<PAGE>
JOHN HANCOCK TAX-EXEMPT SERIES FUND -
MASSACHUSETTS PORTFOLIO
NEW YORK PORTFOLIO
SUPPLEMENT TO THE PROSPECTUS DATED JANUARY 1, 1996
The INVESTMENT OBJECTIVES AND POLICIES section is supplemented to include the
following:
OPTIONS TRANSACTIONS. The Fund may write listed and over-the-counter covered
call options and covered put options on debt and equity securities, securities
indices and foreign currency to earn income from the premiums received. The Fund
may write listed and over-the-counter covered call and put options on up to 100%
of its net assets. In addition, the Fund may purchase listed and
over-the-counter call and put options on securities, securities indices and
currency. The SEC considers over-the-counter options to be illiquid except under
prescribed conditions which are discussed in detail in the Statement of
Additional Information.
The Fund's ability to use futures contracts and options to hedge or increase
total return successfully will depend on the ability of John Hancock Advisers,
Inc. (the "Adviser") to predict accurately the future direction of securities
prices, interest, rate changes, currency exchange rate fluctuations and other
market factors. There is no assurance that a liquid market for futures and
options will always exist. In addition, the Fund could be prevented from opening
or realizing the benefits of closing out a futures or options position because
of position limits or limits on daily price fluctuations imposed by an exchange.
The Fund may invest in variable rate and floating rate obligations, including
inverse floating rate obligations, on which the interest rate is adjusted at
predesignated periodic intervals or when there is a change in the market rate of
interest on which the interest rate payable on the obligation is met is based.
Options futures contracts and variable and floating rate instruments are
generally considered to be "derivative" instruments because they derive their
value from the performance of an underlying asset, index or other economic
benchmark.
March 5, 1996
0000S-3/96
<PAGE>
JOHN HANCOCK
TAX-EXEMPT SERIES FUND
MASSACHUSETTS PORTFOLIO
NEW YORK PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1996 AS REVISED MARCH 5, 1996
This Statement of Additional Information provides information about
John Hancock Tax-Exempt Series Fund (the "Fund") and its two portfolios, the
Massachusetts Portfolio and the New York Portfolio (each a "Portfolio" and
together, the "Portfolios"), in addition to the information that is contained in
the Fund's Prospectus dated January 1, 1996.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
STATEMENT OF CROSS-REFERENCED
ADDITIONAL TO CAPTIONS
INFORMATION IN PROSPECTUS
PAGE PAGE
Organization of the Fund 2 10
Investment Objective and Policies 2 5
Certain Investment Practices 5 5
Special Risks 9 8
Investment Restrictions 17 5
Ratings 19 25
Those Responsible For Management 23 10
Investment Advisory And Other Services 28 10
Distribution Contract 31 19
Methods Of Obtaining Reduced Sales Charge 32 20
Special Redemptions 33 --
Additional Services And Programs 33 21
Tax Status 35 11
State Income Tax Information 38 12
Net Asset Value 39 16
Description Of The Fund's Shares 39 16
Calculation Of Performance 41 13
Brokerage Allocation 42 --
Transfer Agent Services 44 Back Cover
Custody Of Portfolios 44 Back Cover
Independent Accountants 44 Back Cover
Financial Statements -- --
ORGANIZATION OF THE FUND
John Hancock Tax-Exempt Series Fund is an open-end management investment company
presently consisting of two non-diversified separate portfolios.
Massachusetts Portfolio (the "Massachusetts Portfolio"). The Massachusetts
Portfolio is intended to provide investors with current income excludable from
gross income for Federal income tax purposes and exempt from the personal income
tax of Massachusetts, consistent with preservation of capital.
New York Portfolio (the "New York Portfolio"). The New York Portfolio is
intended to provide investors with current income excludable from gross income
for Federal income tax purposes and exempt from the personal income tax of New
York State and New York City, consistent with preservation of capital.
The Fund was organized in March 1987 by John Hancock Advisers, Inc. (the
"Adviser") as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to January 2, 1991, when the Fund changed its name, it
was known as John Hancock Tax-Exempt Series Trust. The Adviser is an indirect
wholly-owned subsidiary of John Hancock Mutual Life Insurance Company (the "Life
Company"), a Massachusetts life insurance company chartered in 1862, with
national headquarters at John Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide income from gross income for
Federal income tax purposes and exempt from the personal income taxes of
Massachusetts, or New York State and New York City, consistent with preservation
of capital. For a discussion of each Portfolio's investment objective and
policies, investors should refer to the caption "Investment Objective and
Policies" in the Prospectus. As defined in this Statement of Additional
Information, "Tax-Exempt Bonds" and tax-exempt securities refer to debt
securities issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies or instrumentalities, the interest on which is excludable from gross
income for Federal income tax purposes, without regard to whether the interest
income thereon is exempt from the personal income tax of any state.
Tax-Exempt Bonds. Tax-Exempt Bonds are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which Tax-Exempt Bonds may
be issued include the refunding of outstanding obligations or obtaining funds
for general operating expenses. In addition, certain types of "private activity
bonds" may be issued by public authorities to finance privately operated housing
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal, student loans, or the obtaining of funds to lend
to public or private institutions for the construction of facilities such as
educational, hospital and housing facilities. Such private activity bonds are
included within the term Tax-Exempt Bonds if the interest paid thereon is
excluded from gross income for Federal income tax purposes.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may also constitute Tax-Exempt Bonds, but current
Federal tax law places substantial limitations on the size of such issues.
Notes. Tax-Exempt Notes generally are used to provide for short-term capital
needs and generally have maturities of one year or less. Tax-Exempt Notes
include:
1. Project Notes. Project notes are backed by an agreement between a local
issuing agency and the Federal Department of Housing and Urban Development
("HUD") and carry a United States Government guarantee. These notes provide
financing for a wide range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income housing programs and urban
renewal programs). Although they are the primary obligations of the local public
housing agencies or local urban renewal agencies, the HUD agreement provides for
the additional security of the full faith and credit of the United States
Government. Payment by the United States pursuant to its full faith and credit
obligation does not impair the tax-exempt character of the income from Project
Notes.
2. Tax-Anticipation Notes. Tax Anticipation Notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation of
various tax revenues, such as income, sales, use and business taxes, and are
specifically payable from these particular future tax revenues.
3. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of specific types of revenue, other than taxes, such as
federal revenues available under Federal Revenue Sharing Programs.
4. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most cases,
the long-term bonds then provide the funds for the repayment of the Notes.
5. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by the commitments of banks to purchase the loan.
Commercial Paper. Issues of commercial paper typically represent short-term,
unsecured, negotiable promissory notes. These obligations are issued by agencies
of state and local governments to finance seasonal working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, tax-exempt commercial paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions.
Yields. The yields on Tax-Exempt Bonds depend on a variety of factors, including
general money market conditions, effective marginal tax rates, the financial
condition of the issuer, general conditions of the Tax-Exempt Bond market, the
size of a particular offering, the maturity of the obligation and the rating (if
any) of the issue. The ratings of Moody's Investors Service, Inc. ("Moody's"),
Fitch Investors Services, Inc. ("Fitch") and Standard & Poor's Rating Group
("Standard & Poor's") represent their opinions as to the quality of various
Tax-Exempt Bonds which they undertake to rate. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, Tax-Exempt
Bonds with the same maturity and interest rate with different ratings may have
the same yield. Yield disparities may occur for reasons not directly related to
the investment quality of particular issues or the general movement of interest
rates, due to such factors as changes in the overall demand or supply of various
types of Tax-Exempt Bonds or changes in the investment objectives of investors.
"Moral Obligation" Bonds. No Portfolio currently intends to invest in so-called
"moral obligation" bonds, where repayment is backed by a moral commitment of an
entity other than the issuer, unless the credit of the issuer itself, without
regard to the "moral obligation," meets the investment criteria established for
investments by the Portfolio.
Lower Rated High Yield "High Risk" Debt Obligations. As discussed in the Fund's
Prospectus, each Portfolio may invest in high yielding, fixed income securities
rated below Baa by Moody's or BBB by Standard & Poor's or Fitch. Ratings are
based largely on the historical financial condition of the issuer. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate.
The values of lower-rated securities generally fluctuate more than those of
high-rated securities. In addition, the lower rating reflects a greater
possibility of an adverse change in financial condition affecting the ability of
the issuer to make payments of interest and principal. Although the Adviser
seeks to minimize these risks through diversification, investment analysis and
attention to current developments in interest rates and economic conditions,
there can be no assurance that the Adviser will be successful in limiting a
Portfolio's exposure to the risks associated with lower securities. Because each
Portfolio invests in securities in the lower rated categories, the achievement
of each Portfolio's goals is more dependent on the Adviser's ability than would
be the case if each Portfolio's were investing in securities in the higher rated
categories.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the portfolio
manager of each Portfolio intends to seek protection against early call.
Similarly, when such yields increase, the market value of a portfolio already
invested at lower yields can be expected to decline. Each Portfolio may invest
in debt securities which sell at substantial discounts from par. These
securities are low coupon bonds which, during periods of high interest rates,
because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates.
Additional Risks. Securities in which a Portfolio may invest are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or, as the case may be, the Massachusetts, or
New York legislature extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay when due principal of and
interest on their Tax-Exempt Bonds may be materially affected.
From time to time, proposals have been introduced before Congress which would
adversely affect the Federal income tax consequences of holding Tax-Exempt
Bonds. Federal tax legislation enacted primarily during the 1980's limits the
types and amounts of Tax-Exempt Bonds issuable for certain purposes, especially
for industrial development bonds and other types of so-called "private activity"
bonds. Such limits may affect the future supply and yields of these types of
Tax-Exempt Bonds. Further proposals limiting the issuance of Tax-Exempt Bonds
may well be introduced in the future. If it appeared that the availability of
Tax-Exempt Bonds for investment by a Portfolio and the value of the Portfolio's
investments could be materially affected by such changes in law, the Trustees
would reevaluate such Portfolio's investment objective and policies and consider
changes in the structure of the Portfolio or its dissolution.
Portfolio Turnover. It is impossible to predict portfolio turnover rates
accurately. The portfolio turnover rate for a Portfolio is calculated by
dividing the lower of that Portfolio's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of all securities whose maturities
at the time of acquisition were 1 year or less) by the monthly average value of
the securities in the Portfolio during the year.
Ratings. Ratings for Bonds issued by various jurisdictions are noted herein.
Such ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings may be obtained from the rating
agency furnished the same. There is no assurance that a rating will continue for
any given period of time or that a rating will not be revised or withdrawn
entirely by any or all of such rating agencies, if, in its or their judgment,
circumstances so warrant. Any downward revision or withdrawal of a rating could
have an adverse effect on the market prices of any of the bonds described
herein.
CERTAIN INVESTMENT PRACTICES
"When-Issued" Securities. As discussed in the Prospectus, "when-issued" refers
to securities whose terms are available and for which a market exists, but which
have not yet been issued. If a Portfolio enters into a "when-issued"
transaction, the Portfolio will segregate in a separate account, cash or liquid
high-grade debt securities equal in value to its commitment to acquire
"when-issued" securities. These assets will be valued at market value daily, and
additional cash or liquid assets will be segregated in the separate account to
the extent the total value of the assets in the account declines below the
amount of such commitment.
Repurchase Agreements. As discussed in the Prospectus, a Portfolio may enter
into repurchase agreements with respect to its portfolio securities. Each
Portfolio has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to such Portfolio's
custodian either physically or in book-entry form and that the collateral must
be marked-to-market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, a Portfolio could experience delays in
liquidating the underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the period in
which the Portfolio seeks to enforce its rights thereto, possible subnormal
levels of income and lack of access to income during this period, and the
expense of enforcing its rights. The Adviser will monitor the creditworthiness
of the parties with whom the Fund enters into repurchase agreements. The
Portfolios will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S. Government securities.
It is a fundamental policy of each Portfolio not to invest more than 10% of its
net assets in illiquid securities, including repurchase agreements maturing in
more than 7 days.
Financial Futures Contracts. A Portfolio may hedge its portfolio by selling
financial futures contracts to offset the effect of expected increases in
interest rates and by purchasing such futures contracts to offset the effect of
expected declines in interest rates. Although other techniques could be used to
reduce a Portfolio's exposure to interest rate fluctuations, a Portfolio may be
able to hedge its exposure more effectively and economically by using financial
futures contracts. A portfolio may enter into futures contracts and related
options for hedging and speculative purposes to the extent permitted by the
regulations of the Commodity Futures Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which have
been designated "contract markets" by the CFTC. Futures contracts are traded on
these markets in a manner that is similar to the way a stock is traded on a
stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate-sensitive instruments such as long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") modified pass-through mortgage-backed securities,
three-month U.S. Treasury bills, 90-day commercial paper, bank certificates of
deposit, the municipal bond buyer index, and Eurodollar certificates of deposit.
