<PAGE> 1
John Hancock Funds
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Tax-Exempt
Income
Fund
ANNUAL REPORT
December 31, 1995
<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. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
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
TRANSFER 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:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders -- technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place -- slow economic growth, muted inflation and decent corporate earnings --
it would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always be
able to count on consistent customer service performance. At John Hancock Funds,
we never stop working to find ways to sustain and improve the quality of
information and the level of assistance we provide you. Our commitment to this
task is no less than John Hancock's loyalty was to his fledgling country when he
is said to have uttered, "if it does the public good, burn Boston." We won't go
that far, of course, but we share our namesake's dedication to putting the
public before all else.
In our case, that public is you, our shareholders. We take very seriously the
role you have entrusted to us, that of helping you achieve your financial goals.
Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY THOMAS C. GOGGINS, PORTFOLIO MANAGER
JOHN HANCOCK
TAX-EXEMPT INCOME FUND
MUNICIPAL BONDS ENJOY STRONGEST YEAR IN NEARLY A DECADE
Municipal bonds enjoyed an impressive comeback in 1995, posting some of their
best returns in nearly a decade. From the very outset of the year, all bond
markets, including the municipal market, rallied on news that the economy's rate
of growth was slowing and inflation was subdued. The year-long rally was
beneficial to municipal bonds -- particularly in the first quarter, when they
rated as the top fixed-income category during that period.
However, by spring the municipal bond market stalled as talk of tax reform
took center stage. Investors worried that various proposals -- particularly the
flat-tax proposal -- might affect the attractiveness of municipals if enacted.
That political rhetoric caused municipals to underperform Treasury bonds in the
second quarter. While we and many other market participants believe that the
flat tax doesn't stand much of a chance of being enacted before 1998, if ever,
the market nonetheless used the topic as an excuse to consolidate.
[A 2 1/4" x 3" photo of Thomas C. Goggins at bottom right. Caption reads:
"Thomas C. Goggins, Portfolio Manager".]
By the second half of the year, municipals -- which were priced attractively
relative to taxable bonds at the time -- began to move up again as supply waned
and demand strengthened. Two interest-rate cuts by the Federal Reserve Board
gave the muni market an added boost. All in all, municipal bond funds enjoyed
their strongest performance since 1986.
The municipal bond market's strong performance was reflected in John Hancock
Tax-Exempt Income Fund's performance. For the 12 months ended December 31, 1995,
the Fund's Class A and Class B shares posted total returns of 16.60% and 15.70%,
respectively, at net asset value. Those returns compared to
[CAPTION]
"Municipal bonds enjoyed an impressive comeback in 1995..."
3
<PAGE> 4
John Hancock Funds - Tax-Exempt Income Fund
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) Electric Utilities 21%; 2) Transportation 20%; 3)
Pollution Control 17%; 4) Health Care 13%; 5) Industrial Revenue Bonds 7%.
Footnote below reads: "As a percentage of net assets on December 31, 1995."]
the average municipal bond fund's return of 16.84% for the same period,
according to Lipper Analytical Services.(1)
STRATEGIC CHANGES
Due to several portfolio changes we made over the past six months, the Fund's
performance gained ground on our competitors throughout the year and ended the
period matching its peers. First, we focused on adding more discount bonds.
During periods of falling interest rates, discount bonds -- which sell below
their par (face) value -- generally appreciate more than par bonds, and more
than premium bonds that sell above par value.
Second, we worked steadily all year to improve the call protection of the
Fund. We did that by adding more non-callable bonds, which can't be redeemed by
their issuer before their scheduled maturity date. Non-callable bonds offer the
advantages of a predictable stream of income and the ability to outperform the
market. What's more, because they are relatively scarce, non-callables tend to
be more easily traded, or liquid.
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Category"' the header for the right column is "Trend...and what's
driving it." The first listing is "Wayne County/Northwest Airlines" followed by
an up arrow and the phrase "Improving profitability for airline". The second
listing is "Indianapolis/United Airlines" followed by an up arrow and the phrase
"Growth in revenues and earnings". The third listing is "Housing bonds" followed
by a flat arrow and the phrase "Rising risk of prepayments". Footnote below
reads: "See "Schedule of Investments." Investment holdings are subject to
change.]
Finally, we actively managed the Fund's duration, which measures how
sensitive its share price is to changes in interest rates. The longer a fund's
duration, the more its share price will rise when interest rates are falling and
fall when interest rates are rising. At the beginning of the year, the Fund's
duration was relatively long, which helped its performance in the first quarter
of the year. But by the end of June, we had shortened our duration in response
to the spring's more volatile market. We reversed course and lengthened our
duration again in mid-summer because we felt that interest rates would continue
to decline. That strategy ultimately benefited the Fund when the Federal Reserve
made two interest rate cuts in the second half of the year.
FOCUS ON SECTORS
While we kept the Fund's stake in health-care bonds steady at about 13% of
investments, we made some changes among those holdings. Heightened competition
and proposed cuts in Medicare and Medicaid have made the fate of many hospitals
and health-care organizations much less certain. As a result, we sold some of
what we believed to be the more vulnerable holdings and concentrated on
individual hospitals that we believe will be able to withstand, and even benefit
from, a more competitive environment.
We used some of the proceeds to purchase industrial revenue bonds, a sector
that generally performed well during the period. Bonds issued by the city of
Walla Walla, Washington for
[CAPTION]
"...industrial revenue bonds... generally performed well during the period."
