<PAGE> 1
John Hancock Funds
- --------------------------------------------------------------------------------
TAX-EXEMPT
INCOME
FUND
ANNUAL REPORT
December 31, 1994
<PAGE> 2
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Gail D. Fosler*
Bayard Henry*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodson
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Michael P. DiCarlo
Senior Vice President
James K. Ho
Senior Vice President
Andrew F. St. Pierre
Senior Vice President
John A. Morin
Vice President
Susan S. Newton
Vice President, Assistant Secretary and
Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[Photo]
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and
Chief Executive Officer, flush right, next to second paragraph.]
With 1995 upon us, New Year's resolutions abound. Dieting and saving
money -- Americans' long-time favorites -- are sure to top the list once
again. And once again, they'll probably be the most difficult to keep.
This year, however, Congress may give savers an additional incentive to
stick to their guns. Both the Republicans and Democrats want to revive
Individual Retirement Accounts (IRAs). In an effort to encourage savings,
IRAs were made available to all working Americans in 1981. Anyone with
earned income could contribute up to $2,000 annually. The contributions
were fully tax-deductible, and the earnings weren't taxed until withdrawal.
IRAs became the most successful savings program in the U.S., drawing in more
than $250 billion and 13 million new participants by 1985.
Sweeping tax reforms in 1986, however, changed all that. As it stands
now, the full deduction only applies to individuals who earn less than
$25,000, married couples who earn less than 40,000 and people without
employer-sponsored retirement plans. The result of this congressional
tinkering: the number of IRA contributors declined dramatically, from 16.2
million in 1985 to 4.2 million in 1992.
Legislators are now taking a closer look at expanding the accessibility
of IRAs once again. Several proposals are on the table: (1) the Republicans'
"Contract with America" includes the American Dream Savings Account, a type of
IRA; (2) President Clinton has proposed expanding eligibility by raising income
limits; and (3) several congressional representatives have introduced
legislation to restore the universal availability of a fully tax-deductible
IRA.
We enthusiastically support restoring IRAs to their original luster.
Not only will they provide a tax break to middle-income Americans, but they'll
go a long way toward raising the nation's dangerously low personal savings
rate -- the lowest of any major industrial country. There's an increasing
awareness that Social Security and pension plans will no longer provide for the
retirement needs of middle-income Americans. Increasing IRA accessibility for
more working individuals and families is one of the most sensible ways to help
Americans take responsibility for their future financial needs. We urge you to
support the expanded IRA by contacting your congressional representative or
senator.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY FRANK LUCIBELLA, SECOND VICE PRESIDENT AND
PORTFOLIO MANAGER
JOHN HANCOCK
TAX-EXEMPT INCOME FUND
Municipal market bruised by higher
interest rates; strong demand and lower supply
should provide better backdrop for 1995
Fears of rising inflation took their toll on municipal bonds in 1994.
The year started on a positive note when municipal bond investors were
encouraged by the notion that strong supply/demand factors would help
municipals outperform other bonds.
But on February 4, 1994, the Federal Reserve made the first in a
series of short-term interest rate hikes and all bonds came under pressure.
Yields rose and prices fell through April. Investors stopped briefly to catch
their breath last summer. Wading through a series of economic reports, they
attempted to get a handle on inflation and the economy. With no definitive
signs, they sat on the sidelines.
By early fall, investors once again began to fear the worst: a
rapidly growing economy accompanied by increased inflationary pressure. While
those fears have yet to materialize, investors weren't willing to take a
wait-and-see attitude. The market picked up where it left off last spring, and
bond prices began to slide. Adding additional pressure in November and December
was the fact that many municipal bond funds were forced to sell holdings to
meet an increase in redemptions at year-end.
In December, Orange County, California declared bankruptcy after
sustaining huge losses in its investment pool. That event also provided a
temporary disturbance for the market at year-end. We hold no Orange County or
related issues, so the incident had no impact on
(Figure 1)
A 2 1/4" x 3" photo of Frank Lucibella at bottom right. Caption reads: "Frank
A. Lucibella, Portfolio Manager."
"Fears of rising inflation took their toll on municipal bonds in 1994."
3
<PAGE> 4
John Hancock Funds - Tax-Exempt Income Fund
(Figure 2)
Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into nine sections. Going from left to right:
Electric 21%; Industrial Revenue 8%; Other 13%; Health/Education 16%; Housing
6%; Pollution Control 10%; Water and Sewer 5%; Transportation 17%; and General
Obligation Bonds 4%. A footnote below states "As a percentage of net assets on
December 31, 1994."
the Fund's share price. However, we have carefully reviewed all of our holdings
and are satisfied that from what we know now, none of them should experience
similar problems.
"..we maintained a shorter than average duration.."
A LOOK AT PERFORMANCE
While no bond fund escaped the market's decline, John Hancock Tax-Exempt Income
Fund outpaced many of its competitors. For the year ended December 31, 1994,
the Fund's Class A and Class B shares returned -5.90% and -6.23%, respectively,
at net asset value. That compared to the average general municipal bond fund's
return of -6.53%, according to Lipper Analytical Services(1). A couple of
strategies helped the Fund outperform most of its peers.
(Figure 3)
Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "States"; the header for the right column is "A look at the
current environment." The first listing is Florida followed by an up arrow and
the phrase "Strong retail demand." The second listing is California followed by
an up arrow and the phrase "Signs of economic improvement." The third listing
is New York followed by a down arrow and the phrase "Increased budgetary
pressure." Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
We maintained a shorter-than-average duration of less than 7 years.
Duration is a measure of how sensitive a fund's share price is to interest-rate
changes. With a shorter duration, the Fund's share price was much less
sensitive. And that helped cushion the Fund's decline as rates rose sharply.
Throughout the year, we used several methods to manage duration. For one, we
kept a fair amount invested in two types of bonds -- premium and pre-refunded
bonds -- with shorter durations. What makes these bonds have a short duration
is that they trade to their call date (or the first date the issuer can redeem
the bond) rather than to their stated maturity date. We also replaced some
30-year bonds with 20-year bonds and raised our cash position. Later in the
period, we used a technique called hedging. Basically, we sold futures
contracts to counteract the price movements of the bonds we wanted to hedge.
The gain on one offsets a corresponding loss on the other. We did this because
we didn't want to sell the Fund's longer-term holdings -- the 20-year bonds --
and give up their higher yields.
A word of clarification, though. While futures contracts are
technically derivatives, they shouldn't be confused with the speculative, risky
derivatives that have received so much attention lately. It's important to
understand that the risk involved with derivatives can vary greatly. Some are
extremely risky, while others entail very little risk. We don't invest in
exotic, illiquid derivatives. Futures contracts are one of the most "plain
vanilla" derivatives out there, and they've been used as a hedge against
interest-rate risk for years.
Throughout the year, we also continued to build up our stake in
lower-quality investment grade bonds. Because of their relatively high level of
income, these bonds also helped the Fund's
4
<PAGE> 5
(Figure 4)
Bar chart with heading "Fund Performance" at top of left hand column. Under
the heading is the footnote: "For the year ended December 31, 1994." The chart
is scaled in increments of 2% from bottom to top, with 0% at the top and -8.0%
at the bottom. Within the chart, there are three solid bars. The first
represents the -5.90% total return for John Hancock Tax-Exempt Income Fund:
Class A. The second represents the -6.23% total return for John Hancock
Tax-Exempt Income Fund: Class B. The third represents the -6.53% total return
for the average general municipal bond fund. The footnote below states: "Total
returns for John Hancock Tax-Exempt Income Fund are at net asset value with all
distributions reinvested. The average general municipal bond fund is tracked by
Lipper Analytical Services. See following page for historical performance
information."
performance. In particular, we increased our stake in bonds rated Baa by
Moody's Investors Services to 28%, from 14% a year ago. With the economy
strong, the prospect for many lower-rated bonds has improved. We focused on
industrial revenue bonds, which fund pollution control programs for private
enterprises, and resource recovery bonds, which fund projects that recycle
coal, waste wood and solid waste materials. As always, in buying lower quality,
investment grade bonds, we aren't just chasing after yield. We target those
issues with strong underlying fundamentals and yields high enough to compensate
for the added risk.
