on the above-referenced considerations and
other factors, the Board concluded that the Fund's overall expense results
and performance supported the re-approval of the Advisory Agreement.
Profitability
The Board received and considered a detailed profitability analysis of the
Adviser based on the Advisory Agreement, as well as on other relationships
between the Fund and the Adviser and its affiliates. The Board concluded
that, in light of the costs of providing investment management and other
services to the Fund, the profits and other ancillary benefits reported by
the Adviser were not unreasonable.
Economies of scale
The Board received and considered general information regarding economies
of scale with respect to the management of the Fund, including the Fund's
ability to appropriately benefit from economies of scale under the Fund's
fee structure. The Board recognized the inherent limitations of any
analysis of economies of scale, stemming largely from the Board's
understanding that most of the Adviser's costs are not specific to
individual Funds, but rather are incurred across a variety of products and
services.
To the extent the Board and the Adviser were able to identify actual or
potential economies of scale from Fund-specific or allocated expenses, in
order to ensure that any such economies continue to be reasonably shared
with the Fund as its assets increase, the Adviser and the Board agreed to
continue the existing breakpoints.
34
Information about
services to other clients
The Board also received information about the nature, extent and quality of
services and fee rates offered by the Adviser to its other clients,
including other registered investment companies, institutional investors
and separate accounts. The Board concluded that the Advisory Agreement Rate
was not unreasonable, taking into account fee rates offered to others by
the Adviser and giving effect to differences in services covered by such
fee rates.
Other benefits to
the Adviser
The Board received information regarding potential "fall-out" or ancillary
benefits received by the Adviser and its affiliates as a result of the
Adviser's relationship with the Fund. Such benefits could include, among
others, benefits directly attributable to the relationship of the Adviser
with the Fund and benefits potentially derived from an increase in the
business of the Adviser as a result of its relationship with the Fund (such
as the ability to market to shareholders other financial products offered
by the Adviser and its affiliates).
The Board also considered the effectiveness of the Adviser's and the Fund's
policies and procedures for complying with the requirements of the federal
securities laws, including those relating to best execution of portfolio
transactions and brokerage allocation.
Other factors and
broader review
As discussed above, the Board reviewed detailed materials received from the
Adviser as part of the annual re-approval process under Section 15(c) of
the 1940 Act. The Board also regularly reviews and assesses the quality of
the services that the Fund receives throughout the year. In this regard,
the Board reviews reports of the Adviser at least quarterly, which include,
among other things, a detailed portfolio review, detailed fund performance
reports and compliance reports. In addition, the Board meets with portfolio
managers and senior investment officers at various times throughout the
year.
After considering the above-described factors and based on its
deliberations and its evaluation of the information described above, the
Board concluded that approval of the continuation of the Advisory Agreement
for the Fund was in the best interest of the Fund and its shareholders.
Accordingly, the Board unanimously approved the continuation of the
Advisory Agreement.
35
TRUSTEES
& OFFICERS
This chart provides information about the Trustees and Officers who oversee
your John Hancock fund. Officers elected by the Trustees manage the
day-to-day operations of the Fund and execute policies formulated by the
Trustees.
Independent Trustees
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
Ronald R. Dion, Born: 1946 1998 53
Independent Chairman (since 2005); Chairman and Chief Executive Officer,
R.M. Bradley & Co., Inc.; Director, The New England Council and Massachusetts
Roundtable; Trustee, North Shore Medical Center; Director, Boston Stock
Exchange; Director, BJ's Wholesale Club, Inc. and a corporator of the Eastern
Bank; Trustee, Emmanuel College; Director, Boston Municipal Research Bureau;
Member of the Advisory Board, Carroll Graduate School of Management at
Boston College.
James F. Carlin, Born: 1940 1994 53
Director and Treasurer, Alpha Analytical Inc. (analytical laboratory) (since 1985);
Part Owner and Treasurer, Lawrence Carlin Insurance Agency, Inc. (since 1995);
Part Owner and Vice President, Mone Lawrence Carlin Insurance Agency, Inc.