4
<PAGE> 5
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 20% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
16.60% total return for John Hancock Tax-Exempt Income Fund: Class A. The second
represents the 15.70% total return for John Hancock Tax-Exempt Income Fund:
Class B. The third represents the 16.84% total return of the average general
municipal bond fund. A 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."]
a Scott Paper facility that recycles paper into liner board did well on the
improving fundamentals of the paper industry. During the past six months we also
added some airline bonds including those issued by Wayne County, Michigan for
Northwest Airlines, which will fund the remodeling of the airline's terminal at
Detroit's Metropolitan Airport. Another addition was on airline bond issued by
Indianapolis, Indiana for a United Airlines maintenance facility. These bonds
also performed well as a result of increased profitability in the airline
sector.
Not all sectors of the municipal market participated equally in the rally.
Housing bonds were generally laggards throughout 1995. These bonds typically
underperform other sectors when the market is rising, because there is some
concern that they will be paid off before their scheduled maturity dates.
However, we held onto them because they are generally high-quality bonds which
offer relatively high yields.
OUTLOOK
Political haggling over various tax-reform proposals could continue to draw
headlines in 1996. If that is the case, the municipal bond market could
experience further volatility in the months to come. Our view is that it's
unlikely that any significant tax reform will be enacted within the next two
years. And we're not even convinced that the flat tax is viable. So we think the
market has overreacted.
We believe that the tax-reform scare has actually created an opportunity. At
the end of 1995, municipals were priced attractively compared to Treasuries. In
fact, there was only one other time in recent history that municipals were this
cheap relative to Treasuries. In our experience, it is in times like these that
municipals offer good value for investors seeking after-tax income.
It may be difficult for municipals to achieve the same exceptional gains they
made in 1995. However, there are several reasons why we're optimistic about
1996. We believe that economic growth will continue to slow, inflation will
remain subdued and, as a result, interest rates can continue to fall this year.
Since bond prices generally move in the opposite direction of interest rates,
that could be good news for bonds. What's more, the supply of new municipals
issued should remain relatively weak. And if demand stays constant or improves,
that too could be a positive.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end
of the Fund's period discussed in this report. Of course, the manager's
views are subject to change as market and other conditions warrant.
[CAPTION]
"...we're optimistic about 1996."
5
<PAGE> 6
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Exempt Income Fund. Total return is a
performance measure that equals the sum of all dividends and capital gains,
assuming reinvestment of these distributions and the change in the price of the
Fund's average net assets. Performance figures include the maximum applicable
sales charge of 4.50% for Class A shares. The effect of the maximum contingent
deferred sales charge for Class B shares (maximum 5% and declining to 0% over
six years) is included in Class B performance. Performance is affected by a
12b-1 plan, which commenced on March 24, 1987 and January 3, 1994 for both Class
A and Class B shares, respectively. Remember that all figures represent past
performance and are no guarantee of how the Fund will perform in the future.
Also, keep in mind that the total return and share price of the Fund's
investments will fluctuate. As a result, your Fund's shares may be worth more or
less than their original cost, depending on when you sell them.
Note: A portion of the Fund's income may be subject to taxes. Some investors may
be subject to the Alternative Minimum Tax. Capital gains are taxable.
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---- ----- -----------
<S> <C> <C> <C>
Tax-Exempt Income Fund: Class A 11.33% 42.08% 121.64%
Tax-Exempt Income Fund: Class B 10.73% 4.52%(1) N/A
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---- ----- ----------
<S> <C> <C> <C>
Tax-Exempt Income Fund: Class A 11.33% 7.28% 8.28%
Tax-Exempt Income Fund: Class B 10.73% 2.24%(1) N/A
</TABLE>
YIELDS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
-----
<S> <C>
Tax-Exempt Income Fund: Class A 4.65%
Tax-Exempt Income Fund: Class B 4.17%
</TABLE>
NOTES TO PERFORMANCE
(1) Class B shares started on January 3, 1994.
6
<PAGE> 7
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Exempt Income Fund would be worth on December 31, 1995, assuming you have
been invested for the past ten years or since the day each class of shares
started and reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Municipal Bond Index -- an unmanaged
index that includes approximately 15,000 bonds and is commonly used as a measure
of bond performance.
[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. Within
the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $24,202 as of December 31, 1995. The second line represents the
value of the hypothetical $10,000 investment made in the Tax Exempt Income Fund
on December 31, 1985, before sales charge, and is equal to $23,212 as of
December 31, 1995. The third line represents the Tax Exempt Income Fund after
sales charge and is equal to $22,164 as of December 31, 1995.]
[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. Within
the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $11,138 as of December 31, 1995. 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
$10,852 as of December 31, 1995. The third line represents the Tax Exempt Income
Fund after contingent deferred sales charge and is equal to $10,452 as of
December 31, 1995.]
7
<PAGE> 8
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds
(cost - $473,955,312) ................................. $ 516,930,920
Receivable for shares sold ............................... 53,251
Receivable for investments sold .......................... 561,000
Interest receivable ...................................... 11,112,667
Segregated assets for financial futures contracts ........ 112,500
Other assets ............................................. 10,445
-------------
Total Assets ........................... 528,780,783
-----------------------------------------------------------
LIABILITIES:
Temporary overdraft of cash .............................. 4,544,139
Dividend payable ......................................... 72,239
Payable for shares repurchased ........................... 348
Payable for investments purchased ........................ 19,433,358
Payable for futures variation margin - Note A ............ 23,437
Payable to John Hancock Advisers, Inc. ...................
and affiliates - Note B ................................. 255,355
Accounts payable and accrued expenses .................... 74,068
-------------
Total Liabilities ...................... 24,402,944
-----------------------------------------------------------
NET ASSETS:
Capital paid-in .......................................... 470,926,567
Accumulated net realized loss on investments
and financial futures contracts ......................... (9,352,555)
Net unrealized appreciation of investments
and financial futures contracts ......................... 42,713,108
Undistributed net investment income ...................... 90,719
-------------
Net Assets ............................. $ 504,377,839
============================================================
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 - $495,730,615/45,056,903......................... $ 11.00
=============================================================================
Class B - $8,647,224/786,183.............................. $ 11.00
=============================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($11.00 x 104.71%).............................. $ 11.52
=============================================================================
</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.