EMPHASIS ON REVENUE BONDS
While it's true that some general obligation bonds (GOs) have been helped by
the economic recovery, we still think they're too expensive relative to their
credit quality. So we've kept our main focus on revenue bonds, which are backed
by user fees rather than tax revenues.
In particular, we've kept about 10% in health-care bonds. We favor
hospitals -- like Boston's Deaconess Hospital -- with healthy cash flows, good
HMO relationships and a strong management team that has proven it can weather
the tougher health-care climate. One area where we have cut back is electric
utility bonds, which now total 21% of assets. Competition in that sector is
heating up; we've held onto only those issues that we believe can withstand it.
A LOOK AT 1995
In our opinion, the municipal bond market could remain choppy over the short
term. So we'll remain defensive until some of the turbulence is over, keeping
the Fund's duration and allocations roughly the same. Eventually, however, we
believe higher interest rates could choke off some of the economy's strength
and keep inflation in check. With slow economic growth and subdued inflation,
the bond market could turn more positive in 1995. If that happens, we'll most
likely lengthen the Fund's duration.
The outlook is bright for the municipal market as well. With some
municipal bonds yielding as high as 7% at the end of December, investors could
earn double-digit, after-tax returns. That attractive level of income could
catch the attention of more investors. At the same time, the supply of
municipals has continued to diminish; it's now about half of its 1993 rate.
These positive supply/demand fundamentals should eventually work to firm the
municipal market.
"...the bond market could turn more positive in 1995."
(1) Figures from Lipper Analytical Services include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance
would be lower.
5
<PAGE> 6
NOTES TO PERFORMANCE INFORMATION
John Hancock Funds - Tax-Exempt Income Fund
In accordance with the reporting requirements of the Securities and Exchange
Commission, the following data are supplied for the periods ended December 31,
1994 with all distributions reinvested in shares. The average annual total
returns for the 1-year, 5-year, and 10-year periods for Class A shares were
(10.14%), 5.29% and 8.73%, respectively, and reflect payment of the maximum
sales charge of 4.5% for Class A shares. Total return (not annualized) since
inception on January 3, 1994 for Class B shares was (10.92%) and reflects the
applicable contingent deferred sales charge (maximum contingent deferred sales
charge is 5% and declines to 0% over 6 years). The SEC standard yields for the
30-day period ended December 30, 1994 for Class A and Class B shares were 5.43%
and 4.97%, respectively. All performance data shown represent past performance
and should not be considered indicative of future performance. Returns and
principal values of Fund investments will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Performance is affected by a 12b-1 plan, which commenced on March 24, 1987 and
January 3, 1994 for Class A and Class B shares, respectively. A portion of the
Fund's income may be subject to Federal, state, or local taxes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT OVER LIFE OF THE FUND (OR MOST
RECENT TEN YEARS)
TAX-EXEMPT INCOME FUND: CLASS A
(Figure 5)
Tax-Exempt Income Fund
Class A shares
Line chart with the heading Tax-Exempt Income Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund (or the
most recent 10 years). Within the chart are three lines. The first line
represents the value of the Lehman Bros. Municipal Bond Index and is equal to
$24,733 as of December 31, 1994. The second line represents the value of the
hypothetical $10,000 investment made in the Tax-Exempt Income Fund on December
31, 1984, before sales charge, and is equal to $24,182 as of December 31, 1994.
The third line represents the Tax-Exempt Income Fund after sales charge and is
equal to $23,092 as of December 31, 1994.
(Figure 6)
Tax-Exempt Income Fund
Class B shares
Line chart with the heading Tax-Exempt Income Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund (or most
recent 10 years). Within the chart are three lines. The first line represents
the value of Lehman Bros. Municipal Bond Index and is equal to $9,483 as of
December 31, 1994. The second line represents the value of the hypothetical
$10,000 investment made in the Tax-Exempt Income Fund on January 3, 1994,
before contingent deferred sales charge, and is equal to $9,377 as of December
31, 1994. The third line represents Tax-Exempt Income Fund after contingent
deferred sales charge and is equal to $8,908 as of December 31, 1994.
* The Lehman Bros. Municipal Bond Index is an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
6
<PAGE> 7
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $469,197,178) . . . . . . . . . . . $458,512,064
Tax-exempt short-term notes (cost - $2,000,000) . . . . . . . . . . . . 2,000,000
Joint repurchase agreement (cost - $96,000) . . . . . . . . . . . . . . 96,000
Corporate savings account . . . . . . . . . . . . . . . . . . . . . . . 1,730
------------
460,609,794
Receivable for shares sold . . . . . . . . . . . . . . . . . . . . . . . 62,061
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . 3,210,000
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,561,343
Receivable for variation margin - Note A . . . . . . . . . . . . . . . . 84,375
Segregated assets for financial futures contracts . . . . . . . . . . . . 562,500
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . 475,090,073
-------------------------------------------------------------------------------
LIABILITIES:
Dividend payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,422
Payable for shares repurchased . . . . . . . . . . . . . . . . . . . . . 28,925
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . 3,179,070
Payable to John Hancock Advisers, Inc.
and affiliates - Note B . . . . . . . . . . . . . . . . . . . . . . . . 291,598
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . 69,268
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 3,641,283
-------------------------------------------------------------------------------
NET ASSETS:
Capital paid-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486,600,302
Accumulated net realized loss on investments and
financial futures contracts . . . . . . . . . . . . . . . . . . . . . . ( 3,473,882)
Net unrealized depreciation of investments and
financial futures contracts . . . . . . . . . . . . . . . . . . . . . . (11,680,426)
Undistributed net investment Income . . . . . . . . . . . . . . . . . . . 2,796
------------
Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . $471,448,790
===============================================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $467,474,910/46,945,981 . . . . . . . . . . . . . . . . . . . . $ 9.96
============================================================================================
Class B - $3,973,880/399,205 . . . . . . . . . . . . . . . . . . . . . . $ 9.95
============================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($9.96 x 104.71%) . . . . . . . . . . . . . . . . . . . . . . . $ 10.43
============================================================================================
</TABLE>
* 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.
**Class B shares commenced operations on January 3, 1994.
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1994. YOU'LL
ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF
THAT DATE.
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
STATEMENT OF OPERATIONS
Year ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,894,653
-----------
Expenses:
Investment management fee - Note B . . . . . . . . . . . . . . . . . . 2,763,233
Distribution/service fee - Note B
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,502,239
Class B ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,375
Transfer agent fee - Note B
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,624
Class B ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,482
Custodian fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,376
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . 72,885
Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,945
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,125
Auditing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,100
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,310
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,368
------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 5,685,062
---------------------------------------------------------------------------
Less Expense Reductions -
Note B . . . . . . . . . . . . . . . . . . . . . . . . . ( 94,444)
---------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . 5,590,618
---------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . 27,304,035
---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FINANCIAL FUTURES CONTRACTS:
Net realized loss on investments sold . . . . . . . . . . . . . . . . . . ( 5,111,771)
Net realized gain on financial futures contracts . . . . . . . . . . . . 1,645,744
Change in net unrealized appreciation/depreciation of
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 54,450,304)
Change in net unrealized appreciation/depreciation of
financial futures contracts . . . . . . . . . . . . . . . . . . . . . . ( 995,312)
------------
Net Realized and Unrealized Loss
on Investments and Financial
Futures Contracts . . . . . . . . . . . . . . . . . . . ( 58,911,643)
---------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . ($31,607,608)
===========================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 8
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993
------------- ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,304,035 $ 26,311,507
Net realized gain (loss) on investments sold and financial futures contracts . . . . . . . . . ( 3,466,027) 20,280,139
Change in net unrealized appreciation/depreciation of investments . . . . . . . . . . . . . . . ( 55,445,616) 9,374,845
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . . . . . . . . . . . . . ( 31,607,608) 55,966,491
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($0.5664 and $0.5753 per share, respectively) . . . . . . . . . . . . . . . . . . . ( 27,204,549) ( 26,311,507)
Class B ** - ($0.4918 and none per share, respectively) . . . . . . . . . . . . . . . . . . . ( 99,486) -----
Distributions from net realized gain on investments sold and financial futures contracts
Class A - ($0.0296 and $0.4085 per share, respectively) . . . . . . . . . . . . . . . . . . . ( 1,428,226) ( 19,000,656)
Class B ** - ($0.0296 and none per share, respectively) . . . . . . . . . . . . . . . . . . . ( 2,933) -----
------------ ------------
Total Distributions to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 28,735,194) ( 45,312,163)
------------ ------------
FROM FUND SHARE TRANSACTIONS -- NET* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 9,489,468) 48,896,970
------------ ------------
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541,281,060 481,729,762
------------ ------------
End of period (including undistributed net investment income of $2,796 and none, respectively). $471,448,790 $541,281,060
============ ============
</TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,879,115 $ 40,764,635 6,665,255 $ 75,747,360
Shares issued to shareholders in reinvestment of distributions . . 2,197,798 22,752,848 3,270,449 36,758,053
---------- ------------ ------------ ------------
6,076,913 63,517,483 9,935,704 112,505,413
Less shares repurchased . . . . . . . . . . . . . . . . . . . . . . ( 7,437,980) ( 77,174,049) ( 5,585,543) ( 63,608,443)
---------- ------------ ------------ ------------
Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . ( 1,361,067) ($ 13,656,566) 4,350,161 $ 48,896,970
========== ============ ============ ============
CLASS B**
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,397 $ 4,462,005
Shares issued to shareholders in reinvestment of distributions . . 8,004 81,368
---------- ------------
435,401 4,543,373
Less shares repurchased . . . . . . . . . . . . . . . . . . . . . . ( 36,196) ( 376,275)
---------- ------------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,205 $ 4,167,098