It is expected that if other financial futures contracts are developed and
traded, a Portfolio may engage in transactions in such contracts.
Although financial futures contracts by their terms call for actual delivery or
acceptance of interest rate instruments, in most cases these contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). If the offsetting purchase price is less than a Portfolio's original
sale price, such Portfolio realizes a gain, or if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than a
Portfolio's original purchase price, such Portfolio realizes a gain, or if it is
less, the Portfolio realizes a loss. A Portfolio will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing out transaction. For a discussion of the Federal income tax
considerations of trading in financial futures contracts, see the information
under the caption "Tax Status" below.
At the time a Portfolio 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." The margin required for a financial
futures contract is set by the board of trade or exchange on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
financial futures contract which is returned to a Portfolio upon termination of
the contract, assuming all contractual obligations have been satisfied. The
Portfolios expect to earn interest income on their initial margin deposits. Each
day, the futures contract is valued at the official settlement price of the
board of trade or exchange on which it is traded. 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. This process is known
as "marking to the market." Variation margin does not represent borrowing or
lending by a Portfolio, but is instead settlement between the Portfolio and the
broker of the amount one would owe the other if the financial futures contract
expired at that time. In computing net asset value, a Portfolio will mark to the
market its open financial futures positions.
Successful hedging depends on a strong correlation between the market for the
portfolio securities being hedged and the futures contract market for those
securities. There are several factors that may prevent this correlation from
being perfect, and thus, even a correct forecast of general interest rate trends
may not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could impair the
effectiveness of a given hedge. The degree of imperfection of correlation
depends on circumstances such as: variations in speculative market demand for
financial futures and debt securities, including technical influences in futures
trading and differences between the financial instruments underlying the
standard financial futures contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. The degree of
imperfection may be increased where the underlying debt securities are
lower-rated and, thus subject to greater fluctuation in prices than higher-rated
securities. In addition, the degree of imperfection may also be increased by the
fact that the Portfolios will enter into financial futures contracts on taxable
securities, and there is no guarantee that the prices of taxable securities will
move in a similar manner to the prices of a Portfolio's tax-exempt securities.
A decision as to whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends. Although the
Adviser believes that the use of financial futures contracts will benefit the
Portfolios, an incorrect prediction could result in a loss on both the hedged
securities in a Portfolio's investments and hedging vehicle so that a
Portfolio's return might have been better had hedging not been attempted.
However, in the absence of the ability to hedge, the Adviser might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs. The low margin
deposits required for futures transactions permit an extremely high degree of
leverage. A relatively small movement in a futures contract may result in losses
or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in price of
certain futures contract during a single trading day. The daily limit
establishes the maximum amount by which the price of a futures contract may vary
either up or down from the previous day's settlement price. Once the daily limit
has been reached in a futures contract subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movements during a particular trading day and, therefore, does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
Finally, although a Portfolio engages in financial futures transactions only on
boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, a Portfolio could be prevented from executing a
buy or sell order at a specified price or closing out a position due to limits
on open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If a Portfolio cannot close out a position, it will be required
to continue to meet margin requirements until the position is closed.
Options on Financial Futures Contracts. As discussed in the Portfolios'
Prospectus, a Portfolio may purchase and write call and put options on financial
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. A Portfolio would be required to deposit with
its custodian initial and variation margin with respect to put and call options
on futures contracts written by it.
Options on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an option
purchased by a Portfolio may expire worthless, in which case a Portfolio would
lose the premium paid therefor.
Other Considerations. The Portfolios will engage in futures transactions for
bona fide hedging or speculative purposes to the extent permitted by CFTC
regulations. A Portfolio will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Portfolio
or which it expects to purchase. Except as stated below, the Portfolios' futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that a Portfolio owns, or futures contracts will be purchased to
protect the Portfolio against an increase in the price of securities or the
currency in which they are denominated it intends to purchase. As evidence of
this hedging intent, each Portfolio expects that on 75% or more of the occasions
on which it takes a long futures or option position (involving the purchase of
futures contracts), the Portfolio will have purchased or will be in the process
of purchasing, equivalent amounts of related securities or assets denominated in
the related currency in the cash market at the time when the futures or, option
position is closed out. However, in particular cases, when it is economically
advantageous for a Portfolio to do so, a long futures position may be terminated
or an option may expire without the corresponding purchase of securities or
other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the Portfolios to elect to comply with a different test,
under which the aggregate initial margin and premiums required to establish
speculative positions in futures contracts and options on futures will not
exceed 5% of the net asset value of a Portfolio's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase. Each
Portfolio will engage in transactions in futures contracts and options only to
the extent such transactions are consistent with the requirements of the
Internal Revenue Code for maintaining its qualification as a regulated
investment company for federal income tax purposes.
When a Portfolio purchases a futures contract, writes a put option thereon or
purchases a call option thereon, an amount of cash or high grade, liquid debt
securities will be deposited in a segregated account with the Portfolio's
custodian which is equal to the underlying value of the futures contract reduced
by the amount of initial and variation margin held in the account of its broker.
Variable or Floating Rate Obligations. As discussed under "Investment Objective
and Policies" in the Prospectus, certain of the obligations in which the Fund
may invest may be variable or floating rate obligations on which the interest
rate is adjusted as predesignated periodic intervals (variable rate) or when
there is a change in the market rate of interest on which the obligations may
include a demand feature which entitles the purchaser to demand prepayment of
the principal amount prior to stated maturity. Also, the issuer may have a
corresponding right to prepay the principal amount prior to maturity. As with
any other type of debt security, the marketability of variable or floating rate
instruments may vary depending upon a number of factors, including the type of
issuer and the terms of the instruments. The Fund may also invest in more
recently developed floating rate instruments which are created by dividing a
municipal security's interest rate into two or more different components.
Typically, one component ("floating rate component" or 'FRC") pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index. A second component "inverse floating rate component" or
"IFRC") pays an interest rate that varies inversely with changes to market rates
of interest, because the interest paid to the IFRC holders is generally
determined by subtracting a variable or floating rate from a predetermined
amount (i.e., the difference between the total interest paid by the municipal
security and that paid by the FRC). The Fund may purchase FRC's without
limitation. Up to 10% of the Fund's total assets may be invested in IFRC's in an
attempt to protect against a reduction in the income earned on the Fund's other
investments due to a decline in interest rates. The extent of increases and
decreases in the value of an IFRC generally will be greater than comparable
changes in the value of an equal principal amount of a fixed-rate municipal
security having similar credit quality, redemption provisions and maturity. To
the extent that such instruments are not readily marketable, as determined by
the Investment Adviser pursuant to guidelines adopted by the Board of Trustees,
they will be considered illiquid for purposes of the Fund's 10% investment
restriction on investment in non-readily marketable securities.
The investment practices described above under the caption "Certain Investment
Practices" are not fundamental and may be changed by the Trustees without
shareholder approval.
SPECIAL RISKS
The following information as to certain special risks associated with investing
in Massachusetts and New York constitutes only a brief summary and does not
purport to be a complete description of the considerations associated with such
investments. The information is based in part on information from official
statements related to securities offerings of Massachusetts and New York issuers
and is believed to be accurate.
MASSACHUSETTS TAX-EXEMPT BONDS
The Commonwealth of Massachusetts has improved over the last four years. This
improvement reflects the combination of implementing more conservative fiscal
policy and budgetary practices, as well as increasing tax revenues through a
combination of tax increases and the slowly rebounding state economy. Since
Fiscal 1992, the state revenues have increased from $9.48 billion to an
estimated $11.16 billion in Fiscal 1995, an annual gain of 5.6%. For Fiscal
1996, tax revenues are projected to increase by 4.4% to $11.65 billion. This
consistent growth in tax revenues coupled with restrained expenditure levels
produced an operating surplus for the Fiscal 1992 through Fiscal 1994 period.
The ending fund balances for Fiscal 1996 are projected to be $169.9 million, or
23.5% lower than the Fiscal 1995 year-end balances.
In connection with his proposal to reorganize state government, Governor Weld
announced on November 1, 1995 that he would propose to reduce the personal
income tax rate on earned income from 5.95% to 5.45%. Legislation to effectuate
such tax reduction is expected to be filed by the Governor in January, 1996 in
conjunction with the filing of his budget recommendations for Fiscal 1997. The
cost to the Commonwealth of the proposed tax reduction has been estimated to be
approximately $500 million per year.
FISCAL 1992. Fiscal 1992 ended with an excess of operating revenues over
expenditures of $312 million and a positive fund balance of $549 million, which
included $230 million in the Stabilization Fund. Overall, budgeted revenues
increased only 0.7% to $13.7 billion and budgeted expenditures declined by 1.7%
to $13.4 billion.
FISCAL 1993. The Commonwealth ended Fiscal 1993 with an operating surplus of $13
million and aggregate ending operating fund balance of approximately $562
million, including a Stabilization Fund balance of $309 million. Budget revenues
increased by 4.7% to over $14.7 billion in Fiscal 1992. Budgeted expenditures in
Fiscal 1993 totalled approximately $14.7 billion, approximately 9.6% higher than
the Fiscal 1992 expenditures.
FISCAL 1994. The Commonwealth ended Fiscal 1994 with an operating surplus of $27
million and aggregate ending operating fund balance of approximately $589
million, including a Stabilization Fund balance of $383 million. For the year,
budgeted revenues totaled $15.5 billion, representing an increase of 5.7% over
Fiscal 1993. The Commonwealth budgeted expenditures in Fiscal 1994 totalled
$15.523 billion, 5.6% higher than the Fiscal 1993 budgeted expenditures.
FISCAL 1995. The Commonwealth is in the process of closing its Fiscal 1995
financial records. Current financial information is unaudited and is based upon
a preliminary financial report of the Commonwealth's Controller for Fiscal 1995
issued on September 15, 1995.
Fiscal 1995 budgeted revenues totaled approximately $16.4 billion or 5.4% above
Fiscal 1994 levels and exceeded budgeted expenditures by $90 million. Budgeted
expenditures in Fiscal 1995 were approximately $16.259 billion, or 4.7% above
the Fiscal 1994 budgeted expenditures. During Fiscal 1995, a modification was
enacted creating a formula for assigning certain year-end surpluses to the
Stabilization Fund. The new allocations called for sharing funds between the
Stabilization Fund and the newly created Cost Stabilization Fund. Amounts in the
Cost Relief Fund can be appropriated for the following purposes: 1) to subsidize
costs of the Massachusetts Water Pollution Abatement Trust projects; 2) finance
homeowner loans to facilitate compliance with sanitary waste regulations; 3)
mitigate sewer rate increases; and 4) unanticipated obligations or extraordinary
expenditures of the Commonwealth. Based upon this formula, it is anticipated
that the expected $90 million surplus would be allocated as follows: $55 million
would be carried forward as an initial balance for Fiscal 1996; $27.9 million
deposited in the Stabilization Fund; and $7 million to the Cost Relief Fund.
FISCAL 1996. On June 21, 1995, the Governor signed into law the Fiscal 1996
Budget totalling $16.8 billion in appropriations. A final supplemental budget
passed for Fiscal 1995 added $71 million in continuing appropriations to the
Fiscal Budget. Overall, the Commonwealth expects the Fiscal 1996 budget to total
approximately $16.9 billion, a 4.5% increase over Fiscal 1995 spending.
Comprehensive educational reform funding with a $233 million addition
represented the largest individual expenditure increase. Budgeted revenues are
estimated to equal approximately $16.8 billion in Fiscal 1996.
In August 1995, the Commonwealth received a waiver of federal regulations
subject to certain conditions for the proposed changes to the administration of
its AFDC program. This action followed the passing of legislation approved by
the Governor in February 1995 and was accepted by the Governor in September
1995. The changes proposed for the AFDC program were implemented in November
1995. For Fiscal 1996, these changes are budgeted to decline by 4.1% from Fiscal
1995 expenditures.
The Fiscal 1996 budget centers on numerous projections for spending requirements
of specific programs and expected generation of revenue from individual taxes or
fees; however, achievement of these estimates cannot be assured. During the
first quarter of Fiscal 1996, tax revenue collections have totaled $2.8 billion,
approximately 6.5% higher than the same period in Fiscal 1995.
The reserves of the Massachusetts Unemployment Compensation Trust Fund had been
exhausted by September 1991 due to persistently high levels of unemployment. To
compensate for this shortfall, benefit payments in excess of contributions were
financed through repayable advances from the federal unemployment loan account.
Legislation enacted in September 1992 significantly increased employer
contributions in order to reduce advances from the federal loan account with
1993 contributions exceeding outlays by $200 million. Since September 1994 when
all federal advances and related interest were repaid, the Fund has remained
solvent. As of September 30, 1995, the Trust Fund had a private contribution
balance of $481.07 million. It is expected, as of August, 1995, that the
contributions provided by current law should result in a private contributory
balance of $375 million in the Trust Fund by December, 1995. The Commonwealth
estimates that the reserves of the Trust Fund should total $1.25 billion by
1999.