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, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest .................................................. $ 31,894,499
-------------
Expenses:
Investment management fee - Note B ....................... 2,683,990
Distribution/service fee - Note B
Class A ................................................ 1,445,720
Class B ................................................ 61,171
Transfer agent fee - Note B .............................. 695,061
Custodian fee ............................................ 112,143
Printing ................................................. 52,606
Trustees' fees ........................................... 46,423
Auditing fee ............................................. 40,314
Registration and filing fees ............................. 37,810
Miscellaneous ............................................ 19,493
Legal fees ............................................... 8,824
-------------
Total Expenses .......................... 5,203,555
-----------------------------------------------------------
Less Expense Reductions -
Note B .................................. (76,644)
-----------------------------------------------------------
Net Expenses ............................ 5,126,911
-----------------------------------------------------------
Net Investment Income ................... 26,767,588
-----------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FINANCIAL FUTURES CONTRACTS:
Net realized loss on investments sold ..................... (1,285,961)
Net realized loss on financial futures contracts .......... (4,504,789)
Change in net unrealized appreciation/depreciation
of investments ........................................... 53,660,722
Change in net unrealized appreciation/depreciation
of financial futures contracts ........................... 732,812
-------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ............. 48,602,784
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............... $ 75,370,372
===========================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 9
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994
------------- ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ............................................................................ $ 26,767,588 $ 27,304,035
Net realized loss on investments sold and financial futures contracts ............................ (5,790,750) (3,466,027)
Change in net unrealized appreciation/depreciation of investments and financial futures contracts. 54,393,534 (55,445,616)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............................... 75,370,372 (31,607,608)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($0.5754 and $0.5664 per share, respectively) ......................................... (26,480,078) (27,204,549)
Class B ** - ($0.4931 and $0.4918 per share, respectively) ...................................... (287,510) (99,486)
Dividends from net realized gain on investments sold and financial futures contracts
Class A - (none and $0.0296 per share, respectively) ............................................ -- (1,428,226)
Class B ** - (none and $0.0296 per share, respectively) ......................................... -- (2,933)
------------ ------------
Total Distributions to Shareholders ........................................................... (26,767,588) (28,735,194)
------------ ------------
FROM FUND SHARE TRANSACTIONS-- NET* ................................................................ (15,673,735) (9,489,468)
------------ ------------
NET ASSETS:
Beginning of period .............................................................................. 471,448,790 541,281,060
------------ ------------
End of period (including undistributed net investment income of $90,719 and $2,796, respectively). $504,377,839 $471,448,790
============ ============
<FN>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ...................................................... 5,088,200 $ 53,881,602 3,879,115 $ 40,764,635
Shares issued to shareholders in reinvestment of distributions ... 1,996,923 21,071,918 2,197,798 22,752,848
---------- ------------ ------------ ------------
7,085,123 74,953,520 6,076,913 63,517,483
Less shares repurchased .......................................... (8,974,201) (94,717,342) (7,437,980) (77,174,049)
---------- ------------ ------------ ------------
Net decrease ................................................... (1,889,078) $(19,763,822) (1,361,067) $(13,656,566)
========== ============ ============ ============
CLASS B**
Shares sold ...................................................... 434,135 $ 4,589,783 427,397 $ 4,462,005
Shares issued to shareholders in reinvestment of distributions ... 19,968 211,465 8,004 81,368
---------- ------------ ------------ ------------
454,103 4,801,248 435,401 4,543,373
Less shares repurchased .......................................... (67,125) (711,161) (36,196) (376,275)
---------- ------------ ------------ ------------
Net increase ................................................... 386,978 $ 4,090,087 399,205 $ 4,167,098
========== ============ ============ ============
<FN>
** Class B shares commenced operations on January 3, 1994
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios, and supplemental data are as
follows:
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period........................... $ 9.96 $ 11.21 $ 10.96 $ 11.01 $ 10.59
-------- -------- -------- -------- --------
Net Investment Income.......................................... 0.58(d) 0.57 0.58 0.63 0.68
Net Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts................................... 1.04 (1.22) 0.66 0.26 0.57
-------- -------- -------- -------- --------
Total from Investment Operations............................ 1.62 (0.65) 1.24 0.89 1.25
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income.......................... (0.58) (0.57) (0.58) (0.63) (0.68)
Distributions from Net Realized Gain on Investments Sold and
Financial Futures Contracts................................. -- (0.03) (0.41) (0.31) (0.15)
-------- -------- -------- -------- --------
Total Distributions......................................... (0.58) (0.60) (0.99) (0.94) (0.83)
-------- -------- -------- -------- --------
Net Asset Value, End of Period................................. $ 11.00 $ 9.96 $ 11.21 $ 10.96 $ 11.01
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(c).................. 16.60% (5.90%) 11.53% 8.35% 12.18%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted)...................... $495,731 $467,475 $541,281 $481,730 $422,311
Ratio of Expenses to Average Net Assets........................ 1.04% 1.11% 1.27% 1.28% 1.21%
Ratio of Net Investment Income to Average Net Assets........... 5.49% 5.43% 5.06% 5.71% 6.23%
Portfolio Turnover Rate........................................ 133% 74% 81% 93% 56%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: NET INVESTMENT INCOME, GAINS (LOSSES),
DIVIDENDS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET
ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD.
ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE
FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 11
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIOD
JANUARY 3, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1995 1994
----------------- ---------------
<S> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...................................................... $ 9.95 $11.17(a)
------ ------
Net Investment Income..................................................................... 0.49(d) 0.49
Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts.... 1.05 (1.19)
------ ------
Total from Investment Operations....................................................... 1.54 (0.70)
------ ------
Less Distributions:
Dividends from Net Investment Income..................................................... (0.49) (0.49)
Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts. -- (0.03)
------ ------
Total Distributions.................................................................... (0.49) (0.52)
------ ------
Net Asset Value, End of Period............................................................ $11.00 $ 9.95
====== ======
Total Investment Return at Net Asset Value(c)............................................. 15.70% (6.23%)(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted)................................................. $8,647 $3,974
Ratio of Expenses to Average Net Assets................................................... 1.82% 1.83%*
Ratio of Net Investment Income to Average Net Assets...................................... 4.70% 4.88%*
Portfolio Turnover Rate................................................................... 133% 74%
<FN>
* On an annualized basis.
(a) Initial price to commence operations.
(b) Not annualized.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) On average month end shares outstanding.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
TAX-EXEMPT INCOME FUND ON DECEMBER 31, 1995. THE TAX-EXEMPT LONG-TERM BONDS ARE
FURTHER BROKEN DOWN BY STATE. UNDER EACH STATE IS A LIST OF THE SECURITIES OWNED
BY THE FUND.
<TABLE>
SCHEDULE OF INVESTMENTS
December 31, 1995
<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 (1.10%)
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj..... 6.950% 01/01/20 BBB- $ *5,250 $ 5,547,833 6.58%
-----------
ALASKA (0.50%)
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser............................... 7.750 12/01/14 A+ 1,000 1,065,590 7.27
Ins Mtg Prog 1990 1st Ser............................... 7.800 12/01/30 A+ 1,380 1,463,200 7.36
-----------
2,528,790
-----------
ARIZONA (2.88%)
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public Service Co Palo
Verde Proj ........................................... 6.375 08/15/23 BB *8,550 8,445,263 6.45
Phoenix, City of,
GO Ref Ser A............................................ 6.250 07/01/16 AA+ *2,700 3,107,052 5.43
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 2,948,880 5.34
-----------
14,501,195
-----------
CALIFORNIA (18.49%)
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj.......................... 6.350 10/01/07 AAA *2,090 2,286,126 5.81
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993...... 6.100 07/01/13 BBB- *1,000 1,020,950 5.97
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993...... 6.200 07/01/20 BBB- 5,000 5,107,950 6.07
Duarte, City of,
Cert of Part City of Hope National Medical Center Proj.. 6.250 04/01/23 Baa1*** *1,500 1,484,325 6.32
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/19 BBB- *36,600 8,629,914 6.38
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/20 BBB- *10,000 2,214,300 6.38
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.000 01/01/16 BBB- *13,500 13,550,760 5.98
Hawaiian Gardens Redevelopment Agency,
Tax Alloc Ref Proj No 1................................. 6.200 12/01/23 BBB *3,000 3,004,830 6.19
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant
Proj ................................................... 8.000 06/01/10 A 1,000 1,107,630 7.22
Madera, County of,
Cert of Part Valley Children's Hosp Proj................ 6.500 03/15/15 AAA *13,185 15,162,882 5.65
</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>
CALIFORNIA (CONTINUED)
Metropolitan Water District,
Southern Calif Waterworks Rev Ser A..................... 5.500% 07/01/25 AAA $*11,000 $11,074,580 5.46%
Southern Calif Waterworks Rev Reg Inverse Floater....... 7.560# 08/05/22 AA *5,000 5,212,500 7.25
Sacramento Power Auth,
Rev 1995 Ser Cogeneration Proj.......................... 6.000 07/01/22 BBB- *5,000 4,988,800 6.01
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj........... 5.500 08/01/17 A- *9,130 8,740,514 5.75
Cert of Part Ser 1994 Medical Center Fin Proj........... 5.500 08/01/22 A- *2,500 2,363,275 5.82
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec.......................... Zero 01/01/28 BBB*** *1,550 147,777 7.48
Toll Rd Rev Sr Lien..................................... 5.000 01/01/33 BBB*** *1,435 1,228,274 5.84
Toll Rd Rev Sr Lien Cap Apprec.......................... Zero 01/01/14 BBB*** *5,000 1,656,650 5.97
Toll Rd Rev Sr Lien Cap Apprec.......................... Zero 01/01/21 BBB*** *375 78,934 6.33
Toll Rd Rev Sr Lien Cap Apprec.......................... Zero 01/01/22 BBB*** *5,000 988,850 6.33
Toll Rd Rev Sr Lien Conv Cap Apprec..................... Zero 01/01/05 BBB*** *2,500 1,837,075 3.45
Southern California Public Power Auth,
Rev Elec Pwr & Light Imp................................ 6.750 07/01/11 A *1,195 1,383,547 5.83
-----------
93,270,443
-----------
COLORADO (2.17%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470........................... 6.950 08/31/20 Baa*** *5,000 5,416,750 6.42
Denver, City and County of,
Airport Sys Rev Ser 1992A............................... 7.250 11/15/25 BBB *5,000 5,512,400 6.58
-----------
10,929,150
-----------
CONNECTICUT (0.38%)
Connecticut State Health and Educational Facilities Auth,
Rev Ser D Quinnipiac College Iss........................ 6.000 07/01/23 BBB- 2,000 1,889,700 6.35
-----------
DELAWARE (0.99%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj............ 6.750 05/01/19 AAA *4,500 4,973,175 6.11
-----------
FLORIDA (3.60%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P.