========== ============
</TABLE>
** Class B shares commenced operations on January 3, 1994.
THE STATEMENT OF CHANGES IN NET ASSETS SHOWS HOW THE VALUE OF THE FUND'S NET
ASSETS HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD. THE DIFFERENCE
REFLECTS EARNINGS LESS EXPENSES, ANY INVESTMENT GAINS AND LOSSES, DISTRIBUTIONS
PAID TO SHAREHOLDERS, AND ANY INCREASE OR DECREASE IN MONEY SHAREHOLDERS
INVESTED IN THE FUND. THE FOOTNOTE ILLUSTRATES THE NUMBER OF FUND SHARES SOLD,
REINVESTED AND REDEEMED DURING THE LAST TWO PERIODS, ALONG WITH THE
CORRESPONDING DOLLAR VALUES.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 9
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period . . . . . . . . . . . . . . . $ 11.21 $ 10.96 $ 11.01 $ 10.59 $ 10.68
-------- -------- -------- -------- --------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . 0.57 0.58 0.63 0.68 0.68
Net Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts . . . . . . . . . . . . . . . . . . . ( 1.22) 0.66 0.26 0.57 ( 0.05)
-------- -------- -------- -------- --------
Total from Investment Operations . . . . . . . . . . . . . . . ( 0.65) 1.24 0.89 1.25 0.63
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income . . . . . . . . . . . . . . ( 0.57) ( 0.58) ( 0.63) ( 0.68) ( 0.68)
Distributions from Net Realized Gain on Investments Sold and
Financial Futures Contracts . . . . . . . . . . . . . . . . . . ( 0.03) ( 0.41) ( 0.31) ( 0.15) ( 0.04)
-------- -------- -------- -------- --------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . ( 0.60) ( 0.99) ( 0.94) ( 0.83) ( 0.72)
-------- -------- -------- -------- --------
Net Asset Value, End of Period . . . . . . . . . . . . . . . . . . $ 9.96 $ 11.21 $ 10.96 $ 11.01 $ 10.59
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (c) . . . . . . . . . . ( 5.90%) 11.53% 8.35% 12.18% 6.15%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted) . . . . . . . . . . . . . $467,475 $541,281 $481,730 $422,311 $377,738
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . 1.11% 1.27% 1.28% 1.21% 1.23%
Ratio of Net Investment Income to Average Net Assets . . . . . . . 5.43% 5.06% 5.71% 6.23% 6.43%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . 74% 81% 93% 56% 59%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZE THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIODS INDICATED: THE NET INVESTMENT INCOME, GAINS
(LOSSES), DIVIDENDS AND TOTAL INVESTMENT RETURNS OF THE FUND. IT SHOWS HOW THE
FUND'S NET ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS
PERIOD. ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN
THE FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 3, 1994
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBER 31,
1994
--------------
<S> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11.17(a)
--------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.49
Net Realized and Unrealized Loss on Investments and Financial Futures Contracts . . . . . . . . . ( 1.19)
--------
Total from Investment Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 0.70)
--------
Less Distributions:
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 0.49)
Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts . . . ( 0.03)
--------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 0.52)
--------
Net Asset Value, End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.95
========
Total Investment Return at Net Asset Value (c) . . . . . . . . . . . . . . . . . . . . . . . . . ( 6.23%)(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,974
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.83%*
Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . . . . . . . . . 4.88%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74%
</TABLE>
* On an annualized basis.
(a) Initial price to commence operations.
(b) Not annualized.
(c) Without the expense reduction, total investment return would have been
lower.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 11
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
SCHEDULE OF INVESTMENTS
December 31, 1994
- --------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
TAX-EXEMPT INCOME FUND ON DECEMBER 31, 1994. IT'S DIVIDED INTO THREE MAIN
CATEGORIES: TAX-EXEMPT LONG-TERM BONDS, TAX-EXEMPT SHORT-TERM NOTES AND
SHORT-TERM INVESTMENTS. THE TAX-EXEMPT BONDS AND NOTES ARE FURTHER BROKEN DOWN
BY STATE. UNDER EACH STATE IS A LIST OF THE SECURITIES OWNED BY THE FUND.
SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S "CASH" POSITION, ARE LISTED
LAST.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA (0.43%)
Birmingham, City of,
GO Ref Ser 1985 . . . . . . . . . . . . . . . . . . . . . . . . . 9.800% 10/01/11 AA $ 1,920 $ 2,026,522 9.28%
------------
ALASKA (1.08%)
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser . . . . . . . . . . . . . . . . . . . . 7.750 12/01/14 A+ 1,000 1,029,010 7.53
Ins Mtg Prog 1990 1st Ser . . . . . . . . . . . . . . . . . . . . 7.800 12/01/30 A+ 1,380 1,423,304 7.56
Alaska, State of,
Cert of Part In Rent 1985 Ser A . . . . . . . . . . . . . . . . . 9.700 10/01/07 AAA 2,500 2,633,425 9.21
------------
5,085,739
------------
ARIZONA (0.52%)
Salt River Project Agricultural Improvement and Power District,
Salt River Proj Elec Sys Rev Ref Ser 1993C . . . . . . . . . . . 5.250 01/01/19 AA *3,000 2,453,550 6.42
------------
CALIFORNIA (2.10%)
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice Gen Proj 1993 Ser . . . . . . . 6.200 07/01/20 BBB- *3,000 2,571,540 7.23
Los Angeles County Transportation Commission,
Sales Tax Rev Ser 1991 A . . . . . . . . . . . . . . . . . . . . 6.750 07/01/20 AAA 4,000 4,267,440 6.33
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant Proj . . 8.000 06/01/10 A 1,000 1,094,100 7.31
Sacramento County Sanitation District Finance Auth,
Rev Ser 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.750 12/01/23 AA 2,750 1,978,900 6.60
------------
9,911,980
------------
COLORADO (1.04%)
Colorado Housing Finance Auth,
Single Family Rev 1985 Ser C . . . . . . . . . . . . . . . . . . 9.375 03/01/12 AAA** 195 201,419 9.08
Colorado Springs, City of,
Util Sys Rev Ser 1991C . . . . . . . . . . . . . . . . . . . . . 6.750 11/15/21 AAA 2,665 2,675,287 6.72
Denver, City and County of,
Airport Sys Rev Ser 1985 . . . . . . . . . . . . . . . . . . . . 8.875 08/01/15 BB 1,000 1,016,900 8.73
Airport Sys Rev Ser 1985 . . . . . . . . . . . . . . . . . . . . 9.250 08/01/20 BB 1,000 1,022,180 9.05
------------
4,915,786