CREDIT FACTORS
The fiscal viability of the authorities and municipalities in Massachusetts is
inextricably linked to the financial health of the Commonwealth as well as to
the guarantee of the debt of several authorities, most notably, the
Massachusetts Bay Transportation Authority and the University of Massachusetts
Building Authority. These agency ratings are based on this guarantee and can be
expected to follow any changes in the Commonwealth's rating. In addition,
Massachusetts statutes which limit the taxing authority of the Commonwealth or
certain governmental entities may impair the ability of issuers to maintain debt
service on their obligations.
The tax on personal property and real estate is virtually the only source of
local tax revenues available to the Commonwealth's cities and towns to meet
local costs. "Proposition 2 1/2", an initiative adopted by the voters in
November 1980, limits the power of Massachusetts cities and towns and certain
tax-supported districts to raise revenue from property taxes to support their
operations, including the payment of debt service. Proposition 2 1/2 required
many cities and towns to reduce their property tax levies to a stated percentage
of full and fair cash value of taxable property and real estate, and limited the
amount that all cities and towns might increase their property tax from year to
year.
RATINGS
The rating agencies have assigned the following long term credit ratings to the
Commonwealth: "A1" from Moody's; "A+" from Standard and Poor's, and "A+" from
Fitch.
NEW YORK TAX-EXEMPT BONDS
The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from the State, certain of its authorities and the City, as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
the State, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default in the absence of a
specific guarantee of pledge provided by the State. It should also be noted that
the fiscal stability of New York State is related to the fiscal stability of New
York City and of the State's Authorities. New York State's experience has been
that if New York City or any other major political subdivision or any of the
State's Authorities suffers serious financial difficulty, the ability of New
York State, New York State's political subdivisions (including New York City)
and the State's Authorities to obtain financing in the public credit markets is
adversely affected. This results in part from the expectation that to the extent
that any Authority or local government experiences financial difficulty, it will
seek and receive New York State financial assistance. Moreover, New York City
accounts for approximately 40 percent of New York State's population and tax
receipts, so New York City's financial integrity in particular affects New York
State directly. Accordingly, if there should be a default by New York City or
any other major political subdivision or any of the State's Authorities, the
market value and marketability of all New York Tax-Exempt Bonds issued by New
York State, its political subdivisions and Authorities ("New York Tax-Exempt
Bonds") could be adversely affected. This would have an adverse effect on the
asset value and liquidity of the New York Portfolio, even though securities of
the defaulting entity may not be held by the Portfolio.
REGIONAL ECONOMY
The New York State economy has entered its third year of slow recovery from the
national recession of 1990. Expansion in the service, trade, and construction
sectors has netted the State approximately 185,000 new jobs since the recession
trough of 1992. Much of the service growth has been in business, social
services, and in the health sectors. The State's Budget Division, in light of
the forecasts for national economic growth, anticipates continued but slowing
economic growth for New York State. Mirroring national trends, personal income
growth is expected to increase 5% in 1995, down from 6% in 1994, and continue to
increase at a slower rate. Employment growth in 1995 is expected to be slightly
lower than the prior year, or .8%, with a net increase of roughly 60,000 jobs.
Industries that have benefited from the lower dollar abroad will be offset by
Government cutbacks and shrinking of the banking industry. Unemployment, which
peaked to 9.3% in 1992 was reported at a more favorable 6.3% in May 1995.
1995-1996 FISCAL YEAR. On June 7, 1995, the State Legislature passed the
1995-1996 budget and the 1995-1996 Financial Plan was formulated on June 20,
1995. The Financial Plan reflects a deposit of $15 million in the Tax
Stabilization Reserve Fund and a year end fund balance of $172 million. The
Financial Plan projects total receipts of the General Fund to be $33.1 billion,
a decline of $48 million from the prior fiscal year. The absence of one-time
transactions, the impact of tax reductions enacted in 1994 and 1995, the
reduction of the business tax surcharge, and reductions in the General Fund
share of petroleum based taxes account for the anticipated decline in receipts.
Tax cuts enacted this year are expected to reduce personal income tax receipts
by $515 million. Business taxes are projected to fall to $4.7 billion, or $360
million less than Fiscal 1995 levels. User taxes deposited in the General Fund
are expected to increase $73 million from the preceding fiscal year. These taxes
include cigarette, alcoholic beverage, and auto rental taxes; and a portion of
motor fuel excise levies and vehicle registration fees. Miscellaneous receipts
and transfers from other funds are projected to increase $550 million, largely
due to several one-time transactions.
General Fund disbursements and transfers to other governmental funds, combined,
are projected at $33.1 billion, or $334 million below the level of disbursements
in 1994-1995. Grants to local governments are anticipated to decline $392
million and direct payments to local governments, including school aid and
revenue sharing, are projected to increase $74 million from the prior fiscal
year. Social welfare, including Medicaid, welfare, and other social services
will be cut 6.5%, largely due to a reduction of nearly 9% in Medicaid spending.
Other governmental funds, the Special Revenue Funds, Capital Projects Funds, and
the Debt Service Funds, project disbursements of $26 billion, $4 billion, and
$2.5 billion, respectively. Transfers from the General Fund to these funds are
projected at $2.04 billion.
1994-1995 FISCAL YEAR. The State ended the 1994-95 Fiscal Year with the General
Fund in balance. The closing fund balance of $158 million reflects $157 million
in the Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve
Fund.
General Fund receipts fell short of projections by $1.163 billion. Personal
income tax collections reflected weak estimated tax collections and lower
withholding due to reduced wage and salary growth, weakness in the brokerage
industry, and deferral of capital gains realizations in anticipation of Federal
tax changes. Business taxes fell short by $373 million, reflecting lower bank
payments as substantial overpayments of the 1993 liability depressed net
collections. Offsetting these shortfalls were user taxes and fees, which
exceeded projections by $210 million.
Disbursements of the General Fund were lower than original projections by $848
million. Educational costs fell short of projections by $188 million in part due
to the availability of $110 million in additional lottery proceeds and the use
of LGAC bond proceeds. The spending reductions also reflect measures taken by
the Governor to avert a gap in the 1994-95 State Financial Plan in January 1995.
These actions included a hiring freeze, halting the development of certain
services, and the suspension of non-essential capital projects.
1993-1994 FISCAL YEAR. The State of New York completed its 1993-1994 fiscal year
(ending March 30, 1994) with an accumulated surplus of $370 million from
combined Governmental Funds. This includes a General Fund accumulated deficit of
$1.637 billion, a Capital Fund accumulated deficit of $622 million, and
accumulated surpluses in the Special Revenue and Debt Service Funds. On an
operating basis, the State reported an operating surplus of $1.051 billion from
combined Governmental Funds.
General Fund operations completed Fiscal Year 1993-1994 with a surplus of $914
million reported on GAAP-basis. The surplus reflects several major factors
including the use of $671 million of the 1992-1993 operating surplus to fund
1993-1994 expenditures, $575 million in net Local Government Assistance
Corporation ("LGAL") bond proceeds, and the accumulation of a $265 million
balance in the Contingency Reserve.
Receipts of the General Fund increased $800 million or 2.5% over the prior
fiscal year. Primarily, the increase stemmed from gains of over $1 billion in
personal income and business taxes. This 10% growth was driven by the changes in
Federal business laws and the strong performance of the banking and securities
firms in 1993. Expenditures increased $1.05 billion or 3.2% over the prior year.
The growth in expenditures primarily consisted of $850 million in additional
social service costs. The majority of these costs related to Medicaid and Income
Maintenance programs. In addition, the settlement of outstanding labor contracts
and unfavorable judicial decisions caused another $240 million in departmental
operations expenditures. On a cash basis the state closed 1993-1994 with a
surplus of $332 million based upon receipts of $32.2 billion and disbursements
of $31.9 billion.
1992-1993 FISCAL YEAR. In 1992-1993, the State recorded a GAAP-based General
Fund operating surplus of $2.065 billion and ended the years with an accumulated
General Fund deficit of $2.5 billion. The year was highlighted by higher than
expected revenue growth generated by the improving economy combined with the
effects of a tax-induced one-time year end acceleration of income into 1992.
After reflecting a 1992-1993 year-end deposit to the tax refund reserve of $671
million, General Fund receipts exceeded 1992 projections by $45 million. If not
for that year-end transaction, which had the effect of reducing 1992-1993
receipts by $671 million and making them available in Fiscal Year 1993-1994,
General Fund receipts would have been $716 million higher than originally
projected. The favorable revenue performance was primarily attributable to the
withholding and estimated tax components of the income tax exceeding projections
by $800 million. Disbursements ended 1992-1993 at $45 million above projections.
After adjusting for the impact of a $150 million payment from the Medicaid
Malpractice Insurance Association to health insurers pursuant to January 1993
legislation, all other expenditures fell $105 million below projections. The
State closed Fiscal Year 1992-1993 with a cash-basis surplus of $67 million
based on receipts of $31.4 billion and disbursements of $30.8 billion.
RATINGS
The State of New York had its A rating by Moody's and A- by Standard & Poor's
reconfirmed during June 1994 and July 1994, respectively. In affirming the
ratings of long term general obligations both agencies cited the positive trends
establish over the last two fiscal years. Fitch also retained its A+ rating on
New York State.
Current Budget The revised Fiscal Year 1994-1995 budget was developed from
projections of moderate economic growth and slightly higher expectations
regarding social service case loads and required State services and slightly
lower estimates of tax receipts. The budget calls for a balanced General Fund on
a cash basis. Total receipts are projected to increase to $34.1 billion and
expenditures to $34.0 billion. The 1994-1995 revenue projections incorporate a
$1.5 billion transfer from the tax refund reserve fund, a rate sustaining the
1993-94 income tax growth and moderate user tax expansion. Disbursement
estimates call for a $1.9 billion increase in grants to local education
governments consisting primarily of $554 million increase in local education
support and a $143 million local tax relief package. In addition, increased
disbursement for pension contributions of $110 million, salary increases of $193
million and a $153 million capital fund contribution represent significant new
expenditures. At the close of 1994-1995, the balance of the Tax Stabilization
Reserve Fund is projected to total $207 million.
New York State anticipates that its 1994-1995 borrowings for capital purposes
will total approximately $3.1 billion in general obligation and contractual
obligation debt. Of this issuance, general obligations will total only $375
million, the lowest level since 1988-1989. Major projects to be undertaken with
these funds include highway and bridge improvements, mental hygiene facilities,
university building improvements, housing programs and prisons.
Authorities The fiscal stability of New York is related, at least in part, to
the fiscal stability of its localities and Authorities. Authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to New York itself and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls, mass
transportation and rentals for dormitory rooms and housing. In recent years,
however, New York has provided financial assistance through appropriations, in
some cases of a recurring nature, to certain Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This assistance is expected to continue to be
required in future years. Failure of New York to appropriate necessary amounts
or to take other action to permit the Authorities to meet their obligations
could result in a default by one or more of the Authorities. If a default were
to occur, it would likely have a significant adverse effect on the market price
of obligations of the State and its Authorities.
As of March 31, 1994, there was outstanding a $26.4 billion aggregate principal
amount of bonds and notes issued by Authorities which were either guaranteed by
the State or supported by the State through lease-purchase and
contractual-obligation arrangements or moral obligation provisions. Debt service
on outstanding Authority obligations is normally paid out of revenues generated
by the Authorities' projects or programs, but in recent years the State has
provided special financial assistance, in some cases of a recurring nature, for
operating capital and debt service expenses.
Agencies and Localities Beginning in 1975 (in part as a result of the then
current New York City and UDC financial crises), various localities of New York
State began experiencing difficulty in marketing their securities. As a result,
certain localities, in addition to New York City, have experienced financial
difficulties leading to requests for State assistance. If future financial
difficulties cause agencies or localities to seek special State assistance, this
could adversely affect New York State's ability to pay its obligations.
Similarly, if financial difficulties of New York State result in New York City's
inability to meet its regular aid commitments or to provide further emergency
financing, issuers may default on their outstanding obligations, which would
affect the marketability of debt obligations of New York, its agencies and
municipalities such as the New York Municipal Obligations held by the Portfolio.
Reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of New York State's localities.
Should localities be adversely affected by Federal cutbacks, they may seek
additional assistance from the State which might, in turn, have an adverse
impact on New York State's ability to maintain a balanced budget.
New York City and the Municipal Assistance Corporation In 1975, New York City
encountered severe financial difficulties which impaired the borrowing ability
of New York City, New York State, and the Authorities. New York City (the
"City") lost access to public credit markets and was not able to sell debt to
the public until 1979.
As a result of the City's financial difficulties, certain organizations were
established to provide financial assistance and oversee and review the City's
financing. These organizations continue to exercise various monitoring functions
relating to the City's financial position.