South Proj ............................................ 7.950 12/01/08 A 4,445 5,030,051 7.03
Florida, State of,
Sunshine Skyway Rev Ser of 1984......................... 10.250 06/01/10 AAA 1,250 1,385,087 9.25
Hillsborough, County of,
Ref Util Rev Ser 1991A.................................. 7.000 08/01/14 BBB+ 1,245 1,343,990 6.48
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D............................ 6.750 10/01/17 AA- 2,200 2,650,626 5.60
Palm Beach, County of,
Solid Waste Ind'l Dev Rev Ser 1993A Okeelanta Pwr Lp
Proj .................................................. 6.850 02/15/21 BBB-*** 7,500 7,728,825 6.65
-----------
18,138,579
-----------
</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>
GEORGIA (1.22%)
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB...................................... 5.700% 01/01/19 A $ *1,000 $ 1,029,890 5.53%
Pwr Rev Ser M........................................... 8.375 01/01/20 A 1,000 1,059,560 7.90
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1......................... 6.500 01/01/17 AAA *3,500 4,072,390 5.59
-----------
6,161,840
-----------
ILLINOIS (4.09%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A. 7.500 01/01/16 A+ 2,000 2,207,680 6.79
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev
Ser 1992 .............................................. 6.750 01/01/12 AAA 3,000 3,269,940 6.19
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A
American Airlines Proj................................ 7.875 11/01/25 BB+ 3,000 3,273,960 7.22
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1992
Delta Airlines Terminal Proj.......................... 6.450 05/01/18 BB *3,000 3,075,390 6.29
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj........ 5.850 01/15/14 BBB *3,000 2,902,590 6.05
Rev Cap Apprec Lockport School District Proj............ Zero 01/01/14 AAA *5,650 2,157,791 5.42
Rev Cap Apprec Lockport School District Proj............ Zero 01/01/15 AAA *5,935 2,147,877 5.42
Illinois Health Facilities Auth,
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj....... 7.000 01/01/07 A- 1,500 1,606,725 6.54
-----------
20,641,953
-----------
INDIANA (0.20%)
Indianapolis Airport Auth,
Spec Facil Rev Ser A United Airlines Proj............... 6.500 11/15/31 BB *1,000 1,022,330 6.36
-----------
KANSAS (0.47%)
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984.................................... 10.500 12/01/08 AAA 2,000 2,351,720 8.93
-----------
KENTUCKY (1.52%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A............ 6.750 02/01/02 BB 2,000 2,128,820 6.34
Rev Spec Facil Delta Airlines Proj Ser 1992A............ 7.500 02/01/12 BB 2,000 2,156,560 6.96
Rev Spec Facil Delta Airlines Proj Ser 1992A............ 7.125 02/01/21 BB *2,000 2,114,840 6.74
Owensboro Electric Light and Power Co,
Rev Deferred Int Ser B.................................. Zero 01/01/19 AAA *4,400 1,258,356 5.42
-----------
7,658,576
-----------
LOUISIANA (1.57%)
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj............ 6.500 05/15/22 AAA *3,405 3,668,377 6.03
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj. 7.500 06/01/21 BBB 4,000 4,227,480 7.10
-----------
7,895,857
-----------
</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>
MARYLAND (0.68%)
Baltimore, City of,
Rev Ref Ser A Wtr Proj.................................. 5.000% 07/01/24 AAA $*3,500 $ 3,442,530 5.08%
-----------
MASSACHUSETTS (9.27%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B................................ 7.875 03/01/21 AAA 2,000 2,363,420 6.66
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D.................... 6.750 07/01/24 A+ 2,450 2,609,642 6.34
Rev Harvard Univ Iss Ser P.............................. 5.375 11/01/32 AAA *9,670 9,630,740 5.40
Rev Lowell Gen Hosp Iss Ser A........................... 8.400 06/01/11 Baa1*** 1,100 1,223,024 7.56
Rev New England Deaconess Hosp Iss Ser D................ 6.625 04/01/12 A 3,500 3,658,900 6.34
Rev New England Deaconess Hosp Iss Ser D................ 6.875 04/01/22 A 7,960 8,365,005 6.54
Rev New England Medical Center Hosp Iss Ser E........... 7.875 07/01/11 A- 1,950 2,157,343 7.12
Rev Worcester Polytechnic Institute Ser E............... 6.750 09/01/11 A+ 2,000 2,243,280 6.02
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A.............................. 6.900 11/15/24 AAA 2,700 2,859,759 6.51
Single Family Hsg Ser 8................................. 7.700 06/01/17 A+ 1,500 1,608,000 7.18
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of The
Commonwealth of Mass .................................. 6.750 07/01/17 BBB+ 4,405 4,812,727 6.18
Massachusetts, Commonwealth of,
GO Consol Loans of 1994 Ser B........................... 6.000 08/01/14 A+ 2,000 2,120,560 5.66
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil
Proj .................................................. 7.000 04/01/22 A- 2,750 3,087,645 6.23
------------
46,740,045
------------
MICHIGAN (2.91%)
Detroit, City of,
Sewage Disposal Rev Ser 1993 Linked Pars & Inflos....... 7.116# 07/01/23 AAA *2,000 2,060,000 6.91
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group..... 8.100 10/01/13 BBB *4,250 4,747,675 7.25
Hosp Rev Ref Sinai Hospital Proj........................ 6.700 01/01/26 Baa*** *2,500 2,524,625 6.63
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines
Facil ................................................. 6.750 12/01/15 BB+*** *5,200 5,359,900 6.55
------------
14,692,200
------------