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
CONNECTICUT (0.34%)
Connecticut State Health and Educational Facilities Auth,
Rev Ser D Quinnipiac College Iss . . . . . . . . . . . . . . . . 6.000% 07/01/23 BBB- $*2,000 $ 1,600,100 7.50%
-----------
FLORIDA (8.46%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P. South Proj . 7.950 12/01/08 A 4,590 4,948,204 7.37
Citrus, County of,
Poll Control Ref Rev Ser 1992A Florida Pwr Corp Crystal River
Pwr Plant Proj . . . . . . . . . . . . . . . . . . . . . . . . 6.625 01/01/27 A+ 6,180 6,063,260 6.75
Poll Control Ref Rev Ser 1992B Florida Pwr Corp Crystal River
Pwr Plant Proj . . . . . . . . . . . . . . . . . . . . . . . . 6.350 02/01/22 A+ 7,000 6,661,690 6.67
Florida, State of,
Full Faith & Credit State Board of Ed Pub Ed Cap Outlay Ser
1991C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.625 06/01/22 AA *4,500 4,477,500 6.66
Full Faith & Credit State Board of Ed Cap Outlay Ser 1994A . . . 5.750 01/01/12 AA *3,000 2,776,320 6.21
Sunshine Skyway Rev Ser of 1984 . . . . . . . . . . . . . . . . . 10.250 06/01/10 AAA 1,250 1,407,787 9.10
Hillsborough, County of,
Ref Util Rev Ser 1991A . . . . . . . . . . . . . . . . . . . . . 7.000 08/01/14 BBB+ 1,245 1,246,482 6.99
Jacksonville Electric Auth,
St. Johns River Pwr Park Sys Ref Rev Iss Two Ser Seven . . . . . 5.750 10/01/12 AA *2,000 1,835,260 6.27
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D . . . . . . . . . . . . . . . . . . 6.750 10/01/17 AA- 2,200 2,260,500 6.57
Palm Beach, County of,
Solid Waste Ind'L Dev Rev Ser 1993A Okeelanta Pwr Lp Proj . . . . 6.850 02/15/21 NR 4,000 3,619,280 7.57
Solid Waste Ind'L Dev Rev Ser 1994A Osceola Pwr Lp Proj . . . . . 6.850 01/01/14 NR *5,000 4,602,650 7.44
-----------
39,898,933
-----------
GEORGIA (2.83%)
Atlanta, City of,
GO Ser A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.000 12/01/16 AA *3,000 2,809,230 6.41
Spec Facil Rev Ser B Delta Airlines Proj Ser 1989B . . . . . . . 7.900 12/01/18 BB *2,075 2,033,334 8.06
Wtr & Swr Rev Ser 1993 . . . . . . . . . . . . . . . . . . . . . 5.000 01/01/15 AA- 3,150 2,546,838 6.18
Georgia Municipal Electric Auth,
Pwr Rev Ser M . . . . . . . . . . . . . . . . . . . . . . . . . . 8.375 01/01/20 A+ 1,000 1,063,650 7.87
Metropolitan Atlanta Rapid Transportation Auth,
Sales Tax Rev Ser O . . . . . . . . . . . . . . . . . . . . . . . 6.550 07/01/20 AA- 5,000 4,873,150 6.72
-----------
13,326,202
-----------
HAWAII (0.32%)
Hawaii, State of,
Airport Sys Rev Second Ser of 1991 . . . . . . . . . . . . . . . 7.000 07/01/18 A- 1,500 1,488,045 7.06
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 13
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS (6.07%)
Chicago, City of,
Chicago-O'Hare Int'L Airport Gen Airport Rev 1990 Ser A . . . . . 7.500% 01/01/16 A+ $ 2,000 $ 2,124,280 7.06%
Chicago-O'Hare Int'L Airport Int'L Terminal Spec Rev Ser 1990A . 6.500 01/01/18 A 1,000 944,320 6.88
Chicago-O'Hare Int'L Airport Int'L Terminal Spec Rev Ser 1992 . . 6.750 01/01/12 AAA 3,000 2,990,970 6.77
Chicago-O'Hare Int'L Airport Spec Facil Rev Ser 1990 Lufthansa
German Airlines Proj . . . . . . . . . . . . . . . . . . . . . 7.125 05/01/18 AAA 1,000 999,850 7.13
Chicago-O'Hare Int'L Airport Spec Facil Rev Ser 1990A American
Airlines Proj . . . . . . . . . . . . . . . . . . . . . . . . . 7.875 11/01/25 BB+ 3,000 2,919,990 8.09
Skyway Toll Bridge Rev Ref Ser 1994 . . . . . . . . . . . . . . . 6.750 01/01/14 BBB- *5,400 5,097,330 7.15
Skyway Toll Bridge Rev Ref Ser 1994 . . . . . . . . . . . . . . . 6.750 01/01/17 BBB- *4,000 3,711,480 7.27
Illinois Health Facilities Auth,
Rev Ref Ser 1992 Mercy Hosp & Medical-Center . . . . . . . . . . 7.000 01/01/07 A- 1,500 1,482,060 7.08
Illinois, State of,
Civic Center Spec State Oblig Ser 1991 . . . . . . . . . . . . . 6.250 12/15/20 AAA 3,000 2,817,300 6.66
Sales Tax Rev Ser V . . . . . . . . . . . . . . . . . . . . . . . 6.375 06/15/17 AAA *5,750 5,521,380 6.64
------------
28,608,960
------------
INDIANA (1.74%)
Indianapolis Local Public Improvement Bond Bank,
Ser 1992 D . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.750 02/01/20 A+ 8,500 8,210,830 6.99
------------
KANSAS (2.26%)
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984 . . . . . . . . . . . . . . . . . . . . . . 10.500 12/01/08 AAA 2,000 2,343,240 8.96
Kansas City, City of,
Util Sys Ref & Imp Rev Ser 1994 . . . . . . . . . . . . . . . . . 6.375 09/01/23 AAA *8,500 8,286,225 6.54
------------
10,629,465
------------
KENTUCKY (0.82%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A . . . . . . . . . . 6.750 02/01/02 BB *2,000 1,934,460 6.98
Rev Spec Facil Delta Airlines Proj Ser 1992A . . . . . . . . . . 7.500 02/01/12 BB *2,000 1,923,640 7.80
------------
3,858,100
------------
LOUISIANA (2.02%)
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj . . . . . 7.500 06/01/21 BBB+ 4,000 3,931,920 7.63
West Feliciana, Parish of,
Poll Control Rev Gulf States Util Co Proj III Remarketed
12-1-1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.700 12/01/14 BBB- *3,600 3,607,020 7.69
Poll Control Rev Gulf States Util Co. Proj III Remarketed
12-1-1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.700 12/01/14 AA- *2,000 2,003,900 7.69
------------
9,542,840
------------
MARYLAND (0.80%)
Maryland State Health & Higher Educational Facilities Auth,
Ref Rev Francis Scott Key Medical Center . . . . . . . . . . . . 5.000 07/01/18 AAA *1,750 1,386,437 6.31
Northeast Maryland Waste Disposal Auth,
Solid Waste Rev Montgomery County Resource Recovery Proj Ser
1993A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.300 07/01/16 A** 2,650 2,364,648 7.06
------------
3,751,085
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 14
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
MASSACHUSETTS (11.44%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B . . . . . . . . . . . . . . . . . . . . 7.875% 03/01/21 AAA $ 2,000 $ 2,251,560 7.00%
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D . . . . . . . . . . . . . . 6.750 07/01/24 A+ 2,450 2,347,516 7.04
Rev Lowell Gen Hosp Iss Ser A . . . . . . . . . . . . . . . . . . 8.400 06/01/11 BAA1** 1,100 1,154,560 8.00
Rev Mass Institute of Technology Ser H . . . . . . . . . . . . . 5.000 07/01/23 AA+ 3,000 2,345,700 6.39
Rev New England Deaconess Hosp Iss Ser D . . . . . . . . . . . . 6.625 04/01/12 A 2,000 1,885,220 7.03
Rev New England Deaconess Hosp Iss Ser D . . . . . . . . . . . . 6.875 04/01/22 A 7,960 7,560,886 7.24