New York City has maintained a balanced budget for each of its last nine fiscal
years and has retired all of its federally guaranteed debt. As a result of the
City's success in balancing its budget, certain restrictions imposed on the City
by the new York Financial Control Board (the "Control Board"), which was created
in response to the City's 1975 fiscal crises, have been suspended. Those
restrictions, including the Control Board's power to approve or disapprove
certain contracts, long-term and short-term borrowings and the four-year
financial plan of the City, will remain suspended unless and until, among other
things, there is a substantial threat of an actual failure by New York City to
pay debt service on its notes and bonds or to keep its operating deficits below
$100 million. Although the City has maintained a balanced budget in recent
years, the ability to balance future budgets is contingent upon accrual versus
expected levels of Federal and State Aid and the effects of the economy on City
revenues and services.
The City requires certain amounts of financing for seasonal and capital spending
purposes. The City has issued $2.2 billion in notes to finance the City's
current estimate of its seasonal financing needs during its 1995 fiscal year.
The City's capital financing program projects long-term financing requirements
of approximately $11.3 billion for the City's fiscal years 1995 through 1998 for
the construction and rehabilitation of the City's infrastructure and other fixed
assets. The major capital requirements include expenditures for the City's water
supply system, sewage and waste disposal systems, roads, bridges, mass transit,
schools and housing.
Certain localities in addition to the City could have financial problems which,
if significant, could lead to requests for additional State assistance during
the State's 1994-95 fiscal years and thereafter. Fiscal difficulties experienced
by the City of Yonkers, for example, could result in State actions to allocate
State resources in amounts that cannot yet be determined. In the recent past,
the State provided substantial financial assistance to its political
subdivisions, totaling approximately 67% of General Fund disbursements in the
State's fiscal year 1992-93 and estimated to account for 68% of General Fund
disbursements in the State's 1993-94 fiscal year, primarily for aid to
elementary, secondary and higher education (34% in fiscal year 1992-93 and 34%
in fiscal year 1993-94 of local assistance) and medicaid and income maintenance
(33% in fiscal year 1992-93 and 34% in fiscal year 1993-94). The legislature
enacted substantial reductions for previously budgeted levels of State aid since
December 1990. To the extent the State is constrained by its financial
condition, State assistance to localities may be further reduced, compounding
the serious fiscal constraints already experienced by many local governments.
Localities also face anticipated and potential problems resulting from pending
litigation (including challenges to local property tax assessments), judicial
decisions and socio-economic trends.
The total indebtedness of all localities in the State, other than New York City,
was approximately $15.7 billion as of the localities' fiscal year ending during
1992. A small portion (approximately $71.6 million) if this indebtedness
represented borrowing to finance budgetary deficits issued pursuant to enabling
State legislation (requiring budgetary review by the State Comptroller).
Subsequently, certain counties and other local governments have encountered
significant financial difficulties, including Nassau County and Suffolk County
(which each received approval by the legislature to issue deficit notes). The
State has imposed financial control on the City of New York from 1977 to 1986
and on the City of Yonkers in 1984, 1988 and 1989, under an appointed control
board in response to fiscal crises encountered by these municipalities.
Litigation Certain litigation pending against New York State, its subdivisions
and their officers and employees could have a substantial or long-term adverse
effect on State finances. Among the more significant of these lawsuits are those
that involve: (i) the validity and fairness of certain eighteenth century
agreements and treaties by which Oneida and Cayuga Indian tribes transferred
title to the State of approximately five million acres of land in central New
York; (ii) certain aspects of the State's Medicaid rates and regulations,
including reimbursements to providers of mandatory and optional Medicaid
services; (iii) the care and housing for individuals released from State mental
health facilities; (iv) the treatment provided at several State mental hygiene
facilities; (v) contamination of the Love Canal area of Niagara Falls; (vi)
education accommodations for learning-disabled students at a State University;
(vii) alleged employment discrimination by the State and its agencies; (viii)
the State's practice of reimbursing certain mental hygiene patient-care expenses
with the client's Social Security benefits; (ix) methods by which the State
computes its aid to localities for the administrative costs of food stamp
programs; (xi) retirement benefits payable to certain State and municipal
employees; (xii) State reimbursement of local governments for Medicaid
expenditures made for certain mentally disturbed patients; (xiii) the State's
possession of certain assets taken pursuant to the State's Abandoned Property
Law; (xiv) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; and (xv) liability for
maintenance of erosion barriers constructed along Long Island's shorelines.
INVESTMENT RESTRICTIONS
The Portfolios observe the following fundamental restrictions. The Portfolios
may not:
(1) Issue senior securities, except as permitted by paragraph (2) below. For
purposes of this restriction, financial futures contracts and repurchase
agreements entered into in accordance with a Portfolio's investment policy are
not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure for extraordinary
emergency purposes in amounts not to exceed 5% of the Portfolio' s total assets
(including the amount borrowed) taken at market value. The Portfolio will not
leverage to attempt to increase income. The Portfolio will not purchase
securities while borrowings are outstanding.
(3) Pledge, mortgage or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and then only if such pledging, mortgaging or
hypothecating does not exceed 10% of the Portfolio's total assets taken at
market value. (The Portfolios have no present intention of engaging in
transactions permitted under this paragraph (3).)
(4) Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Portfolio may be deemed to be an
underwriter for purpose of the Securities Act of 1933. A Portfolio may also
participate as part of a group in bidding for the purchase of Tax-Exempt Bonds
directly from an issuer in order to take advantage of the lower purchase price
available to members of such groups.
(5) Purchase or sell real estate or any interest therein, but this restriction
shall not prevent a Portfolio from investing in Tax-Exempt Bonds secured by real
estate or interests therein.
(6) Make loans, except for the purchase of a portion of an issue of Tax-Exempt
Bonds or short-term taxable investment, whether or not the purchase is made upon
the original issuance of such securities, and repurchase agreements entered into
in accord with a Portfolio's investment policy.
(7) Except as permitted by paragraph (4) above, participate in a joint or
joint-and-several basis in any securities trading account. The "bunching" of
orders for the sale or purchase of marketable portfolio securities with other
accounts under the management of the Adviser to save commissions or to average
prices among them is not deemed to result in a joint securities trading account.
(8) Buy or sell commodity contracts, except financial futures contracts as
described in the Prospectus under the caption "Investment Objective and
Policies."
(9) Purchase securities on margin (except that it may obtain such short-term
credits as may be necessary for the clearance of purchase or sales of securities
and may make margin payments in connection with transactions in financial
futures) or make short sales of securities.
(10) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets taken at
market value at the time of each investment. (Tax-Exempt Bonds and securities
issued or guaranteed by the United States Government and its agencies and
instrumentalities are not subject to this limitation.)
(11) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if
(a) such purchase would cause more than 10 percent of the
outstanding voting securities of such issuer to be held by the Fund; or
(b) to the Portfolio's knowledge, one or more of the Trustees or
officers of the Fund or directors or officers of the Adviser or any investment
management subsidiary of the Adviser individually owns beneficially more than
0.5 percent and together own beneficially more than 5 percent of the securities
of such issuer, nor will the Portfolio hold the securities of any such issuer.
For the purposes of this paragraph (11), each government unit (state, county,
city, for example) and each subdivision, agency or instrumentality thereof, and
each multimember agency of which any of them is a member, shall be considered a
separate issuer.
(12) Invest in securities of another registered investment company.
(13) Except for investments which, in the aggregate, taken at cost do not exceed
5 percent of the Portfolio's total assets taken at market value, purchase
securities unless the issuer thereof has a record of at least 3 years'
continuous operation prior to the purchase. (This limitation does not apply to
securities that are issued or guaranteed by the United States government and its
agencies or instrumentalities or are secured by the pledge of the faith, credit,
and taxing power of any entity authorized to issue Tax-Exempt Bonds.)
(14) Purchase any security, including any repurchase agreement maturing in more
than seven days, which is subject to legal or contractual delays in or
restrictions on resale, or which is not readily marketable, if more than 10% of
the net assets of the Portfolio, taken at market value, would be invested in
such securities.
The Portfolios observe the following non-fundamental restriction. The Portfolios
may not:
(1) Notwithstanding any investment restriction to the contrary, each Portfolio
may in connection with the John Hancock Group of Funds Deferred Compensation
Plan for Independent Trustees/Directors, purchase securities of other investment
companies within the John Hancock Group of Funds provided that, as a result, (i)
no more than 10% of the Fund's assets would be invested in securities of all
other investment companies. (ii) such purchase would not result in more than 3%
of the total outstanding voting securities of any one such investment company
being held by each Portfolio and (iii) no more than 5% of the Fund's assets
would be invested in any one such investment company.
In order to permit the sale of the Portfolios in certain states the Trustees
may, in their sole discretion, adopt restrictions on investment policies more
restrictive than those described above. Should the Trustees determine that a
restrictive policy is no longer in the best interest of a Portfolio and its
shareholders, the Portfolio may cease offering shares in the state involved and
the Trustees may revoke the restrictive policy. Moreover, if the states involved
no longer require any such restrictive policy, the Trustees may, at their
discretion, revoke the policy.
The investment objective and the fundamental restrictions of a Portfolio may not
be changed without approval of a majority of the outstanding voting securities
of the respective Portfolio. As used in the Prospectus and this Statement of
Additional Information, such approval means the approval of the lesser of (i)
the holders of 67 percent or more of the shares represented at the meeting if
the holders of more than 50 percent of the outstanding shares of the affected
Portfolio are present in person or by proxy, or (ii) the holders of more than 50
percent of the outstanding shares.
RATINGS
Moody's describes its ratings for Tax-Exempt Bonds as follows:
Bonds. "Bonds which are rated 'AAA' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Bonds which are rated 'AA' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of grater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in 'Aaa'
securities.
"Bonds which are rated 'A' possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Bonds which are rated 'BAA' are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Bonds which are rated 'BA' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
"Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Bonds which are rated 'CAA' are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
"Bonds which are rated 'CA' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
"Bonds which are rated 'C' are the lowest rated classes of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever obtaining any
real investment standing."
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Standard & Poor's describes its ratings for Tax-Exempt Bonds as follows:
"AAA. Debt rated 'AAA' has the highest rating by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA. Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A. Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB. Debt rated 'BBB' is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Debt rated "BB," "B," "CCC," or "CC" is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and pay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major risk exposures to adverse
conditions.
UNRATED. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Fitch describes its rating for Tax-Exempt Bonds as follows:
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and the 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated 'F-1+'.
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB. Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB. Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
NOTES. Ratings for state and municipal notes and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance on bond risk are of lesser importance in the short run.
Symbols will be used as follows:
"MIG-1 Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
"MIG-2 Notes bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group."
COMMERCIAL PAPER. As described in the Prospectus, the Fund may invest in
commercial paper which is rated A-1 or A-2 by Standard & Poor's, P-1 or P-2 by
Moody's or F-1+ or f1 by Fitch.
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ Exceptionally strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated "F-1+"
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Fund who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Fund are also officers and directors of the Adviser or officers
and directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupation or employment of the
Trustees and principal officers of the Fund during the past five years.
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive Officer, the
101 Huntington Avenue Adviser and The Berkeley Financial Group
Boston, Massachusetts ("The Berkeley Group"); Chairman, NM Capital
Management, Inc. ("NM Capital"); John Hancock
Advisers International Limited ("Advisers
International"); John Hancock Funds, Inc.,
("John Hancock Funds"); John Hancock Investor
Services Corporation ("Investor Services")
and Sovereign Asset Management Corporation
("SAMCorp") (herein after the Adviser, The
Berkeley Group, NM Capital, Advisers
International, John Hancock Funds, Investor
Services and SAMCorp are collectively
referred to as the "Affiliated Companies");
Chairman, First Signature Bank & Trust;
Director, John Hancock Freedom Securities
Corp., John Hancock Capital Corp., New
England/Canada Business Council; Member,
Investment Company Institute Board of
Governors; Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of Science;
President, the Adviser (until July 1992).
Chairman, John Hancock Distributors, Inc.
(until April, 1994).
<FN>
- --------------
*An "interested person" of the Fund, as such term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act:).
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee (4) Professor of Law, Boston University School
Boston University of Law; Trustee, Brookline Savings Bank;
Boston, Massachusetts Director, Boston University Center for
Banking Law Studies (until 1990).
Richard P. Chapman, Jr. Trustee (4) President, Brookline Savings Bank.
160 Washington Street
Brookline, Massachusetts
William J. Cosgrove Trustee (4) Vice President, Senior Banker and Senior
20 Buttonwood Place Credit Officer, Citibank, N.A. (retired
Saddle River, New Jersey September 1991); Executive Vice President,
Citadel Group Representatives, Inc.;
Director, the Hudson City Savings Bank.
Gail D. Fosler Trustee (4) Vice President and Chief Economist, The
4104 Woodbine Street Conference Board (non-profit economic and
Chevy Chase, MD business research).