(since 1996); Director and Treasurer, Rizzo Associates (engineering) (until 2000);
Chairman and CEO, Carlin Consolidated, Inc. (management/investments) (since
1987); Director and Partner, Proctor Carlin & Co., Inc. (until 1999); Trustee,
Massachusetts Health and Education Tax Exempt Trust (since 1993); Director of
the following: Uno Restaurant Corp. (until 2001), Arbella Mutual (insurance)
(until 2000), HealthPlan Services, Inc. (until 1999), Flagship Healthcare, Inc. (until
1999), Carlin Insurance Agency, Inc. (until 1999); Chairman, Massachusetts
Board of Higher Education (until 1999).
Richard P. Chapman, Jr., 2 Born: 1935 2005 53
President and Chief Executive Officer, Brookline Bancorp Inc. (lending)
(since 1972); Director, Lumber Insurance Co. (insurance) (until 2000);
Chairman and Director, Northeast Retirement Services, Inc. (retirement
administration) (since 1998).
William H. Cunningham, Born: 1944 1989 148
Former Chancellor, University of Texas System and former President of the
University of Texas, Austin, Texas; Chairman and CEO, IBT Technologies
(until 2001); Director of the following: The University of Texas Investment
Management Company (until 2000), Hire.com (until 2004), STC Broadcasting,
Inc. and Sunrise Television Corp. (electronic manufacturing) (until 2001),
Symtx, Inc. (electronic manufacturing) (since 2001), Adorno/Rogers Technology,
Inc. (until 2004), Pinnacle Foods Corporation (until 2003), rateGenius (Internet
36
Independent Trustees (continued)
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
William H. Cunningham, Born: 1944 (continued) 1989 148
service) (until 2003), Jefferson-Pilot Corporation (diversified life insurance
company) (since 1985), New Century Equity Holdings (formerly Billing Concepts)
(until 2001), eCertain (until 2001), ClassMap.com (until 2001), Agile Ventures
(until 2001), LBJ Foundation (until 2000), Golfsmith International, Inc.
(until 2000), Metamor Worldwide (until 2000), AskRed.com (until 2001),
Southwest Airlines (since 2000) and Introgen (since 2000); Advisory Director,
Q Investments (until 2003); Advisory Director, Chase Bank (formerly Texas
Commerce Bank -- Austin) (since 1988), LIN Television (since 2002), WilTel
Communications (until 2003) and Hayes Lemmerz International, Inc.
(diversified automotive parts supply company) (since 2003).
Charles L. Ladner, 2 Born: 1938 1994 148
Chairman and Trustee, Dunwoody Village, Inc. (retirement services) (until 2003);
Senior Vice President and Chief Financial Officer, UGI Corporation (public utility
holding company) (retired 1998); Vice President and Director for AmeriGas, Inc.
(retired 1998); Director of AmeriGas Partners, L.P. (until 1997) (gas distribution);
Director, EnergyNorth, Inc. (until 1995); Director, Parks and History Association
(since 2001).
John A. Moore, 2 Born: 1939 2005 53
President and Chief Executive Officer, Institute for Evaluating Health Risks,
(nonprofit institution) (until 2001); Chief Scientist, Sciences International (health
research) (until 2003); Principal, Hollyhouse (consulting) (since 2000); Director,
CIIT (nonprofit research) (since 2002).
Patti McGill Peterson,2 Born: 1943 2005 53
Executive Director, Council for International Exchange of Scholars and Vice
President, Institute of International Education (since 1998); Senior Fellow, Cornell
Institute of Public Affairs, Cornell University (until 1998); Former President of
Wells College and St. Lawrence University; Director, Niagara Mohawk Power
Corporation (until 2003); Director, Ford Foundation, International Fellowships
Program (since 2002); Director, Lois Roth Endowment (since 2002); Director,
Council for International Educational Exchange (since 2003).
Steven R. Pruchansky, Born: 1944 1994 53
Chairman and Chief Executive Officer, Greenscapes of Southwest Florida, Inc.