MISSISSIPPI (0.03%)
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A...................... 9.250 03/01/12 AAA 130 142,418 8.44
------------
NEBRASKA (0.27%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B................................. 6.200 02/01/17 AA 1,200 1,360,860 5.47
------------
NEW JERSEY (0.47%)
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984................................... 10.375 01/01/03 AAA 1,900 2,377,204 8.29
------------
</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 (12.70%)
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1.................. 8.500% 07/01/17 AAA $ 1,000 $ 1,087,970 7.81%
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj**.. 7.950 01/01/28 BB*** *3,250 3,317,502 7.79
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp............................. 6.875 04/01/19 A 8,700 9,758,877 6.13
New York State Dormitory Auth,
City Univ Ref Iss 1988B................................. 8.125 07/01/08 BBB 1,000 1,109,690 7.32
Cornell Univ Rev Ser 1990A.............................. 7.375 07/01/30 AA 1,000 1,125,880 6.55
State Univ Ed Facil Rev Iss Ser 1990B................... 7.500 05/15/11 BBB+ 500 608,115 6.17
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 6,164,580 6.96
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc
Proj .................................................. 7.500 01/01/26 A+ 2,000 2,185,240 6.86
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A.... 7.500 06/15/12 A 3,770 4,212,749 6.71
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A.................. 8.000 05/01/11 AAA 2,000 2,566,840 6.23
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B............... 7.875 08/15/08 BBB+ 500 559,595 7.04
Mental Hlth Serv Facil Imp Rev 1990 Ser B............... 7.875 08/15/20 BBB+ 460 518,871 6.98
Mental Hlth Serv Facil Imp Rev 1991 Ser A............... 7.750 08/15/11 BBB+ 540 610,319 6.86
Mental Hlth Serv Facil Imp Rev 1991 Ser A............... 7.750 08/15/11 AAA 1,460 1,719,617 6.58
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2.............................. 7.950 10/01/15 AA*** 1,135 1,197,697 7.53
New York State Power Auth,
Gen Purpose Ser V....................................... 7.875 01/01/13 AAA 2,400 2,627,736 7.19
Gen Purpose Ser V....................................... 8.000 01/01/17 AA 1,850 2,027,692 7.30
New York, City of,
GO Fiscal 1991 Ser D.................................... 8.000 08/01/04 BBB+ 250 285,718 7.00
GO Fiscal 1991 Ser F.................................... 8.200 11/15/03 BBB+ 1,250 1,451,587 7.06
GO Fiscal 1992 Ser A.................................... 7.750 08/15/12 BBB+ 2,000 2,262,100 6.85
GO Fiscal 1992 Ser D.................................... 7.700 02/01/09 BBB+ 1,000 1,131,000 6.81
GO Fiscal 1992 Ser H.................................... 7.000 02/01/08 BBB+ 2,000 2,178,140 6.43
GO Fiscal 1993 Ser D.................................... 5.750 08/15/13 BBB+ *3,170 3,097,724 5.88
GO Fiscal 1995 Ser B.................................... 7.000 08/15/16 BBB+ 3,000 3,289,680 6.38
GO Fiscal 1996 Ser G**.................................. 6.750 02/01/09 BBB+ *2,500 2,710,775 6.23
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L................................... 8.125 01/01/12 A+ 1,750 1,917,265 7.42
Gen Purpose Rev Ser R................................... 7.375 01/01/16 AAA 1,600 1,810,880 6.52
Spec Oblig Ref Ser 1991B................................ 6.875 01/01/15 A- 2,300 2,531,265 6.25
-----------
64,065,104
-----------
</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 (4.13%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A............................... 5.750% 01/01/19 BBB+ $*4,000 $ 3,910,200 5.88%
Pwr Sys Rev Ref Ser 1993C............................... 5.000 01/01/21 BBB+ *5,000 4,463,350 5.60
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992............................... 5.750 01/01/15 AAA *7,410 7,410,000 5.75
Catawba Elec Rev Ser 1993............................... 5.000 01/01/15 AAA *5,220 5,033,855 5.18
-----------
20,817,405
-----------
OHIO (5.72%)
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A.............................. 7.000 11/15/24 AAA 6,200 7,213,328 6.02
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United
Methodist Hosp Proj ................................... 7.600 05/15/20 AAA 1,000 1,152,150 6.60
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj................ 8.625 02/01/22 BBB-*** *3,600 3,978,288 7.80
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj..................... 6.250 12/01/20 Baa2*** *4,500 4,477,230 6.28
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1989A Ohio Edison Co Proj 7.625 07/01/23 BB+ *8,390 9,037,205 7.08
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co
Proj .................................................. 7.700 08/01/25 BB *2,800 3,004,232 7.18
-----------
28,862,433
-----------
OKLAHOMA (0.81%)
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989........................ 7.875 01/01/21 A+ 1,745 1,958,274 7.02
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc...................... 7.375 12/01/20 BB+ 2,000 2,148,140 6.87
-----------
4,106,414
-----------
OREGON (1.00%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj.................. 7.125 01/01/21 BB-*** 4,800 5,059,440 6.76
-----------
PENNSYLVANIA (8.95%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj....... 6.700 12/01/20 BB+ 5,000 5,201,200 6.44
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A Toledo Edison Co