Rev New England Medical Center Hosp Iss Ser E . . . . . . . . . . 7.875 07/01/11 A- 1,950 2,119,416 7.25
Rev Worcester Polytechnic Institute Ser E . . . . . . . . . . . . 6.750 09/01/11 A+ *2,000 2,006,780 6.73
Massachusetts Housing Finance Agency,
Hsg Proj Ser A . . . . . . . . . . . . . . . . . . . . . . . . . 6.150 10/01/15 AAA 2,000 1,837,600 6.69
Multi-Family Hsg 1985 Ser A . . . . . . . . . . . . . . . . . . . 8.875 07/01/18 AAA 870 895,769 8.62
Multi-Family Mtg Rev 1985 Ser A . . . . . . . . . . . . . . . . . 9.125 12/01/20 AAA 980 1,017,808 8.79
Residential Dev 1992 Ser A . . . . . . . . . . . . . . . . . . . 6.900 11/15/24 AAA 2,700 2,662,713 7.00
Residential Dev 1992 Ser E . . . . . . . . . . . . . . . . . . . 6.250 11/15/12 AAA 5,000 4,722,350 6.62
Single Family Hsg Ser 8 . . . . . . . . . . . . . . . . . . . . . 7.700 06/01/17 A+ 1,500 1,549,995 7.45
Single Family Mtg Purchase 1985 Ser A . . . . . . . . . . . . . . 9.500 12/01/16 A+ 275 286,564 9.12
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser A A Pub Corp of The Commonwealth
of Mass . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.750 07/01/08 BBB+ *3,000 3,056,790 6.62
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of The Commonwealth
of Mass . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.750 07/01/17 BBB+ 4,405 4,330,027 6.87
Massachusetts Turnpike Auth,
Turnpike Rev 1993 Ser A . . . . . . . . . . . . . . . . . . . . . 5.000 01/01/20 A+ 3,500 2,712,920 6.45
Turnpike Rev 1993 Ser A . . . . . . . . . . . . . . . . . . . . . 5.125 01/01/23 AAA 2,500 1,978,850 6.47
Massachusetts Water Resource Auth,
Gen Rev Ref Ser 1992B . . . . . . . . . . . . . . . . . . . . . . 5.500 11/01/15 AAA *3,000 2,598,510 6.35
Massachusetts, Commonwealth of,
GO Consol Loans Ser B . . . . . . . . . . . . . . . . . . . . . . 6.000 08/01/14 A+ *2,000 1,850,440 6.48
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj . . . 7.000 04/01/22 A- 2,750 2,751,485 7.00
------------
53,923,459
------------
MICHIGAN (0.88%)
Detroit, City of,
Wtr Supply Sys Rev Ref Ser 1993 . . . . . . . . . . . . . . . . . 4.750 07/01/19 AAA *1,000 748,480 6.35
Michigan Housing Development Auth,
Rental Hsg Rev 1992 Ser A . . . . . . . . . . . . . . . . . . . . 6.600 04/01/12 A+ 3,500 3,418,625 6.76
------------
4,167,105
------------
MINNESOTA (1.06%)
Robbinsdale Hospital,
Rev Ser B North Memorial Medical Center . . . . . . . . . . . . . 5.450 05/15/13 AAA 2,000 1,747,420 6.24
Saint Paul Housing and Redevelopment Auth,
Sales Tax Rev Ser 1993 Civic Center Proj . . . . . . . . . . . . 5.450 11/01/13 A 2,500 2,151,375 6.33
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 15
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
MINNESOTA (CONTINUED)
Southern Minnesota Municipal Power Agency,
Pwr Supply Sys Rev Ser 1988A . . . . . . . . . . . . . . . . . . . . 8.125% 01/01/18 AAA $ 1,000 $1,088,970 7.46%
----------
4,987,765
----------
MISSISSIPPI (0.04%)
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A . . . . . . . . . . . . . . . . . 9.250 03/01/12 AAA 160 171,011 8.65
----------
MISSOURI (0.36%)
Missouri Housing Development Commission,
Single Family Mtg Rev 1991 Ser A . . . . . . . . . . . . . . . . . . 7.375 08/01/23 AAA 1,415 1,436,324 7.27
Missouri State Environmental Improvement and Energy Resource,
Floating/Fixed Rate Poll Control Rev Ser 1984G-4 Assoc
Elec Coop Proj . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.250 11/15/14 A+ 265 280,314 7.80
----------
1,716,638
----------
NEBRASKA (3.26%)
Lincoln Electric System,
Rev Ref Ser A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.250 09/01/15 AA 1,550 1,306,417 6.23
Omaha Public Power District,
Elec Sys Rev 1989 Ser A . . . . . . . . . . . . . . . . . . . . . . . 6.800 02/01/17 AA 4,000 4,243,920 6.41
Elec Sys Rev 1992 Ser A . . . . . . . . . . . . . . . . . . . . . . . 6.500 02/01/17 AA 4,500 4,736,295 6.18
Elec Sys Rev 1992 Ser B . . . . . . . . . . . . . . . . . . . . . . . 6.200 02/01/17 AA *2,250 2,133,450 6.54
Elec Sys Rev 1993 Ser B . . . . . . . . . . . . . . . . . . . . . . . 5.700 02/01/17 AA 1,810 1,602,719 6.44
Elec Sys Rev 1993 Ser D . . . . . . . . . . . . . . . . . . . . . . . 5.300 02/01/16 AA *1,600 1,348,848 6.29
----------
15,371,649
----------
NEW JERSEY (1.87%)
Cape May County Municipal Utilities Auth,
Swr Rev Ref Ser 1985 . . . . . . . . . . . . . . . . . . . . . . . . 9.000 01/01/16 AAA 2,000 2,109,100 8.53
New Jersey Turnpike Auth,
Turnpike Rev 1991 Ser C . . . . . . . . . . . . . . . . . . . . . . . 6.500 01/01/16 A *4,500 4,436,685 6.59
Turnpike Rev Ser 1984 . . . . . . . . . . . . . . . . . . . . . . . . 10.375 01/01/03 AAA 1,900 2,256,953 8.73
----------
8,802,738
----------
NEW MEXICO (0.33%)
Albuquerque, City of,
Gross Receipts Tax Adjustable/Fixed Rate Demand Rev Ser December 1984
Airport Rev Supported Sub Lien . . . . . . . . . . . . . . . . . . 8.250 07/01/14 AA 1,500 1,567,350 7.90
----------
NEW YORK (17.09%)
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1 . . . . . . . . . . . . . . . 8.500 07/01/17 AAA 1,000 1,095,010 7.76
Transit Facil 1987 Serv Contract Ser 2 . . . . . . . . . . . . . . . 8.000 07/01/18 AAA 1,500 1,648,260 7.28
New York Local Government Assistance Corp,
Rev Ser B Pub Benefit Corp . . . . . . . . . . . . . . . . . . . . . 6.250 04/01/21 A *3,000 2,795,400 6.71
Ser 1992 A Pub Benefit Corp . . . . . . . . . . . . . . . . . . . . . 6.875 04/01/19 A 4,200 4,217,850 6.85
Ser 1993 B Pub Benefit Corp . . . . . . . . . . . . . . . . . . . . . 5.375 04/01/16 A *3,000 2,500,710 6.45
Ser 1993 C Pub Benefit Corp . . . . . . . . . . . . . . . . . . . . . 5.500 04/01/17 A 2,000 1,695,640 6.49
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 16
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK (CONTINUED)
New York State Dormitory Auth,
City Univ Ref 1988B Iss . . . . . . . . . . . . . . . . . . . . . . . 8.125% 07/01/08 BBB $ 1,000 $ 1,092,720 7.44%
Cornell Univ Rev Ser 1990A . . . . . . . . . . . . . . . . . . . . . 7.375 07/01/30 AA 1,000 1,045,870 7.05
Court Facil Lease Rev Ser A . . . . . . . . . . . . . . . . . . . . . 5.375 05/15/16 BBB+ *12,750 10,312,200 6.65
State Univ Ed Facil Rev Ser 1990B . . . . . . . . . . . . . . . . . . 7.500 05/15/11 BBB+ 500 527,080 7.11
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj . . . . . . . 7.150 06/01/20 BB+ 6,000 5,497,020 7.80
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj . . . . . . 7.500 01/01/26 A+ 2,000 2,025,960 7.40