Bayard Henry Trustee (4) Corporate Advisor; Director, Fiduciary Trust
31 Milk Street Company (a trust company); Director,
Boston, Massachusetts Groundwater Technology, Inc. (remediation);
Samuel Cabot, Inc.; Advisor, Kestrel Venture
Management.
<FN>
- ------------------
* An "interested person" of the Fund, as such term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
*Richard S. Scipione Trustee (3) General Counsel, the Life Company; Director,
John Hancock Place the Adviser, the Affiliated Companies, John
P.O. Box 111 Hancock Distributors, Inc., JH Networking
Boston, Massachusetts Insurance Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp, NM Capital and
John Hancock Property and Casualty Insurance
and its affiliates (until November, 1993);
Trustee, The Berkeley Group.
Edward J. Spellman, CPA Trustee (4) Partner, KPMG Peat Marwick LLP (retired June
259C Commercial Bld. 1990).
Lauderdale, FL
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment Officer,
101 Huntington Avenue Investment Officer (2) the Adviser; President, the Adviser (until
Boston, Massachusetts December 1994).
*Anne C. Hodsdon President (2) President and Chief Operating Officer, the
101 Huntington Avenue Adviser; Executive Vice President, the Adviser
Boston, Massachusetts (until December 1994); Senior Vice President;
the Adviser (until December 1993); Vice
President, the Adviser, until 1991.
*Thomas H. Drohan Senior Vice President and Senior Vice President and Secretary, the
101 Huntington Avenue Secretary Adviser.
Boston, Massachusetts
<FN>
- ------------------
* An "interested person" of the Fund, as such term is defined in the Investment Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
*James B. Little Senior Vice President and Senior Vice President the Adviser.
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
*John A. Morin Vice President Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
*Susan S. Newton Vice President, Assistant Vice President and Assistant Secretary,
101 Huntington Avenue Secretary and Compliance the Adviser.
Boston, Massachusetts Officer
*James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
<FN>
- ------------------
* An "interested person" of the Fund, as such term is defined in the Investment Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
<PAGE>
As of the date of this Statement of Additional Information, the officers and
Trustees of the Fund as a group owned less than 1% of the outstanding shares of
each Portfolio and to the knowledge of the registrant, no persons owned of
record or beneficially 5% or more of any of the Fund's outstanding securities .
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services for the Fund's 1995 fiscal year. The two
non-Independent Trustees, Messrs. Boudreau and Scipione, and each of the
officers of the Funds are interested persons of the Adviser, are compensated by
the Adviser and receive no compensation from the Fund for their services.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR RETIREMENT FROM THE FUND AND JOHN HANCOCK
AGGREGATE BENEFITS ACCRUED AS FUND
COMPENSATION PART OF THE FUND'S COMPLEX TO
FROM THE EXPENSES TRUSTEES
INDEPENDENT TRUSTEES FUND (TOTAL OF 17 FUND(S)
MA NY MA NY
<S> <C> <C> <C> <C> <C>
Dennis S. Aronowitz $819 $832 $-- $-- $ 61,050
Richard P. Chapman, Jr. 265 270 578 588 62,800
William Cosgrove 321 327 553 562 61,050
Gail D. Fosler 832 845 -- -- 60,800
Bayard Henry 791 804 -- -- 58,850
Edward J. Spellman 857 871 -- -- 61,050
--- --- -- -- - ------
Total $3,885 $3,949 $1,131 $1,150 $365,600
------ ------ ------ ------ --------
</TABLE>
The total compensation paid by John Hancock Fund Complex to the Independent
Trustees is as of the calendar year ended December 31, 1995.
INVESTMENT ADVISORY AND OTHER SERVICES
Each of the Trustees and principal officers affiliated with the Fund and the
Portfolios who is also an affiliated person of the Adviser is named above,
together with the capacity in which such person is affiliated with the Fund and
the Adviser.
As described in the Fund's Prospectus under the caption "Organization and
Management of the Fund," the Fund, on behalf of the Portfolios, has entered into
an investment management contract with the Adviser, under which the Adviser
provides each Portfolio with a continuous investment program, consistent with
the Portfolio's stated investment objective and policies. Investors should refer
to the Prospectus for a description of certain information concerning the
investment management contract of the Fund. The Adviser is responsible for the
management of each Portfolio's assets.
Securities held by a Portfolio may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Securities may be held by, or be appropriate investments for, a
Portfolio as well as such other clients or funds. Because of different
investment objectives or other factors, a particular security may be bought for
one or more funds or clients when one or more are selling the same security. If
opportunities for purchase or sale of securities by the Adviser for a Portfolio
or for other funds or clients for which the Adviser renders investment advice
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds or
clients in a manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Adviser or its affiliates
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund's
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
Under the terms of the investment management contract with the Fund, the Adviser
provides the Fund with office space, supplies and other facilities required for
the business of the Fund. The Adviser pays the compensation of all officers and
employees of the Fund, and pays the expenses of clerical services relating to
the administration of the Fund.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund (including fees of Trustees of the Fund
who are not "interested persons," as such term is defined in the Investment
Company Act but excluding certain distribution-related activities required to be
paid for by the Adviser or John Hancock Funds), and the continuous public
offering of the shares of the Fund are borne by the Fund on behalf of each of
the Portfolios.
As provided by the investment management contract, the Fund pays the Adviser
monthly an investment management fee, which is accrued daily, based on a stated
percentage of the average daily net assets of each Portfolio as follows:
Net Asset Value Annual Rate
--------------- -----------
First $250,000,000 0.500%
Next $250,000,000 0.450%
Next $500,000,000 0.425%
Next $250,000,000 0.400%
Amount over $1,250,000,000 0.300%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit a Portfolio's expenses to a specified percentage of its average daily net
assets. The Adviser retains the right to re-impose a fee and recover any other
payments to the extent that, at the end of any fiscal year, a Portfolio's annual
expenses fall below this limit.
On August 31, 1995, the net assets of the Massachusetts and New York Portfolios
were $54,415,695 and $55,752,967, respectively. For the years ended August 31,
1993 and 1994, as a result of the expense limitations described in the
Prospectus, the Adviser did not receive a fee from any Portfolio. For the year
ended August 31, 1995, the management fee paid by the Massachusetts and New York
Portfolios to the Adviser amounted to $62,994 and $57,450, respectively.
If the total of all ordinary business expenses of any Portfolio for any fiscal
year exceeds the limitations prescribed in any state in which shares of the
Portfolio are registered for sale, the fee payable to the Adviser will be
reduced to the extent of such excess and the Adviser will make any additional
arrangements necessary to eliminate any remaining excess expenses.
If the total of all ordinary business expenses of the Fund for any fiscal year
exceeds limitations prescribed in any state in which shares of the Fund are
qualified for sale, the fee payable to the Adviser will be reduced to the extent
required by these limitations. At this time, the most restrictive limit on
expenses imposed by a state requires that expenses charged to the Fund in any
fiscal year may not exceed 2 1/2% of the first $30,000,000 of the Fund's average
net assets, 2% of the next $70,000,000 of such net assets and 1 1/2% of the
remaining average net assets. When calculating the above limit, the Fund may
exclude interest, brokerage commissions and extraordinary expenses.
Pursuant to its investment management contract, the Adviser is not liable to the
Fund or its shareholders for any error of judgment or mistake of law or for any
loss suffered by the Fund in connection with the matters to which the contract
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
reckless disregard by the Adviser of its obligations and duties under the
management contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and currently has more than $16 billion in assets under
management in its capacity as investment adviser to the Fund and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over 1,080,000 shareholders. The Adviser is
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $80 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries high ratings from Standard & Poor's
and A.M. Best's. Founded in 1862, the Life Company has been serving clients for
over 130 years.
Under the investment management contract, the Fund and each Portfolio may use
the name "John Hancock" or any name derived from or similar to it only for so
long as the contract or any extension, renewal or amendment thereof remains in
effect. If the contract is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such a name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The investment management contract continues in effect from year to year if
approved annually by vote of a majority of the Trustees who are not interested
persons of one of the parties to the contract, cast in person at a meeting
called for the purpose of voting on such approval, and by either the Trustees or
the holders of a majority of each affected Portfolio's outstanding voting
securities. This contract automatically terminates upon assignment and may be
terminated as to any Portfolio without penalty on 60 days' notice at the option
of either party to the contract or by vote of a majority of the outstanding
voting securities of that Portfolio.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, John Hancock Funds is obligated to use its best efforts to sell shares
on behalf of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are offered at net asset value next
determined, plus the applicable sales charge. John Hancock Funds and Selling
Brokers receive compensation in the form of a sales charge at rates which are
listed in the Portfolios' Prospectus.
The Fund's Trustees have adopted a Distribution Plan (the "Plan"), on behalf of
each Portfolio pursuant to Rule 12b-1 under the Investment Company Act. Under
the Plan, the Fund will pay distribution and service fees at an aggregate annual
rate of up to 0.30% of the average daily net assets of the Portfolio, provided
that the service fee will not exceed 0.25% of such assets. The distribution fees
reimburse John Hancock Funds for its distribution costs incurred in the
promotion of sales of Portfolio shares, and the service fees compensate Selling
Brokers for providing personal and account maintenance services to shareholders.
The Plan was approved by a majority of the voting securities of each Portfolio
and the Plan with all amendments was approved by a majority of the Trustees,
including a majority of the Trustees who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Plan (the "Independent Trustees") by votes cast in person at meetings called for
the purpose of voting on the Plan.
Pursuant to the Plan, at least quarterly, John Hancock Funds shall provide the
Fund on behalf of each Portfolio with a written report of the amounts expended
under the Plan and the purpose for which such expenditures were made. The
Trustees shall review such reports on a quarterly basis.
During the fiscal year ended August 31, 1995, each Portfolio paid John Hancock
Funds the following amounts of expenses:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of
Prospectuses Interest Carrying
to New Compensation to Expense of or Other Finance
Advertising Shareholders Selling Brokers Distributors Charges Other
<S> <C> <C> <C> <C> <C>
New York Portfolio $ 8,207 $3,247 $43,803 $106,993 $0
Massachusetts Portfolio $10,383 $1,257 $44,137 $103,758 $0
</TABLE>
The Plan provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plan provides that it may be terminated as to any
Portfolio without penalty (a) by vote of a majority of the Independent Trustees,
(b) upon 60 days' written notice to John Hancock Funds of the affected Portfolio
and (c) automatically in the event of assignment. It further provides that it
may not be amended to increase the maximum amount of the fees for the services
described therein without the approval of a majority of the outstanding voting
securities of the affected Portfolio. It also provides that no material
amendment to the Plan will, in any event, be effective unless it is approved by
a vote of a majority of the Trustees and of the Independent Trustees of the
Fund.
In adopting the Plan the Trustees concluded that, in their judgment, there is a
reasonable likelihood that the Plan will benefit each Portfolio's shareholders.
When the Fund seeks an Independent Trustee to fill a vacancy or as a nominee for
election by shareholders, the selection or nomination of the Independent Trustee
is, under resolutions adopted by the Trustees, committed to the discretion of
the Committee on Administration of the Trustees. The members of the Committee on
Administration are all Independent Trustees and are identified in this Statement
of Additional Information under the heading "Those Responsible for Management."
The distribution contract continues in effect from year to year if approved
annually by vote of a majority of the Trustees who are not interested persons of
one of the parties to the contract, cast in person at a meeting called for the
purpose of voting on such approval, and by either the Trustees or the holders of
a majority of the affected Portfolio's outstanding voting securities. The
distribution contract automatically terminated upon assignment. Such contract
may be terminated as to any Portfolio without penalty on 60 days' notice at the
option of either party to the contract or by vote of a majority of the
outstanding voting securities of that Portfolio.
METHODS OF OBTAINING REDUCED SALES CHARGE
The sales charge applicable to purchases of shares of a Portfolio is described
in the Fund's Prospectus. Methods of obtaining a reduced sales charge referred
to generally in the Prospectus are described in detail below.
COMBINED PURCHASES. For each Portfolio, in calculating the sales charge
applicable to purchases made at one time, the purchases will be combined if made
by (a) an individual, his spouse and their children under the age of 21,
purchasing securities for his or their own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account, and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from a Investor
Services or Selling Broker's representative.
WITHOUT SALES CHARGE. As described in the Prospectus, shares of a Portfolio may
be sold without a sales charge to John Hancock affiliates and certain government
authorities.
ACCUMULATION PRIVILEGE. Investors (including investors combining purchases) who
are already shareholders may also obtain the benefit of a reduced sales charge
by taking into account not only the amount then being invested but also the
purchase price or current account value of the shares already held by such
person.
COMBINATION PRIVILEGE. For each Portfolio, reduced sales charges (according to
the schedule set forth in the Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in shares
of the Portfolio and shares of all other John Hancock funds which carry a sales
charge.