Beaver Valley Proj ..................................... 7.750 05/01/20 BB *7,500 8,116,500 7.16
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co
Proj .................................................. 7.375 04/01/21 BBB+ 6,095 6,631,421 6.78
Exeter Township School District,
GO Cap Apprec Ser 1994**................................ Zero 05/15/16 AAA *3,785 1,269,338 5.43
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A....................................... 6.700 09/01/14 BBB- 4,950 5,436,189 6.10
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj............. 7.125 12/01/15 BBB- 7,000 7,571,340 6.59
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N...................................... 6.500 12/01/13 AAA 2,840 3,061,832 6.03
</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 Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia Airport
Hotel Proj ............................................ 7.750% 12/01/17 B+*** $ *3,250 $ 3,398,330 7.41%
Westmoreland County Municipal Auth,
Municipal Serv Rev Cap Apprec Ser C..................... Zero 08/15/17 AAA *10,880 3,350,931 5.52
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 1,090,600 7.52
-----------
45,127,681
-----------
PUERTO RICO (1.75%)
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref Ser W................................... 5.500 07/01/13 A *5,000 5,095,950 5.40
Puerto Rico Public Building Auth,
Gtd Rev Gov't Facil Ser A............................... 6.250 07/01/14 AAA *2,195 2,492,203 5.50
Gtd Rev Gov't Facil Ser A............................... 6.250 07/01/15 AAA *1,100 1,253,681 5.48
-----------
8,841,834
-----------
SOUTH CAROLINA (1.13%)
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys......................... 5.375 01/01/25 AAA *3,000 3,055,530 5.28
South Carolina Public Service Auth,
Santee Cooper Elec Sys Exp Rev Ref 1988 Ser A........... 7.875 07/01/21 A+ 2,615 2,667,901 7.72
-----------
5,723,431
-----------
SOUTH DAKOTA (0.20%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss...................... 7.625 11/01/13 AA- 925 1,029,812 6.85
-----------
TENNESSEE (2.74%)
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj ...................................... 6.500 09/01/24 A- *9,000 9,576,270 6.11
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp............................ 6.750 09/01/12 BBB 4,000 4,266,920 6.33
-----------
13,843,190
-----------
TEXAS (3.94%)
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj... 8.250 05/01/15 A 2,000 2,178,620 7.57
Dallas-Fort Worth International Airport,
Rev Delta Air Lines Inc................................. 7.600 11/01/11 BB 3,000 3,243,240 7.03
Spec Facil Rev American Airlines Inc.................... 7.250 11/01/12 BB+ *1,900 1,900,133 7.25
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj..... 8.250 02/15/08 AAA 1,000 1,152,770 7.16
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996**................. 5.000 01/01/10 AAA *7,000 6,597,640 5.30
Dallas North Thruway Rev Ref Ser 1996**................. 5.500 01/01/15 AAA *5,000 4,775,550 5.76
-----------
19,847,953
-----------
</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>
WASHINGTON (5.70%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj 9.125% 01/01/26 BB-*** $*11,000 $ 11,385,330 8.82%
Seattle, City of,
Municipal Light & Pwr Rev 1994.......................... 6.625 07/01/16 AA 3,600 3,969,323 6.01
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A.................... 7.500 07/01/15 AA 1,455 1,605,505 6.80
Nuclear Proj No. 1 Ref Rev Ser 1989B.................... 7.125 07/01/16 AA 1,500 1,770,720 6.04
Nuclear Proj No. 1 Ref Rev Ser 1991A.................... 6.875 07/01/17 AA 1,250 1,366,087 6.29
Nuclear Proj No. 2 Ref Rev Ser 1990C.................... 7.625 07/01/10 AAA 5,000 5,834,700 6.53
Nuclear Proj No. 3 Ref Rev Ser 1989B.................... 7.250 07/01/15 AAA 2,500 2,817,800 6.43
------------
28,749,465
------------
WISCONSIN (0.91%)
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A............................ 7.400 07/01/20 AAA 4,000 4,590,360 6.45
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $473,955,312) (102.49%) $516,930,920
======== ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities other than short-term investments, newly added to the portfolio,
during the period ended December 31, 1995.
** These securities having an aggregate value of $18,670,805 or 3.70% of the
Fund's net asset value, have been purchased as forward commitments -- that
is, the Fund has agreed on the trade date, to take delivery of and make
payment for such securities on a delayed basis subsequent to the date of
this schedule. The purchase price and interest rate of such securities is
fixed at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with the current value at least equal to the
amount of its forward commitment. Accordingly, the market values of
$6,631,421 of Delaware County Industrial Development Finance Auth, Poll
Control Rev Ref 1991 Ser A Philadelphia Elec Co, 7.375%, 04-01-21,
$14,605,127 of Madera, County of, Cert of Part Valley Children's Hosp Proj,
6.500%, 03-15-15, and $1,406,106 of Pennsylvania Economic Development
Finance Auth, Resource Recovery Rev Ser 1994D Colver Proj, 7.125%,
12-01-15, has been segregated to cover the forward commitments.
*** Credit Ratings are rated by Moody's Investors Services, Fitch 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. Zero coupon
yields are at yield to maturity.