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A . . . . . . . . 7.500 06/15/12 A 3,770 3,973,882 7.12
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A . . . . . . . . . . . . . . . 8.000 05/01/11 AAA 2,000 2,279,200 7.02
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B . . . . . . . . . . . . . . 7.875 08/15/08 BBB+ 500 534,720 7.36
Mental Hlth Serv Facil Imp Rev 1990 Ser B . . . . . . . . . . . . . . 7.875 08/15/20 BBB+ 460 485,341 7.46
Mental Hlth Serv Facil Imp Rev 1991 Ser A . . . . . . . . . . . . . . 7.750 08/15/11 BBB+ 540 572,929 7.30
Mental Hlth Serv Facil Imp Rev 1991 Ser A . . . . . . . . . . . . . . 7.750 08/15/11 AAA 1,460 1,633,419 6.93
Mental Hlth Serv Facil Imp Rev 1992 Ser F . . . . . . . . . . . . . . 6.500 08/15/12 BBB+ *4,720 4,419,242 6.94
Mental Hlth Serv Facil Imp Rev 1993 Ser F . . . . . . . . . . . . . . 5.375 02/15/14 BBB+ *1,500 1,221,960 6.60
Mental Hlth Serv Facil Imp Rev 1993 Ser F . . . . . . . . . . . . . . 5.250 02/15/19 BBB+ 3,000 2,306,670 6.83
Mental Hlth Serv Facil Imp Rev 1994 Ser E . . . . . . . . . . . . . . 6.250 08/15/19 BBB+ *3,500 3,118,710 7.01
New York State Mortgage Agency,
Rev Homeownership Ser BB-2 . . . . . . . . . . . . . . . . . . . . . 7.950 10/01/15 AA** 1,135 1,184,758 7.62
New York State Power Auth,
Gen Purpose Ser V . . . . . . . . . . . . . . . . . . . . . . . . . . 7.875 01/01/13 AAA 2,400 2,550,480 7.41
Gen Purpose Ser V . . . . . . . . . . . . . . . . . . . . . . . . . . 8.000 01/01/17 AA 1,850 1,988,750 7.44
New York State Urban Development Corp,
Rev Ref Correctional Facil 1993 Ser A . . . . . . . . . . . . . . . . 5.500 01/01/16 BBB *1,500 1,230,210 6.71
New York, City of,
GO Fiscal 1991 Ser D . . . . . . . . . . . . . . . . . . . . . . . . 8.000 08/01/04 A- 250 267,000 7.49
GO Fiscal 1991 Ser F . . . . . . . . . . . . . . . . . . . . . . . . 8.200 11/15/03 A- 1,250 1,370,188 7.48
GO Fiscal 1992 Ser A . . . . . . . . . . . . . . . . . . . . . . . . 7.750 08/15/12 A- 2,000 2,078,580 7.46
GO Fiscal 1992 Ser A . . . . . . . . . . . . . . . . . . . . . . . . 7.750 08/15/17 A- 400 414,416 7.48
GO Fiscal 1992 Ser D . . . . . . . . . . . . . . . . . . . . . . . . 7.700 02/01/09 A- 1,000 1,044,320 7.37
GO Fiscal 1992 Ser H . . . . . . . . . . . . . . . . . . . . . . . . 7.000 02/01/08 A- 2,000 2,011,820 6.96
GO Fiscal 1995 Ser B . . . . . . . . . . . . . . . . . . . . . . . . 7.000 08/15/16 A- *3,000 2,947,230 7.13
New York, State of,
GO Fiscal 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.700 11/01/11 A- 590 598,944 6.60
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L . . . . . . . . . . . . . . . . . . . . . . . . 8.125 01/01/12 A+ 1,750 1,904,683 7.47
Gen Purpose Rev Ser R . . . . . . . . . . . . . . . . . . . . . . . . 7.375 01/01/16 AAA 1,600 1,743,488 6.77
Spec Oblig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.250 01/01/12 AAA *2,000 1,942,980 6.43
Spec Oblig Ref Ser 1991B . . . . . . . . . . . . . . . . . . . . . . 6.875 01/01/15 A- 2,300 2,309,085 6.85
----------
80,586,725
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 17
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
NORTH CAROLINA (0.99%)
North Carolina Eastern Municipal Power Agency,
Rev Pwr Sys Ser G Remarketed 9-1-93 Ser G . . . . . . . . . . . . . . 5.750% 12/01/16 A- $*3,000 $2,512,260 6.87%
Rev Ser 1993A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.875 01/01/13 A- *2,500 2,166,450 6.78
----------
4,678,710
----------
OHIO (1.10%)
Cleveland Public Power System,
Elec Sys Rev Ser A First Mtg . . . . . . . . . . . . . . . . . . . . 7.000 11/15/24 AAA *4,000 4,103,280 6.82
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United Methodist
Hosp Proj . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.600 05/15/20 AA- 1,000 1,103,020 6.89
----------
5,206,300
----------
OKLAHOMA (1.84%)
Oklahoma Municipal Power Auth,
Pwr Supply Sys Rev Ser 1994A . . . . . . . . . . . . . . . . . . . . 4.750 01/01/22 AAA 2,250 1,685,385 6.34
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 . . . . . . . . . . . . . . . . . . 7.875 01/01/21 A+ 55 59,773 7.25
Turnpike Sys 1st Sr Rev Ser 1989 . . . . . . . . . . . . . . . . . . 7.875 01/01/21 A+ 1,745 1,918,087 7.16
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1985 American Airlines Inc . . . . . . . . . . . . . . . . . 9.500 06/01/20 BB+ 3,000 3,159,600 9.02
Rev American Airlines Inc. . . . . . . . . . . . . . . . . . . . . . 7.375 12/01/20 BB+ *2,000 1,864,000 7.91
----------
8,686,845
----------
OREGON (0.96%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj . . . . . . . . . . . . . . . 7.125 01/01/21 NR *2,000 1,871,580 7.61
Rev 1994 Ser B Wauna Cogeneration Proj . . . . . . . . . . . . . . . 7.400 01/01/16 NR *2,800 2,657,564 7.80
----------
4,529,144
----------
PENNSYLVANIA (10.13%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj 6.700 12/01/20 BB+ *5,000 4,513,850 7.42
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co Proj 7.375 04/01/21 BBB+ 6,095 6,107,007 7.36
Montgomery County Redevelopment Auth,
Multifamily Hsg Rev Ser A KBF Assoc L.P. Proj 6.400 07/01/14 NR 2,000 1,848,420 6.92
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A 6.700 09/01/14 BB *4,950 4,593,204 7.22
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj 7.125 12/01/15 BBB- *7,000 6,632,710 7.52
Pennsylvania Intergovernmental Cooperation Auth,
Spec Tax Rev City of Philadelphia Funding Proj Ser 1993 5.750 06/15/15 A- *2,000 1,731,800 6.64
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N 6.500 12/01/13 A *2,840 2,818,416 6.55
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev Ser 1993A Temple Univ Hosp Proj 6.625 11/15/23 BBB+ 8,000 7,008,160 7.56
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 18
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Philadelphia, City of,
Gas Works Rev Fifteenth Ser Subseries 3 . . . . . . . . . . . . . . . 5.250% 08/01/15 BBB $*4,205 $ 3,360,047 6.57%
Gas Works Rev Fourteenth Ser . . . . . . . . . . . . . . . . . . . . 6.375 07/01/14 BBB *2,000 1,868,080 6.83
Gas Works Rev Fourteenth Ser . . . . . . . . . . . . . . . . . . . . 6.375 07/01/26 BBB *5,150 4,667,548 7.03
Pittsburgh Water & Sewer Auth,
Wtr & Swr Sys Rev Ref Ser 1993 A . . . . . . . . . . . . . . . . . . 4.750 09/01/16 AAA 2,000 1,529,140 6.21
York County Solid Waste and Refuse Auth,
Adj Tender Ind'L Dev Rev Ser of 1985 Resource Recovery Proj . . . . . 8.200 12/01/14 AA- 1,000 1,052,790 7.79
-----------
47,731,172
-----------
SOUTH CAROLINA (0.69%)