LETTER OF INTENTION. For each Portfolio, the reduced sales charges are also
applicable to investments made over a specified period pursuant to a Letter of
Intention (the "LOI"), which should be read carefully prior to its execution by
an investor. Such an investment (including accumulations and combinations) must
aggregate $100,000 or more invested during the a period of thirteen months from
the date of the LOI or from a date within ninety days prior thereto, upon
written request to Investor Services. The sales charge applicable to all amounts
invested under the LOI is computed as if the aggregate amount intended to be
invested had been invested immediately. If such aggregate amount is not actually
invested, the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However, for
the purchases actually made within the specified period the sales charge
applicable will not be higher than that which would have applied (including
accumulations and combinations) had the LOI been for the amount actually
invested.
The LOI authorizes Investor Services to hold in escrow sufficient shares
(approximately 5% of the aggregate) to make up any difference in sales charges
on the amount intended to be invested and the amount actually invested, until
such investment is completed within the specified period, at which time the
escrow shares will be released. If the total investment specified in the LOI is
not completed, the shares held in escrow may be redeemed and the proceeds used
as required to pay such sales charge as may be due. By signing the LOI, the
investor authorizes Investor Services to act as his attorney-in-fact to redeem
any escrowed shares and adjust the sales charge, if necessary. An LOI does not
constitute a binding commitment by an investor to purchase or by the Fund to
sell any additional shares and may be terminated at any time.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of each Portfolio in whole or in part in portfolio
securities as prescribed by the Trustees of the Fund. When the shareholder sells
portfolio securities received in this fashion the shareholder would incur a
brokerage charge. Any such securities would be valued for the purposes of making
such payment at the same value as used in determining net asset value. The Fund
has, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, each Portfolio must redeem its shares for cash except to
the extent that the redemption payments to any shareholder during any 90-day
period would exceed the lesser of $250,000 or 1% of each Portfolio's net asset
value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Prospectus, each of the
Portfolios permits the establishment of a Systematic Withdrawal Plan. Payments
under this plan represent proceeds arising from the redemption of a Portfolio's
shares. Since the redemption price of the shares of a Portfolio may be more or
less than the shareholder's cost, depending upon the market value of the
securities owned by the Portfolio at the time of redemption, the distribution of
cash pursuant to this plan may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Portfolio could be disadvantageous to a shareholder because of the sales
charge payable on such purchases and because redemptions are taxable events.
Therefore, a shareholder should not purchase Portfolio shares at the same time
as a Systematic Withdrawal Plan is in effect. The Fund reserves the right to
modify or discontinue the Systematic Withdrawal Plan of any shareholder on 30
days' prior written notice to such shareholder, or to discontinue the
availability of such plan in the future. The shareholder may terminate the plan
at any time by giving proper notice to Investor Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program is explained in
the Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investment will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic Accumulation
Program may be revoked by Investor Services without prior notice if any check is
not honored by your bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling Investor
Services or upon written notice to Investor Services which is received at least
five (5) business days prior to the due date of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed shares of a Portfolio
may, within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of that Portfolio or
in shares of any of the other John Hancock mutual funds, subject to the minimum
investment limit in any fund. Each of the Portfolios may modify or terminate the
reinvestment privilege at any time.
No sales charge will apply to shares of a Portfolio reinvested in any of the
other John Hancock funds which are otherwise subject to a sales charge. If a
CDSC was paid upon a redemption, you may reinvest in the same class of shares
from which the redemption was made within 120 days at net asset value, receive a
reinstatement of the CDSC previously charged and reinvested shares will continue
to be subject to the CDSC. For the purpose of calculating the CDSC, the holding
period of the shares acquired through reinvestment will include the holding
period of the redeemed shares.
A redemption or exchange of Portfolio shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of shares will be treated as described under the heading "Tax
Status."
TAX STATUS
Each Portfolio is treated as a separate entity for accounting and tax purposes,
qualified as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") and intends to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, each Portfolio will not be subject to Federal
income tax on taxable income (including gain from the disposition of portfolio
securities or the right to when-issued securities prior to issuance or the
lapse, exercise, delivery under or closing out of options and financial futures
contracts, income from repurchase agreements and other taxable securities,
income attributable to accrued market discount, and a portion of the discount
from certain stripped tax-exempt obligations or their coupons) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
Each Portfolio will be subject to a four percent non-deductible Federal excise
tax on certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. Each Portfolio intends under normal circumstances to avoid
liability for such tax by satisfying such distribution requirements.
Distributions of tax-exempt interest ("exempt-interest dividends") timely
designated as such by a Portfolio to its shareholders will be treated as
tax-exempt interest under the Code, provided that the Portfolio qualifies as a
regulated investment company and at least 50% of the value of its assets at the
end of each quarter of its taxable year is invested in obligations, the interest
on which is excluded from gross income under Section 103(a) of the Code.
Shareholders are required to report their receipt of tax-exempt interest,
including such distributions, on their Federal income tax returns.
Interest income from certain types of tax-exempt bonds that are private activity
bonds in which the Portfolios may invest is treated as an item of tax preference
for purposes of the Federal alternative minimum tax. To the extent that a
Portfolio invests in these tax-exempt bonds, shareholders will be required to
treat as an item of tax preference for Federal alternative minimum purposes that
part of the Portfolio's exempt-interest dividends which is derived from interest
on these tax-exempt bonds. Exempt-interest dividends derived from interest
income from all tax-exempt bonds are taken into account in determining the
alternative minimum tax liability, if any, of corporate shareholders of each
Portfolio.
The amount of realized capital gains, if any, in any given year will vary
depending upon the Adviser's current investment strategy and whether the Adviser
believes it to be in the best interest of the Portfolio to dispose of portfolio
securities and/or engage in options or futures transactions that will generate
capital gains. At the time of an investor's purchase of a Portfolio's shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Portfolio's holdings. Consequently, subsequent distributions
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions (or portions
thereof) in reality represent a return of a portion of the purchase price.
Upon a redemption of shares (including by exercise of the exchange privilege) a
shareholder will ordinarily realize a taxable gain or loss depending upon his
basis in his shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing shares of a Portfolio cannot be
taken into account for purposes of determining gain or loss on the redemption or
exchange of such shares within 90 days after their purchase to the extent shares
of the Portfolio or another John Hancock fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
This charge will result in an increase in the shareholder's tax basis in the
shares subsequently acquired. Also, any loss realized on a redemption or
exchange may be disallowed to the extent the shares disposed of are replaced
with other shares of the same Portfolio within a period of 61 days beginning 30
days before and ending 30 days after the shares are disposed of, such as may
occur when dividends are reinvested. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
Although its present intention is to distribute all net capital gains, if any,
each Portfolio reserves the right to retain and reinvest all or any portion of
the excess, as computed for Federal income tax purposes, of net long-term
capital gain over net short-term capital loss in any year. A Portfolio will not,
in any event, distribute net long-term capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior year capital losses, it would be subject to federal income
tax in the hands of the Portfolio. Each shareholder would be treated for federal
income tax purposes as if the Portfolio had distributed to him on the last day
of its taxable year his pro rata share of such excess, and he had paid his pro
rata share of the taxes paid by the Portfolio and reinvested the remainder in
the Portfolio. Accordingly, each shareholder would (a) include his pro rata
share of such excess as long-term capital gain income in his return for his
taxable year in which the last day of the Portfolio's taxable year falls, (b) be
entitled either to a tax credit on his return for, or to a refund of, his pro
rata share of the taxes paid by the Portfolio and (c) be entitled to increase
the adjusted tax basis for his shares in a Portfolio by the difference between
his pro rata share of each excess and his pro rata share of such taxes.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of a Portfolio will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by such Portfolio.
Pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of a Portfolio even though the borrowed funds may not be directly
traceable to the purchase of shares.
For Federal income tax purposes, each of the Portfolios is permitted to
carryforward a net capital loss in any year to offset its net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they would not result in
federal income tax liability to the Portfolio and, as noted above, would not be
distributed to shareholders. The Massachusetts Portfolio has realized capital
loss carryforwards of $398,976. Of this amount $2,465 expires August 31, 2002
and $396,511 expires August 31, 2003. The New York Portfolio has a realized
capital loss carryforward of $77,663 that expires August 31, 2003.
A Portfolio that invests in securities with original issue discount (or with
market discount if an election is made to include market discount in income
currently) must accrue income on such securities prior to the receipt of the
corresponding cash payments. Each Portfolio must distribute, at least annually,
all or substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, a Portfolio may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash to satisfy distribution requirements.
The Portfolios may invest in debt obligations that are in the lower rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Portfolios. Tax rules are not entirely clear about issues such as when the
Portfolios may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Portfolios, in the event they invest in such securities, in
order to ensure that they distribute sufficient income to preserve their status
as regulated investment companies and to avoid becoming subject to Federal
income or excise tax.
The options and futures transactions undertaken by a Portfolio produce taxable
capital gain or loss and may affect the character as long-term or short-term of
some capital gains and losses realized by the Portfolio. Also, the Portfolio's
losses on its transactions involving options and futures contracts and related
securities positions may be deferred rather than being taken into account
currently. Each Portfolio's options and futures contracts will generally be
required to be marked to market for tax purposes as of the close of its taxable
year, even if they have not been actually disposed of, and any gain or loss
recognized will generally be treated as 60% long-term and 40% short-term capital
gain or loss. Accordingly, the special tax rules applicable to options and
futures transactions may affect the amount, timing and character of each
Portfolio's gain or loss and hence of its distributions to shareholders.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
Dividends, capital gain distributions, and ownership of or gains realized on the
redemption (including an exchange) of Portfolio shares may also be subject to
state and local taxes. The discussion does not address special tax rules
applicable to certain types of investors, such as banks, insurance companies, or
tax-exempt entities. Shareholders should always consult their own tax advisers
as to the Federal, state or local tax consequences of ownership of shares of a
Portfolio in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
Portfolio investment is effectively connected will be subject to U.S. Federal
income tax treatment different from that described above. These investors may be
subject to non-resident alien withholding tax at the rate of 30% (or a lower
rate under an applicable tax treaty) on amounts treated as ordinary dividends
from a Portfolio and, unless an effective IRS Form W-8 or authorized substitute
is on file, to 31% backup withholding on certain other payments from a
Portfolio. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in a Portfolio.
The Portfolios are not subject to Massachusetts corporate excise or franchise
taxes. Provided that each Portfolio qualifies as a regulated investment company
under the Code, it will also not be required to pay any Massachusetts income
tax.
STATE INCOME TAX INFORMATION
MASSACHUSETTS TAXES
Massachusetts legislation enacted on December 9, 1994 (the "Act") substantially
changed the Massachusetts income tax treatment of capital gains realized by
persons subject to Massachusetts income taxation, effective for taxable years
beginning on or after January 1, 1996. Under the Act, long-term capital gains
from the sale of a capital asset will generally be taxed on a sliding scale at
rates ranging from 5% to 0%, with the applicable tax rate declining as the tax
holding period of the asset (beginning on the later of January 1, 1995 or the
date of actual acquisition) increases from more than one year to more than six
years. Massachusetts resident individuals, as well as estates or personal trusts
subject to Massachusetts income taxation, will be subject to this new tax
structure with respect to redemption, exchanges or other dispositions of their
shares of the Massachusetts Portfolio in their taxable years beginning after
1995, assuming that they hold their shares of the Massachusetts Portfolio as
capital assets for purposes of the Act. The Act does not address the
Massachusetts tax treatment of dividends paid by the Massachusetts. Portfolio
that are designated and treated as long-term capital gains for Federal income
tax purposes, and it is accordingly not clear how such dividends will be treated
for Massachusetts tax purposes for taxable years beginning after 1995.
NEW YORK TAXES
New York State and New York City personal income taxes are imposed on "New York
taxable income," which is defined, in the case of New York resident individuals,
estates and trusts as "New York adjusted gross income" minus the New York
deductions and New York exemptions. "New York adjusted gross income", in the
case of a New York resident individual, estate or trust, is federal adjusted
gross income with certain modifications Because distributions that qualify as
exempt-interest dividends under IRC ss. 852(b) (5) will be excluded from Federal
gross income and adjusted gross income, such distributions will also be excluded
from New York adjusted gross income, unless specifically modified by New York
law.
New York law requires that New York resident individuals, estates and trusts add
certain items to their federal adjusted gross income. One such modification is
the addition, to the extent not properly includible in Federal adjusted gross
income, of interest income on obligations of any state (or political subdivision
of any state) other than New York and its political subdivisions.
Distributions that are taxable under the IRC, including distributions properly
designated as capital gain dividends pursuant to IRC ss.852(b)(3) and
distributions derived from interest on U.S. Government obligations, will be
includible in New York adjusted gross income, as there is no provision in the
New York tax law that permits their subtraction from federal adjusted gross
income. New York tax law does not currently contain any special provisions that
would impose differing rates of tax on capital gain and ordinary income in the
hands of individual taxpayers.