(since 2000); Director and President, Greenscapes of Southwest Florida, Inc.
(until 2000); Managing Director, JonJames, LLC (real estate) (since 2001);
Director, First Signature Bank & Trust Company (until 1991); Director, Mast
Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991).
Non-Independent Trustee 3
James R. Boyle, Born: 1959 2005 148
President, John Hancock Annuities; Executive Vice President, John Hancock
Life Insurance Company (since June, 2004); President U.S. Annuities; Senior
Vice President, The Manufacturers Life Insurance Company (U.S.A.) (prior
to 2004).
37
Principal officers who are not Trustees
Name, age
Position(s) held with Fund Officer
Principal occupation(s) and of Fund
directorships during past 5 years since
Keith F. Hartstein, Born: 1956 2005
President and Chief Executive Officer
Senior Vice President, Manulife Financial Corporation (since 2004); Director,
President and Chief Executive Officer, John Hancock Advisers, LLC (the
"Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group")
(holding company); Director, President and Chief Executive Officer, John
Hancock Funds, LLC ("John Hancock Funds"); Director, President and Chief
Executive Officer, Sovereign Asset Management Corporation ("SAMCorp.");
Director, John Hancock Signature Services, Inc.; President, John Hancock Trust;
Chairman and President, NM Capital Management, Inc. (NM Capital) (since
2005); Chairman, Investment Company Institute Sales Force Marketing
Committee (since 2003); Executive Vice President, John Hancock Funds
(until 2005).
William H. King, Born: 1952 1994
Vice President and Treasurer
Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer
of each of the John Hancock funds; Assistant Treasurer of each of the John
Hancock funds (until 2001).
Francis V. Knox, Jr., Born: 1947 2005
Vice President and Chief Compliance Officer
Vice President and Chief Compliance Officer for John Hancock Investment
Company, John Hancock Life Insurance Company (U.S.A.), John Hancock Life
Insurance Company and John Hancock Funds (since 2005); Fidelity Investments --
Vice President and Assistant Treasurer, Fidelity Group of Funds (until 2004);
Fidelity Investments -- Vice President and Ethics & Compliance Officer (until 2001).
John G. Vrysen, Born: 1955 2005
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Financial Officer, the Adviser, Sovereign Asset
Management Corp., the Berkeley Financial Group, LLC and John Hancock Funds,
LLC (since 2005); Vice President and General Manager, Fixed Annuities, U.S.
Wealth Management (until 2005); Vice President, Operations, Manulife Wood
Logan (July 2000 thru September 2004).
The business address for all Trustees and Officers is 601 Congress Street,
Boston, Massachusetts 02210-2805.
The Statement of Additional Information of the Fund includes additional
information about members of the Board of Trustees of the Fund and is
available, without charge, upon request, by calling 1-800-225-5291.
1 Each Trustee serves until resignation, retirement age or until his or her
successor is elected.
2 Member of Audit Committee.
3 Non-independent Trustees hold positions with the Fund's investment
adviser, underwriter and certain other affiliates.
38
OUR FAMILY
OF FUNDS
- -------------------------------------------------------
Equity Balanced Fund
Classic Value Fund
Core Equity Fund
Focused Equity Fund
Growth Trends Fund
International Fund
Large Cap Equity Fund
Large Cap Select Fund
Mid Cap Growth Fund
Multi Cap Growth Fund
Small Cap Equity Fund
Small Cap Growth Fund
Sovereign Investors Fund
U.S. Global Leaders Growth Fund
- -------------------------------------------------------
Allocation Allocation Growth + Value Portfolio
Allocation Core Portfolio
- -------------------------------------------------------
Sector Financial Industries Fund
Health Sciences Fund
Real Estate Fund
Regional Bank Fund
Technology Fund
- -------------------------------------------------------
Income Bond Fund
Government Income Fund
High Income Fund
High Yield Fund
Investment Grade Bond Fund
Strategic Income Fund
- -------------------------------------------------------
Tax-Free Income California Tax-Free Income Fund
High Yield Municipal Bond Fund
Massachusetts Tax-Free Income Fund
New York Tax-Free Income Fund
Tax-Free Bond Fund
- -------------------------------------------------------
Money Market Money Market Fund
U.S. Government Cash Reserve
- -------------------------------------------------------
For more complete information on any John Hancock Fund and a prospectus,
which includes charges and expenses, call your financial professional, or
John Hancock Funds at 1-800-225-5291. Please read
the prospectus carefully before investing or sending money.