South Carolina Public Service Auth,
Santee Cooper Elec Sys Exp Rev Ref 1988 Ser A . . . . . . . . . . . . 7.875 07/01/21 A+ 550 575,157 7.53
Santee Cooper Elec Sys Exp Rev Ref 1988 Ser A . . . . . . . . . . . . 7.875 07/01/21 A+ 2,615 2,697,006 7.64
-----------
3,272,163
-----------
SOUTH DAKOTA (0.23%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss . . . . . . . . . . . . . . . . . 7.625 11/01/13 AA- 75 78,389 7.30
Rev Ser 1989 Sioux Valley Hosp Iss . . . . . . . . . . . . . . . . . 7.625 11/01/13 AA- 925 1,004,347 7.02
-----------
1,082,736
-----------
TENNESSEE (2.11%)
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp . . . . . . . . . . . . . . . . . . . . 6.750 09/01/12 BBB *3,500 3,380,685 6.99
Metropolitan Nashville Airport Auth,
Spec Facil Rev Ser 1985 American Airlines Inc Proj . . . . . . . . . 9.875 10/01/05 BB+ 1,000 1,048,540 9.42
The Industrial Development Board of Maury County,
Multi-Modal Interchangeable Rate Poll Control Ref Rev Saturn Corp Proj
Ser 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.500 09/01/24 BBB+* 6,000 5,514,720 7.07
-----------
9,943,945
-----------
TEXAS (4.33%)
Alliance Airport Auth Inc.,
Spec Facil Rev Ser 1990 American Airlines Inc Proj 7.500 12/01/29 BB+ 2,000 1,887,300 7.95
Austin, City of,
Combined Util Sys Rev Ser 1986A 8.000 11/15/16 AAA 1,250 1,400,975 7.14
Combined Util Sys Rev Ref Ser 1994 5.750 05/15/24 AAA *1,000 873,970 6.58
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj 8.250 05/01/15 A 2,000 2,120,580 7.78
Dallas-Fort Worth International Airport,
Rev Delta Air Lines Inc 7.600 11/01/11 BB *3,000 2,881,500 7.91
Grapevine Industrial Developmental Corp,
Airport Rev Facil Imp American Airlines Inc Proj 9.250 12/01/12 BB+ *3,025 3,163,999 8.84
Gulf Coast Waste Disposal Auth,
Coll Rev Ref Houston Lighting & Pwr Co Proj Ser 1992A 6.375 04/01/12 AAA *1,800 1,776,618 6.46
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 19
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
TEXAS (CONTINUED)
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A St. Luke's Episcopal Hosp Proj . . . . . . . . . . 8.250% 02/15/08 AAA $ 1,000 $ 1,113,200 7.41%
Harris, County of,
Rev Ref Sr Lien Toll Road Ser 1994 . . . . . . . . . . . . . . . . . 5.375 08/15/20 AAA *3,350 2,791,789 6.45
Rev Ref Sr Lien Toll Road Ser 1994 . . . . . . . . . . . . . . . . . 5.000 08/15/16 AAA *3,000 2,407,020 6.23
-----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,416,951
-----------
UTAH (0.67%)
Intermountain Power Agency,
Pwr Supply Rev Ref 1985 Ser A . . . . . . . . . . . . . . . . . . . . 10.000 07/01/09 AA 2,000 2,096,520 9.54
Pwr Supply Rev Ref 1985 Ser C . . . . . . . . . . . . . . . . . . . . 9.625 07/01/19 AA 1,000 1,041,560 9.24
-----------
3,138,080
-----------
VIRGINIA (1.76%)
Fairfax County Water Auth,
Wtr Rev Ser 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.000 04/01/16 AA- *2,900 2,322,929 6.24
Lynchburg City Industrial Development Auth,
Hosp Facil Rev Ref Centra Hlth Inc Ser 1988 Lynchburg Gen Hosp &
Virginia Baptist Hospital . . . . . . . . . . . . . . . . . . . . 8.125 01/01/16 A+ 500 537,775 7.55
Virginia Housing Development Auth,
Commonwealth Mtg 1988 Ser C-2 . . . . . . . . . . . . . . . . . . . . 8.000 01/01/38 A+ 1,000 1,032,330 7.75
Virginia Transportation Board,
Trans Contract Rev Ref Ser 1992 Rte 28 Proj . . . . . . . . . . . . . 6.500 04/01/18 AA 2,200 2,162,600 6.61
Trans Contract Rev Ref Ser 1993B Rte 58 Proj . . . . . . . . . . . . 5.625 05/15/13 AA *2,500 2,222,975 6.33
-----------
8,278,609
-----------
WASHINGTON (4.36%)
Seattle, City of,
Municipal Light & Pwr Rev 1994 . . . . . . . . . . . . . . . . . . . 6.625 07/01/16 AA *3,600 3,577,536 6.67
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A . . . . . . . . . . . . . . . . 7.500 07/01/15 AA 1,455 1,492,481 7.31
Nuclear Proj No. 1 Ref Rev Ser 1989B . . . . . . . . . . . . . . . . 7.125 07/01/16 AA 1,500 1,525,695 7.01
Nuclear Proj No. 1 Ref Rev Ser 1990A . . . . . . . . . . . . . . . . 7.000 07/01/11 AA 4,450 4,488,582 6.94
Nuclear Proj No. 1 Ref Rev Ser 1991A . . . . . . . . . . . . . . . . 6.875 07/01/17 AA 1,250 1,222,738 7.03
Nuclear Proj No. 2 Ref Rev Ser 1990C . . . . . . . . . . . . . . . . 7.625 07/01/10 AAA 5,000 5,541,200 6.88
Nuclear Proj No. 3 Ref Rev Ser 1989B . . . . . . . . . . . . . . . . 7.250 07/01/15 AA 2,500 2,708,800 6.69
-----------
20,557,032
-----------
WISCONSIN (0.93%)
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A . . . . . . . . . . . . . . . . . . . . . 7.400 07/01/20 AAA 4,000 4,387,800 6.75
-----------
TOTAL TAX-EXEMPT LONG TERM BONDS
(Cost $469,197,178) (97.26%) 458,512,064
------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 20
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000'S) MARKET
STATE, ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
TAX-EXEMPT SHORT-TERM NOTES
LOUISIANA (0.21%)
Louisiana Recovery District,
Sales Tax Rev Ser 1988 . . . . . . . . . . . . . . . . . . . . . . . . 5.850%# 07/01/97 $ 1,000 $1,000,000
----------
NEW YORK (0.21%)
New York, City of
GO Fiscal 1993 Ser B . . . . . . . . . . . . . . . . . . . . . . . . . 4.800# 10/01/22 1,000 1,000,000
----------
TOTAL TAX-EXEMPT SHORT TERM NOTES ( 0.42%) 2,000,000
------ ----------
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (0.02%)
Investment in a joint repurchase agreement transaction with
Lehman Brothers Inc., Dated 12-30-94, Due 01-03-95 (secured by U.S.
Treasury Bonds, 9.25% Due 02-15-16 and 8.125% Due 08-15-21, and U.S.
Treasury Notes, 5.50% Due 02-15-95 and 4.625% Due 08-15-95) - Note A . 5.850 01/03/95 96 96,000
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account Current Rate 3.00% . . . . . . . . . . 1,730
------------
TOTAL SHORT-TERM INVESTMENTS ( 0.02%) 97,730
------- ------------
TOTAL INVESTMENTS (97.70%) $460,609,794
------- ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities, other than short term investments, newly added to the
portfolio, during the period ended December 31, 1994
** Credit ratings are rated by Moody's Investors Services or John Hancock
Advisers, Inc. where Standard & Poor's ratings are not available.
*** Credit ratings are unaudited.
NR Not rated.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities Exchange Commission and is unaudited.
# Securities redeemable at par value at any time subject to prior
notification to issuer. Represents the rate in effect on December 31, 1994.
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.