Under New York tax law, New York resident individuals, estates and trusts are
subject to a minimum income tax (sometimes referred to as the "New York
alternate minimum tax") at the rate of six percent of "New York minimum taxable
income." This tax is imposed in addition to the regular personal income tax
imposed by the State of New York. For purposes of this minimum tax, New York
minimum taxable income is, prior to certain reductions, equal to the sum of the
federal items of tax preference defined in IRC ss.57, with certain modifications
and adjustments, but excludes from New York minimum taxable income "the federal
item of tax preference with respect to tax-exempt interest". Distributions by
the portfolio of exempt-interest dividends (including any portion of such
dividends derived from interest on private activity bonds, the interest on which
is a tax preference item enumerated in IRC ss.57) thus will not be included in
income subject to the New York State or New York City minimum income tax on New
York resident individuals, estates and trusts.
Distributions that are properly designated as exempt-interest dividends under
IRC ss.852 (b) (5) made by the Portfolio to corporations, will be included in
entire net income in the computation of the New York State franchise tax and New
York City business taxes and shares of the Portfolio will be included in
investment capital for purposes of these taxes. If such distributions increase a
corporate shareholder's liability, they will also result in an increased
liability for tax surcharges. However, distributions that are taxable under the
IRC, with the possible exception of distributions properly treated as capital
gain dividends pursuant to IRC ss.852(b) (3), may be eligible for a 50% dividend
subtraction.
Under New York tax law, a portion of interest on indebtedness incurred or
continued to purchase or carry shares of an investment company paying dividends
which are exempt from the New York State and New York City personal income
taxes, such as the New York Portfolio, will not be deductible by the investor
for New York State and New York City personal income tax purposes.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of Portfolio shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices. Short-term debt investments which have a remaining maturity
of 60 days or less are generally valued at amortized cost which approximates
market value. If market quotations are not readily available or if in the
opinion of the Adviser any quotation or price is not representative of true
market value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees.
No Portfolio will price its securities on the following national holidays: New
Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day; Thanksgiving Day; and Christmas Day.
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Fund are responsible for the management and supervision of
the Portfolios. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, without
par value, in an unlimited number of series. Each Portfolio share represents an
equal proportionate interest in the Portfolio with each other share of that
Portfolio. In the event of liquidation of a Portfolio, shareholders are entitled
to share pro rata in the net assets of the Fund attributable to such Portfolio
and available for the distribution to such holders. Shares have no preemptive or
conversion rights. Shares are fully paid and nonassessable by the Fund.
The Trustees have to date authorized the issuance of two series of shares (the
Massachusetts Portfolio and the New York Portfolio) and have no current
intention to create additional series. The Trustees, however, may authorize the
creation of additional series of shares with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. The
proceeds of any additional series would be invested in separate, independently
managed portfolios with distinct investment objectives, policies and
restrictions, and share purchase, redemption and net asset valuation procedures.
All consideration received by the Fund for shares of any additional series, and
all assets in which such consideration is invested, would belong to that series
(subject only to the rights of creditors of such series) and would be subject to
the liabilities related thereto. Pursuant to the Investment Company Act,
shareholders of any additional series would normally have to approve the
adoption of any management contract or distribution plan relating to such series
and any changes in the fundamental investment policies related thereto.
The shareholders of the Fund are entitled to a full vote for each full share
held and to a fractional vote for fractional shares. The Trustees themselves
have the power to alter the number and the terms of office of the Trustees, to
lengthen their own terms, or to make their terms of unlimited duration, subject
to certain removal procedures, and appoint their own successors, provided that
at least a majority of Trustees have been elected by the shareholders. The
voting rights of shareholders are not cumulative so that holders of more than
50% of the shares voting can, if they choose, elect all Trustees being selected
while holders of the remaining shares would be unable to elect any Trustees.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Fund's outstanding shares and the Trustees shall promptly call
a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Fund. Shareholders
may, under certain circumstances, communicate with other shareholders in
connection with requesting a special meeting of shareholders. However, at any
time that less than a majority of the Trustees holding office were elected by
the shareholders, the Trustees will call a special meeting of shareholders for
the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any Fund shareholder held
personally liable by reason of being or having been a shareholder. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1995, the Portfolios' annualized yield
and tax-equivalent yields at the maximum tax rates were 5.07% and 9.54% for
Massachusetts and 5.04% and 9.06% for New York respectively. The average annual
total returns of the Portfolios for the 1 year, 5 years and the life-of-fund
periods ended August 31, 1995 were respectively 2.85%, 7.82% and 8.10% for
Massachusetts and 2.38%, 7.81% and 8.24% for New York.
Each Portfolio's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
[GRAPHIC OMITTED]
Where:
a = dividends and interest earned during the period.
b = expenses accrued during the period (net of fee reductions and expense
limitation payments, if any).
c = the average daily number of fund shares outstanding during the period that
would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Each Portfolio's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 years and life-of-fund period that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
[GRAPHIC OMITTED]
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1 year, 5 years and life-of-fund periods.
This calculation assumes the maximum sales charge of 4.5% is included in the
initial investment and also assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period.
In addition to average annual total returns, each Portfolio may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Portfolio's 4.5% sales
charge into account. Excluding the Portfolio's sales charge from a total return
calculation produces a higher total return figure.
The Portfolios may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Portfolio which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Portfolio that is not tax-exempt.
From time to time, in reports and promotional literature, a Portfolio's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes as well as the Russell and Wilshire Indices. Comparisons may also be
made to bank certificates of deposit, ("CDs") which differ from mutual funds,
such as a Portfolio, in several ways. The interest rate established by the
sponsoring bank is fixed for the term of a CD, there are penalties for early
withdrawal from CDs, and the principal on a CD is insured.
PERFORMANCE RANKINGS AND RATINGS REPORTED PERIODICALLY IN NATIONAL FINANCIAL
PUBLICATIONS SUCH AS MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S, BARRON'S, ETC., AS WELL
AS LIPPER, MAY BE UTILIZED.
The performance of a Portfolio is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of a
Portfolio for any period in the future. The performance of a Portfolio is a
function of many factors including its earnings, expenses and number of
outstanding shares. Fluctuating market conditions; purchases, sales and
maturities of portfolio securities; sales and redemptions of shares of
beneficial interest; and changes in operating expenses are all examples of items
that can increase or decrease the Portfolio's performance.
BROKERAGE ALLOCATION
For each Portfolio decisions concerning the purchase and sale of securities held
by the Portfolio and the allocation of brokerage commissions are made by the
officers of the Fund pursuant to recommendations made by an investment committee
of the Adviser, which consists of officers and directors of the Adviser and
affiliates, and officers and Trustees who are interested persons of the Fund.
For each Portfolio, orders for purchases and sales of securities are placed in a
manner which, in the opinion of the officers of the Fund, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commission paid
by the issuer and transactions with dealers serving as market maker reflect a
"spread." Debt securities are generally traded on a net basis through dealers
acting for their own account as principals and not as brokers; no brokerage
commissions are payable on such transactions.
The primary policy of each Portfolio is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of a Portfolio as a factor in the selection of
broker-dealers to execute the Portfolios' portfolio transactions.
To the extent consistent with the foregoing, the Portfolios will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Portfolios, and their value and expected contribution to the performance of the
Portfolios. It is not possible to place a dollar value on information and
services to be received from brokers and dealers, since it is only supplementary
to the research efforts of the Adviser. The receipt of research information is
not expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and,
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Portfolios will make no commitment to allocate
portfolio transactions upon any prescribed basis. While the Fund's officers will
be primarily responsible for the allocation of the Fund's brokerage business,
the policies in this regard must be consistent with the foregoing and will at
all times be subject to review by the Trustees. For the years ended on August
31, 1993, 1994 and 1995 the Fund paid no brokerage commissions. For the year
ended August 31, 1995, the Fund paid brokerage commissions of $575.00.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Portfolios may pay to a broker which provides brokerage and research services to
the Portfolios an amount of disclosed commission in excess of the commission
which another broker would have charged for effecting that transaction. This
practice is subject to a good faith determination by the Trustees that such
price is reasonable in light of the services provided and to such policies as
the Trustees may adopt from time to time. During the fiscal year ended August
31, 1995, each Portfolio did not pay commissions as compensation to any brokers
for research services such as industry, economic and company reviews and
evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), a broker-dealer
and John Hancock Freedom Securities Corporation and its two broker-dealer
subsidiaries, Tucker Anthony Incorporated and Sutro & Company, Inc., ("Sutro")
each an "Affiliated Broker"). Pursuant to procedures determined by the Trustees
and consistent with the above policy of obtaining best net results, each
Portfolio may execute portfolio transactions with or through Affiliated Brokers.
During the year ending August 31, 1995, no Portfolio executed any portfolio
transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Portfolios on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Trustee believe to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if the Fund would have to pay a commission rate less favorable
than the Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers except for accounts for
which the Affiliated Broker acts as clearing broker and comparable to the Fund
as determined by a majority of the Trustees who are not interested persons (as
defined in the Investment Company Act) of the Fund, the Adviser or the
Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated
Brokers, has, as an investment adviser to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Brokers as a basis for negotiating commission at a rate higher than
that determined in accordance with the above criteria.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation ("Investor Services"), P.O. Box 9116,
Boston, MA 02205-9116, a wholly-owned indirect subsidiary of the Life Company,
is the transfer and dividend paying agent for the Fund. The Fund pays an annual
fee of $19.00 for each shareholder, plus certain out-of-pocket expenses. These
expenses are aggregated and charged to the Fund on the basis of the relative net
asset value.
CUSTODY OF PORTFOLIOS
Securities of each Portfolio are held pursuant to a custodian agreement between
the Fund and Investors Bank & Trust Company, 24 Federal Street, Boston, MA
02110. Under the custodian agreement, Investors Bank & Trust Company performs
custody, portfolio and fund accounting services.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110. Price Waterhouse LLP audits and renders an
opinion on each Portfolio's annual financial statements and reviews each
Portfolio's annual Federal income tax return.
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CALIFORNIA MASSACHUSETTS NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $43,938,622, $50,866,573
and $52,675,229, respectively) ..................................... $ 45,753,821 $ 52,827,111 $ 54,722,577
Joint repurchase agreement (cost - none, none and $1,512,000,
respectively) ...................................................... -- -- 1,512,000
Corporate savings account ........................................... -- -- 660
------------ ------------ ------------
45,753,821 52,827,111 56,235,237
Cash ................................................................. 1,809,147 815,155 --
Receivable for shares sold ........................................... 46,258 -- --
Receivable for investments sold ...................................... 45,286 -- 1,724,216
Interest receivable .................................................. 764,158 821,711 757,682
Receivable from John Hancock Advisers, Inc. - Note B ................. 15,662 14,199 19,319
------------ ------------ ------------
Total Assets ....................................... 48,434,332 54,478,176 58,736,454
----------------------------------------------------------------------------------------------------------------
LIABILITIES:
Dividend payable ..................................................... 6,286 8,342 8,286
Payable for investments purchased .................................... 788,832 -- 2,921,276
Payable to John Hancock Advisers, Inc. and affiliates - Note B ....... 21,849 28,082 29,692
Accounts payable and accrued expenses ................................ 68,557 26,057 24,233
------------ ------------ ------------
Total Liabilities .................................. 885,524 62,481 2,983,487
----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital paid-in ...................................................... 45,776,502 53,147,400 54,062,322
Accumulated net realized loss on investments and financial
futures contracts ................................................... (45,654) (694,237) (364,795)
Net unrealized appreciation of investments ........................... 1,815,199 1,960,538 2,047,348
Undistributed net investment income .................................. 2,761 1,994 8,092
------------ ------------ ------------
Net Assets ......................................... $ 47,548,808 $ 54,415,695 $ 55,752,967
================================================================================================================
NET ASSET VALUE PER SHARE ($NAV)
(based on 4,089,010, 4,627,583 and 4,694,309 shares,
respectively, of beneficial interest outstanding -
unlimited number of shares authorized with no par value) ............ $ 11.63 $ 11.76 $ 11.88
====================================================================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
($NAV x 104.71%) ..................................................... $ 12.18 $ 12.31 $ 12.44
====================================================================================================================================
</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 ASSETS AND LIABILITIES IS THE PORTFOLIO'S BALANCE SHEET AND
SHOWS THE VALUE OF WHAT THE PORTFOLIO OWNS, IS DUE AND OWES AS OF AUGUST 31,
1995. YOU'LL ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER
SHARE AS OF THAT DATE.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended August 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA MASSACHUSETTS NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest ................................................................... $ 2,967,124 $ 3,386,143 $ 3,447,241
----------- ----------- -----------
Expenses:
Investment management fee - Note B ........................................ 236,251 265,892 270,417
Distribution/service fee - Note B ......................................... 141,751 159,535 162,250
Transfer agent fee - Note B ............................................... 67,396 84,239 96,927
Custodian fee ............................................................. 52,828 54,714 53,387
Auditing fee .............................................................. 20,435 20,435 20,435
Printing .................................................................. 8,160 7,938 7,298
Trustees' fees ............................................................ 5,646 6,433 6,587
Legal fees ................................................................ 4,863 1,231 1,325
Miscellaneous ............................................................. 3,769 3,869 3,522
Registration and filing fees .............................................. 2,307 4,747 2,267
----------- ----------- -----------
Total Expenses ........................................... 543,406 609,033 624,415
Less Expense Reimbursements and Reductions - Note B ...... (212,654) (236,784) (245,832)
----------- ----------- -----------
Net Expenses ............................................. 330,752 372,249 378,583
----------------------------------------------------------------------------------------------------------------
Net Investment Income .................................... 2,636,372 3,013,894 3,068,658
----------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FINANCIAL
FUTURES CONTRACTS:
Net realized gain (loss) on investments sold ............................... 258,603 (218,685) 9,105
Net realized loss on financial futures contracts ........................... (224,847) (215,439) (247,549)
Change in net unrealized appreciation/depreciation of investments .......... 970,039 1,280,641 848,255
Change in net unrealized appreciation/depreciation of financial futures
contracts ................................................................. 21,406 21,406 21,406
----------- ----------- -----------
Net Realized and Unrealized Gain on Investments and
Financial Futures Contracts ............................ 1,025,201 867,923 631,217
----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations ..... $ 3,661,573 $ 3,881,817 $ 3,699,875
================================================================================================================
</TABLE>
THE STATEMENT OF OPERATIONS SUMMARIZES FOR EACH OF THE PORTFOLIOS, THE
INVESTMENT INCOME EARNED AND EXPENSES INCURRED IN OPERATING THE PORTFOLIO. IT
ALSO SHOWS NET GAINS (LOSSES) FOR THE PERIOD STATED.