# Represents rate in effect on December 31, 1995.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 20
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
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,
1995 ASSIGNED TO THE VARIOUS SECTOR CATEGORIES.
<TABLE>
PORTFOLIO CONCENTRATION
- -----------------------------------------------------------------------------------------------------
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation ................................................ 4.29%
Revenue Bonds - Certificate of Participation ...................... 0.91
Revenue Bonds - Education ......................................... 3.95
Revenue Bonds - Electric Power .................................... 20.74
Revenue Bonds - Health ............................................ 13.05
Revenue Bonds - Housing ........................................... 2.95
Revenue Bonds - Industrial Development Bond ....................... 7.41
Revenue Bonds - Other ............................................. 4.92
Revenue Bonds - Pollution Control Facilities ...................... 17.05
Revenue Bonds - Transportation .................................... 20.21
Revenue Bonds - Water & Sewer ..................................... 7.01
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 102.49%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 21
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 investment objective of the Fund is to provide as high a level of
dividend income exempt from Federal income tax as is consistent with
preservation of capital and the Fund's requirements for liquidity.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. 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. Class A
shares are subject to an initial sales charge of up to 4.50% and a 12b-1
distribution plan. Class B shares are subject to a contingent deferred sales
charge and a separate 12b-1 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 transaction. 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.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract will be 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 will be made on a daily basis as
the market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund will recognize a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening, or realizing the benefits of closing
out, futures positions because of position limits or limits on daily price
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 contracts.
At December 31, 1995, open positions in financial futures contracts were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MAR 1996 75 Muni Bond Index SHORT $(262,500)
=========
</TABLE>
At December 31, 1995, the Fund has deposited in a segregated account $112,500
to cover margin requirements on open financial futures contracts.
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.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the time of disposition.
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 $8,110,320 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gain distributions will be made. The carryforwards expire as follows:
December 31, 2002 -- $2,374,664 and December 31, 2003 -- $5,735,656.
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, if any, 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.
Distribution/service fees, if any, are calculated daily at the class level based
on the appropriate net assets of each class and the specific expense rate(s)
applicable of each class.
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. $76,644 of custodian fees have been reduced by balance
credits applied during the period ended December 31, 1995.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended December
31, 1995, JH Funds received net sales charges on sales of Class A shares of the
Fund in the amount of $779,270. Out of this amount, $90,638 was retained and
used for printing prospectuses, advertising, sales literature and other
purposes, $52,648 was paid as sales commissions and service fees to unrelated
broker-dealers and $635,984 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
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
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, 1995, contingent deferred sales charges received by JH Funds
amounted to $16,759.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B shares 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. 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 October 1, 1995, the Fund paid transfer agent fees as
a class specific expense based on the number of shareholder accounts and certain
out-of-pocket expenses. For the nine months ended September 30, 1995 the
transfer expense, calculated as a class specific expense, was $567,657 for Class
A and $12,261 for Class B, respectively. Effective October 1, 1995, transfer
agent expense is a fund expense.
Messrs. Edward J. Boudreau, Jr. 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. Effective with
the fees paid for 1995, 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 with regard to 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 is marked to market on a periodic basis and income earned by the
investment is recorded on the Fund's books.
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, 1995, aggregated $644,316,886 and $638,779,810, respectively.
Purchases and proceeds from sales of short-term municipal obligations during the
period ended December 31, 1995, aggregated $6,500,000 and $8,500,000,
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, 1995.
The cost of investments owned at December 31, 1995 for Federal income tax
purposes was $474,106,074. Gross unrealized appreciation and depreciation of
investments aggregated $42,833,371 and $8,525, respectively, resulting in net
unrealized appreciation of $42,824,846.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1995, the Fund has reclassified amounts to
reflect increases in accumulated net investment income and accumulated realized
loss on investments of $87,923. This represents the cumulative amounts necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of December 31, 1995. 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.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
NOTE E --
PLAN OF REORGANIZATION
On December 11, 1995, the Board of Trustees of the Fund approved a plan of
reorganization between the Fund and the John Hancock Tax-Free Bond Fund ("Bond
Fund") providing for the transfer of substantially all of the assets and
liabilities of the Fund to the Bond Fund in exchange solely for Class A and
Class B shares of the Bond Fund to be distributed to the Fund's Class A and
Class B shareholders, respectively.
24
<PAGE> 25
John Hancock Funds - Tax-Exempt Income Fund
REPORT 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, 1995, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers, or other
appropriate auditing procedures when replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Tax-Exempt Income Fund at December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 31, 1996
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,
1995.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 99.9% tax-exempt. Approximately 13% of the 1995 income
dividends are subject to the alternative minimum tax. None of the income was
derived from U.S. Treasury obligations, or qualify for the corporate dividends
received deductions. Shareholders were mailed a 1995 U.S. Treasury Department
Form 1099-DIV in January 1996 representing their proportionate share.
25
<PAGE> 26
NOTES
John Hancock Funds - Tax-Exempt Income Fund
26
<PAGE> 27
NOTES
John Hancock Funds - Tax-Exempt Income Fund
27
<PAGE> 28
[LOGO] JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
[A 1/2" x 1/2" John Hancock Funds logo in upper Bulk Rate
left hand corner of the page. A box sectioned in U.S. Postage
quadrants with a triangle in upper left, a PAID
circle in upper right, a cube in lower left and Brockton, MA
a diamond in lower right. A tag line below reads Permit No. 582
"A Global Investment Management Firm."]
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.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