20
<PAGE> 21
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
Portfolio Concentration
- ------------------------------------------------------------------------------
THE TAX-EXEMPT INCOME FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE
VARIOUS STATES AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF
THE FUND IS CLOSELY TIED TO ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATES
AND THE FINANCIAL CONDITION OF THE STATES AND THEIR AGENCIES AND
MUNICIPALITIES. THE CONCENTRATION OF INVESTMENTS BY STATES AND CREDIT RATINGS
FOR INDIVIDUAL SECURITIES HELD BY THE FUND ARE SHOWN IN THE SCHEDULE OF
INVESTMENTS. IN ADDITION, THE CONCENTRATION OF INVESTMENTS CAN BE AGGREGATED
BY VARIOUS SECTOR CATEGORIES.
THE TABLE BELOW SHOWS THE PERCENTAGES OF THE FUND'S INVESTMENTS AT DECEMBER 31,
1994 ASSIGNED TO THE VARIOUS SECTOR CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.70%
Revenue Bonds - Certificate of Participation . . . . . . . . . . . . . . . . . . . . . . . . . 1.35
Revenue Bonds - Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.13
Revenue Bonds - Electric Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.64
Revenue Bonds - Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.82
Revenue Bonds - Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.18
Revenue Bonds - Industrial Development Bond . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10
Revenue Bonds - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.46
Revenue Bonds - Pollution Control Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 9.78
Revenue Bonds - Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.56
Revenue Bonds - Water & Sewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.54
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 97.26%
=====
</TABLE>
See notes to financial statements.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Exempt Income Fund (the "Fund") is a diversified open-end
investment management company registered under the Investment Company Act of
1940.
The Trustees have authorized the issuance of multiple classes of the
Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemption, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution/service expenses under the
terms of a distribution plan, have exclusive voting rights regarding such
distribution plan. Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial
Group, may participate in a joint repurchase agreement. Aggregate cash balances
are invested in one or more repurchase agreements, whose underlying securities
are obligations of the U.S. government and/or its agencies. The Fund's
custodian bank receives delivery of the underlying securities for the joint
account on the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date
of purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $2,374,664 of capital
loss carryforward available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforward is used by the Fund, no
capital gain distributions will be made. The carryforward expires December 31,
2002.
Additionally, net capital losses of $858,729 attributable to security
transactions occurring after October 31, 1994 are treated as arising on the
first day (January 1, 1995) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS, AND INTEREST Interest income on investment
securities is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses
that may be applied differently to each class as explained previously.
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 assets of the respective classes. Transfer
agent expenses and distribution/service fees, if any, are calculated daily at
the class level based on the appropriate net assets of each class and the
specificexpense rate(s) applicable of each class.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates. The
Fund will not engage in transactions in futures contracts for speculation, but
only for hedging or other permissible risk management purposes. The Fund's
ability to hedge successfully will depend on the Adviser's ability to predict
accurately the future direction of interest rate changes and other market
factors. At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
government securities, known as "initial margin", equal to a certain percentage
of the value of the financial futures contract being traded. Each day, the
futures contract is valued at the official settlement price of the board of
trade or U.S. commodities exchange. Subsequent payments, known as "variation
margin", to and from the broker are made on a daily basis as the market price
of the financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market", are recorded by the Fund as
unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss.
Risks of entering into futures contracts include the possibility that there may
be an illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuations imposed by an exchange.
For federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses can be affected as a result of futures
transactions.
At December 31, 1994, open positions in financial futures contracts
were as follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MAR 1995 150 Muni Bond SHORT ($554,687)
MAR 1995 150 U.S. Treasury Bond SHORT ( 440,625)
----------
($995,312)
==========
</TABLE>
At December 31, 1994, the Fund has deposited in a segregated account
$562,500 to cover margin requirements on open financial futures contracts.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities
purchased from either the date of issue or the date of purchase over the life
of the security, as required by the Internal Revenue Code. The Fund records
market discount on bonds purchased after April 30, 1993 at the time of
disposition.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent,
on an annual basis, to the sum of: (a) 0.55% of the first $500,000,000 of the
Fund's average daily net asset value, (b) 0.50% of the next $500,000,000, and
(c) 0.45% of the Fund's average daily net asset value in excess of
$1,000,000,000.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average
daily net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining
average daily net asset value. $94,444 of custodian fees have been reduced by
balance credits applied during the period ended December 31, 1994.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly-owned subsidiary of the Adviser. Prior to January 1,
1995, JH Funds was known as John Hancock Broker Distribution Services, Inc. For
the period ended December 31,
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
1994, JH Funds received net sales charges on sales of Class A shares of the
Fund in the amount of $1,188,012. Out of this amount, $142,733 was retained and
used for printing prospectuses, advertising, sales literature and other
purposes, $89,054 was paid as sales commissions and service fees to unrelated
broker-dealers and $956,225 was paid as sales commissions and service fees to
sales personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker
Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"). The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company, is the
indirect sole shareholder of Distributors and John Hancock Freedom Securities
Corporation and its subsidiaries, which include Tucker Anthony and Sutro, all
of which are broker-dealers.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from CDSC are paid to JH Funds and are used in whole or in part to defray its
expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended December 31,
1994, contingent deferred sales charges received by JH Funds amounted to
$9,999.
In addition, to compensate JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans
with respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum
of 0.25% of these payments may be service fees as defined by the amended Rules
of Fair Practice of the National Association of Securities Dealers, which
became effective July 7, 1993. Under the amended Rules of Fair Practice,
curtailment of a portion of the Fund's 12b-1 payments could occur under certain
circumstances.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of The
Berkeley Financial Group. Prior to January 1, 1995, Investor Services was known
as John Hancock Fund Services, Inc. For the period ended December 31, 1994, the
Fund paid Investor Services a monthly transfer agent fee equivalent, on an
annual basis, to 0.20% and 0.22% of the average daily net asset value of Class
A and Class B shares of the Fund, respectively, plus out of pocket expenses
incurred by Investor Services on behalf of the Fund for proxy mailings.
Effective January 1, 1995, the Fund will pay transfer agent fees based on
transaction volume and the number of shareholder accounts.
Messrs. Edward J. Boudreau, Jr., Francis C. Cleary, Jr. (until
December 14, 1994), and Richard S. Scipione are directors and/or officers of
the Adviser, and/or its affiliates as well as Trustees of the Fund. The
compensation of unaffiliated Trustees is borne by the Fund.
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended December 31, 1994, aggregated $365,620,763 and $383,714,903,
respectively. Purchases and proceeds from sales of short-term municipal
obligations during the period ended December 31, 1994, aggregated $2,500,000
and $2,000,000, respectively. There were no purchases or sales of long-term
obligations of the U.S. government and its agencies during the period ended
December 31, 1994.
The cost of investments owned at December 31, 1994 for Federal income
tax purposes was $471,533,780. Gross unrealized appreciation and depreciation
of investments aggregated $9,305,543 and $20,231,259, respectively, resulting
in net unrealized depreciation of $10,925,716.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1994, the Fund has reclassified amounts to
reflect increases in accumulated net investment income and accumulated realized
loss on investments of $2,796. This represents the cumulative amounts necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of December 31, 1994. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to certain
differences in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles.
25
<PAGE> 26
John Hancock Funds - Tax-Exempt Income Fund
REPORTS OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock Tax-Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Tax-Exempt Income Fund (the "Fund"), including the schedule of
investments, as of December 31, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and a broker. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of John Hancock Tax-Exempt Income Fund at December 31, 1994, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 13, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1994.
The Fund designated distributions to shareholders of $1,431,200 as
long-term capital gain dividends. Shareholders were mailed a 1994 U.S. Treasury
Department Form 1099-DIV in January 1995 representing their proportionate
share.
For specific information on exemption provisions in your state,
consult your local state tax office or your tax adviser.
Income dividends are 99.7% tax-exempt. Approximately 14% of the 1994
income dividends are subject to the alternative minimum tax. None of the income
was derived from U.S. Treasury obligations, or qualify for the corporate
dividends received deductions.
26
<PAGE> 27
NOTES
John Hancock Funds - Tax-Exempt Income Fund
27
<PAGE> 28
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."
A recycled logo in lower left hand corner with the caption " Printed on
Recycled Paper."
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 582
(LOGO) John Hancock Funds
A Global Investment Management Firm
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
This report is for the information of shareholders of the John Hancock
Tax-Exempt Income Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
Printed on Recycled Paper