39
ELECTRONIC
DELIVERY
Now available from
John Hancock Funds
Instead of sending annual and semiannual reports and prospectuses through
the U.S. mail, we'll notify you by e-mail when these documents are
available for online viewing.
How does electronic delivery benefit you?
* No more waiting for the mail to arrive; you'll receive an e-mail
notification as soon as the document is ready for online viewing.
* Reduces the amount of paper mail you receive from John Hancock Funds.
* Reduces costs associated with printing and mailing.
Sign up for electronic delivery today at
www.jhfunds.com/edelivery
40
For more information
The Fund's proxy voting policies, procedures and records are available
without charge, upon request:
By phone On the Fund's Web site On the SEC's Web site
1-800-225-5291 www.jhfunds.com/proxy www.sec.gov
Investment adviser
John Hancock Advisers, LLC
601 Congress Street
Boston, MA 02210-2805
Principal distributor
John Hancock Funds, LLC
601 Congress Street
Boston, MA 02210-2805
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer agent
John Hancock Signature
Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Legal counsel
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109-1803
Independent registered
public accounting firm
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116-5022
The Fund's investment objective, risks, charges and expenses are included
in the prospectus and should be considered carefully before investing. For
a prospectus, call your financial professional, call John Hancock Funds at
1-800-225-5291, or visit the Fund's Web site at www.jhfunds.com. Please
read the prospectus carefully before investing or sending money.
How to contact us
Internet www.jhfunds.com
Mail Regular mail: Express mail:
John Hancock John Hancock
Signature Services, Inc. Signature Services, Inc.
1 John Hancock Way, Suite 1000 Mutual Fund Image Operations
Boston, MA 02217-1000 380 Stuart Street
Boston, MA 02116
Phone Customer service representatives 1-800-225-5291
24-hour automated information 1-800-338-8080
TDD line 1-800-554-6713
A listing of month-end portfolio holdings is available on our Web site,
www.jhfunds.com. A more detailed portfolio holdings summary is available on
a quarterly basis 60 days after the fiscal quarter on our Web site or upon
request by calling 1-800-225-5291, or on the Securities and Exchange
Commission's Web site, www.sec.gov.
41
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
1-800-225-5291
1-800-554-6713 (TDD)
1-800-338-8080 EASI-Line
www.jhfunds.com
Now available: electronic delivery
www.jhfunds.com/edelivery
This report is for the information of
the shareholders of John Hancock
California Tax-Free Bond Fund.
5300A 8/05
10/05
ITEM 2. CODE OF ETHICS.
As of the end of the period, August 31, 2005, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, that applies to its
Chief Executive Officer, Chief Financial Officer and Treasurer
(respectively, the principal executive officer, the principal financial
officer and the principal accounting officer, the "Senior Financial
Officers"). A copy of the code of ethics is filed as an exhibit to this
Form N-CSR.
The code of ethics was amended effective February 1, 2005 to address new
Rule 204A-1 under the Investment Advisers Act of 1940 and to make other
related changes.
The most significant amendments were:
(a) Broadening of the General Principles of the code to cover compliance
with all federal securities laws.
(b) Eliminating the interim requirements (since the first quarter of 2004)
for access persons to preclear their personal trades of John Hancock mutual
funds. This was replaced by post-trade reporting and a 30 day hold
requirement for all employees.
(c) A new requirement for "heightened preclearance" with investment
supervisors by any access person trading in a personal position worth
$100,000 or more.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Charles L. Ladner is the audit committee financial expert and is
"independent", pursuant to general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for professional services rendered by the
principal accountant(s) for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant(s) in
connection with statutory and regulatory filings or engagements amounted to
$33,750 for the fiscal year ended August 31, 2004 and $35,000 for the
fiscal year ended August 31, 2005. These fees were billed to the registrant
and were approved by the registrant's audit committee.
(b) Audit-Related Services
There were no audit-related fees during the fiscal year ended August 31,
2004 and fiscal year ended August 31, 2005 billed to the registrant or to
the registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that provides
ongoing services to the registrant ("control affiliates").
(c) Tax Fees
The aggregate fees billed for professional services rendered by the
principal accountant(s) for the tax compliance, tax advice and tax planning
("tax fees") amounted to $2,250 for the fiscal year ended August 31, 2004
and $2,400 for the fiscal year ended August 31, 2005. The nature of the
services comprising the tax fees was the review of the registrant's income
tax returns and tax distribution requirements. These fees were billed to
the registrant and were approved by the registrant's audit committee. There
were no tax fees billed to the control affiliates.
(d) All Other Fees
There were no other fees during the fiscal year ended August 31, 2004 and
fiscal year ended August 31, 2005 billed to the registrant or to the
control affiliates.
(e)(1) See attachment "Approval of Audit, Audit-related, Tax and Other
Services", with the audit committee pre-approval policies and procedures.
(e)(2) There were no fees that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended August 31,
2004 and August 31, 2005 on behalf of the registrant or on behalf of the
control affiliates that relate directly to the operations and financial
reporting of the registrant.
(f) According to the registrant's principal accountant, for the fiscal year
ended August 31, 2005, the percentage of hours spent on the audit of the
registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons who were not full-time, permanent
employees of principal accountant was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant(s)
for services rendered to the registrant and rendered to the registrant's
control affiliates for each of the last two fiscal years of the registrant
were $20,550 for the fiscal year ended August 31, 2004, and $67,400 for the
fiscal year ended August 31, 2005.
(h) The audit committee of the registrant has considered the non-audit
services provided by the registrant's principal accountant(s) to the
control affiliates and has determined that the services that were not
pre-approved are compatible with maintaining the principal accountant(s)'
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee
comprised of independent trustees. The members of the audit committee are
as follows:
Dr. John A. Moore - Chairman
Richard P. Chapman, Jr.
Charles L. Ladner
Patti McGill Peterson
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant has adopted procedures by which shareholders August
recommend nominees to the registrant's Board of Trustees. A copy of the
procedures is filed as an exhibit to this Form N-CSR. See attached "John
Hancock Funds - Administration Committee Charter" and "John Hancock Funds -
Governance Committee Charter".
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form
N-CSR, the registrant's principal executive officer and principal financial
officer have concluded that those disclosure controls and procedures
provide reasonable assurance that the material information required to be
disclosed by the registrant on this report is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal half-year (the registrant's second fiscal half-year in the case of
an annual report) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive
officer and principal financial officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company
Act of 1940, are attached.
(b) Separate certifications for the registrant's principal executive
officer and principal financial officer, as required by 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
and Rule 30a-2(b) under the Investment Company Act of 1940, are attached.
The certifications furnished pursuant to this paragraph are not deemed to
be "filed" for purposes of Section 18 of the Securities Exchange Act of
1934, or otherwise subject to the liability of that section. Such
certifications are not deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent that the Registrant specifically incorporates
them by reference.
(c)(1) Approval of Audit, Audit-related, Tax and Other Services is
attached.
(c)(2) Submission of Matters to a Vote of Security Holders is attached. See
attached "John Hancock Funds - Administration Committee Charter" and "John
Hancock Funds - Governance Committee Charter".
(c)(3) Contact person at the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock California Tax-Free Income Fund
By: /s/ Keith F. Hartstein
-------------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: October 27, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Keith F. Hartstein
-------------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: October 27, 2005
By: /s/ John G. Vrysen
-------------------------------------
John G. Vrysen
Executive Vice President and Chief Financial Officer
Date: October 27, 2005