THE STATEMENT OF CHANGES IN NET ASSETS SHOWS HOW THE VALUE OF NET ASSETS FOR
EACH PORTFOLIO OF THE FUND HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD. THE
DIFFERENCE REFLECTS NET INVESTMENT INCOME, ANY INVESTMENT GAINS AND LOSSES,
DISTRIBUTIONS PAID TO SHAREHOLDERS, AND ANY INCREASE OR DECREASE IN MONEY
SHAREHOLDERS INVESTED IN EACH PORTFOLIO. THE FOOTNOTES ILLUSTRATE THE NUMBER OF
PORTFOLIO SHARES SOLD, REINVESTED AND REDEEMED DURING THE LAST TWO PERIODS,
ALONG WITH THE PER SHARE AMOUNT OF DISTRIBUTIONS MADE TO SHAREHOLDERS OF EACH
PORTFOLIO FOR THE PERIOD INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA PORTFOLIO MASSACHUSETTS PORTFOLIO
--------------------------- ---------------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
--------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income ............................... $ 2,636,372 $ 2,521,862 $ 3,013,894 $ 2,763,249
Net realized gain (loss) on investments sold and
financial futures contracts ........................ 33,756 49,982 (434,124) (258,100)
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts ..... 991,445 (3,123,300) 1,302,047 (3,052,218)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting
from Operations .................................... 3,661,573 (551,456) 3,881,817 (547,069)
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS: *
Dividends from net investment income ................ (2,636,372) (2,521,862) (3,013,894) (2,763,249)
Distributions from net realized gain on
investments sold and financial futures contracts ... -- (881,280) -- (524,451)
------------ ------------ ------------ ------------
Total Distributions to Shareholders ................ (2,636,372) (3,403,142) (3,013,894) (3,287,700)
------------ ------------ ------------ ------------
FROM PORTFOLIO SHARE TRANSACTIONS: **
Shares sold ......................................... 4,671,968 11,239,290 6,835,830 15,050,941
Shares issued to shareholders in reinvestment
of distributions ................................... 1,753,168 2,175,583 2,120,129 2,294,219
------------ ------------ ------------ ------------
6,425,136 13,414,873 8,955,959 17,345,160
Less shares repurchased ............................. (8,943,159) (8,042,576) (9,530,624) (9,407,294)
------------ ------------ ------------ ------------
Net Capital Increase (Decrease) ..................... (2,518,023) 5,372,297 (574,665) 7,937,866
------------ ------------ ------------ ------------
NET ASSETS:
Beginning of period ................................. 49,041,630 47,623,931 54,122,437 50,019,340
------------ ------------ ------------ ------------
End of period (including undistributed net investment
income of $2,761, none, $1,994, none, $8,092
and none, respectively) ............................ $ 47,548,808 $ 49,041,630 $ 54,415,695 $ 54,122,437
=========================================================
* DISTRIBUTIONS TO SHAREHOLDERS:
Per share dividends from net investment income ...... $ 0.6283 $ 0.6241 $ 0.6469 $ 0.6315
------------ ------------ ------------ ------------
Per share distributions from net realized gain on
investments sold and financial futures contracts ... -- $ 0.2232 -- $ 0.1246
------------ ------------ ------------ ------------
** ANALYSIS OF PORTFOLIO SHARE TRANSACTIONS:
Shares sold ......................................... 414,708 956,177 595,309 1,234,833
Shares issued to shareholders in reinvestment
of distributions ................................... 155,996 183,733 186,027 216,441
------------ ------------ ------------ ------------
570,704 1,139,910 781,336 1,451,274
Less shares repurchased ............................. (791,874) (683,714) (836,966) (791,757)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. (221,170) 456,196 (55,630) 659,517
=========================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO
---------------------------
YEAR ENDED AUGUST 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income ............................... $ 3,068,658 $ 2,906,252
Net realized gain (loss) on investments sold and
financial futures contracts ........................ (238,444) (40,700)
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts ..... 869,661 (3,532,063)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting
from Operations .................................... 3,699,875 (666,511)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS: *
Dividends from net investment income ................ (3,068,658) (2,906,252)
Distributions from net realized gain on
investments sold and financial futures contracts ... -- (580,857)
------------ ------------
Total Distributions to Shareholders ................ (3,068,658) (3,487,109)
------------ ------------
FROM PORTFOLIO SHARE TRANSACTIONS: **
Shares sold ......................................... 7,226,005 13,602,510
Shares issued to shareholders in reinvestment
of distributions ................................... 2,366,589 2,650,147
------------ ------------
9,592,594 16,252,657
Less shares repurchased ............................. (10,161,142) (8,852,991)
------------ ------------
Net Capital Increase (Decrease) ..................... (568,548) 7,399,666
------------ ------------
NET ASSETS:
Beginning of period ................................. 55,690,298 52,444,252
------------ ------------
End of period (including undistributed net investment
income of $2,761, none, $1,994, none, $8,092
and none, respectively) ............................ $ 55,752,967 $ 55,690,298
===========================
* DISTRIBUTIONS TO SHAREHOLDERS:
Per share dividends from net investment income ...... $ 0.6533 $ 0.6421
------------ ------------
Per share distributions from net realized gain on
investments sold and financial futures contracts ... -- $ 0.1319
------------ ------------
** ANALYSIS OF PORTFOLIO SHARE TRANSACTIONS:
Shares sold ......................................... 628,844 1,112,508
Shares issued to shareholders in reinvestment
of distributions ................................... 205,702 217,546
------------ ------------
834,546 1,330,054
Less shares repurchased ............................. (889,508) (732,616)
------------ ------------
Net increase (decrease) ............................. (54,962) 597,438
===========================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- California Portfolio
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ........ $ 11.38 $ 12.36 $ 11.68 $ 11.25 $ 10.72
---------- ---------- ---------- ---------- ----------
Net Investment Income ....................... 0.63 0.62 0.67 0.70 0.70
Net Realized and Unrealized Gain (Loss)
on Investments and Financial
Futures Contracts .......................... 0.25 (0.76) 0.82 0.43 0.53
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ......... 0.88 (0.14) 1.49 1.13 1.23
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ....... (0.63) (0.62) (0.67) (0.70) (0.70)
Distributions from Net Realized Gain on
Investments Sold .......................... -- (0.22) (0.14) -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ...................... (0.63) (0.84) (0.81) (0.70) (0.70)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period .............. $ 11.63 $ 11.38 $ 12.36 $ 11.68 $ 11.25
========== ========== ========== ========== ==========
Total Investment Return at Net Asset Value .. 8.06% (1.13%) 13.36% 10.34% 11.83%
Total Adjusted Investment Return at Net
Asset Value (a)(b) ......................... 7.61% (1.69%) 12.48% 9.30% 10.71%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ... $ 47,549 $ 49,042 $ 47,624 $ 33,896 $ 25,914
Ratio of Expenses to Average Net Assets ..... 0.70% 0.70% 0.67% 0.60% 0.60%
Ratio of Adjusted Expenses to Average Net
Assets (a) ................................. 1.15% 1.26% 1.55% 1.64% 1.72%
Ratio of Net Investment Income to Average Net
Assets ..................................... 5.58% 5.27% 5.62% 6.09% 6.35%
Ratio of Adjusted Net Investment Income to
Average Net Assets (a) ..................... 5.13% 4.71% 4.74% 5.05% 5.23%
Portfolio Turnover Rate ..................... 35% 38% 93% 50% 7%
Expense Reimbursement Per Share ............. $ 0.05 $ 0.07 $ 0.10 $ 0.12 $ 0.12
</TABLE>
(a) On an unreimbursed basis without expense reduction.
(b) Unaudited.
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: THE NET INVESTMENT INCOME, DIVIDENDS,
GAINS (LOSSES) AND TOTAL INVESTMENT RETURN OF THE PORTFOLIO. IT SHOWS HOW THE
PORTFOLIO'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.
12
<PAGE>
Financial Statements
John Hancock Funds - Tax-Exempt Series Fund -- Massachusetts Portfolio
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ..... $ 11.56 $ 12.43 $ 11.75 $ 11.15 $ 10.63
---------- ---------- ---------- ---------- ----------
Net Investment Income .................... 0.65 0.63 0.67 0.71 0.73
Net Realized and Unrealized Gain (Loss)
on Investments and Financial Futures
Contracts ............................... 0.20 (0.75) 0.82 0.60 0.53
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ...... 0.85 (0.12) 1.49 1.31 1.26
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income .... (0.65) (0.63) (0.67) (0.71) (0.73)
Distributions from Net Realized Gain on
Investments Sold ....................... -- (0.12) (0.14) -- (0.01)
---------- ---------- ---------- ---------- ----------
Total Distributions ................... (0.65) (0.75) (0.81) (0.71) (0.74)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ........... $ 11.76 $ 11.56 $ 12.43 $ 11.75 $ 11.15
========== ========== ========== ========== ==========
Total Investment Return at Net
Asset Value ............................. 7.66% (0.97%) 13.29% 12.11% 12.10%
Total Adjusted Investment Return at Net
Asset Value (a)(b) ...................... 7.21% (1.50%) 12.38% 10.93% 10.66%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) ................................ $ 54,416 $ 54,122 $ 50,019 $ 29,113 $ 15,015
Ratio of Expenses to Average Net Assets .. 0.70% 0.70% 0.67% 0.60% 0.60%
Ratio of Adjusted Expenses to Average Net
Assets (a) .............................. 1.15% 1.23% 1.58% 1.78% 2.04%
Ratio of Net Investment Income to Average
Net Assets .............................. 5.67% 5.28% 5.61% 6.18% 6.64%
Ratio of Adjusted Net Investment Income to
Average Net Assets (a) .................. 5.22% 4.75% 4.70% 5.00% 5.20%
Portfolio Turnover Rate .................. 24% 29% 79% 56% 29%
Expense Reimbursement Per Share .......... $ 0.05 $ 0.06 $ 0.11 $ 0.14 $ 0.16
</TABLE>
(a) On an unreimbursed basis without expense reduction.
(b) Unaudited.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- New York Portfolio
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period .......... $ 11.73 $ 12.63 $ 11.90 $ 11.29 $ 10.74
---------- ---------- ---------- ---------- ----------
Net Investment Income ......................... 0.65 0.64 0.68 0.72 0.72
Net Realized and Unrealized Gain (Loss)
on Investments and Financial Futures
Contracts .................................... 0.15 (0.77) 0.87 0.63 0.55
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ........... 0.80 (0.13) 1.55 1.35 1.27
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ......... (0.65) (0.64) (0.68) (0.72) (0.72)
Distributions from Net Realized Gain on
Investments Sold ............................ -- (0.13) (0.14) (0.02) --
---------- ---------- ---------- ---------- ----------
Total Distributions ........................ (0.65) (0.77) (0.82) (0.74) (0.72)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ................ $ 11.88 $ 11.73 $ 12.63 $ 11.90 $ 11.29
========== ========== ========== ========== ==========
Total Investment Return at Net Asset Value .... 7.19% (1.05%) 13.70% 12.17% 12.24%
Total Adjusted Investment Return at Net Asset
Value (a)(b) ................................. 6.74% (1.58%) 12.83% 11.09% 11.02%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ..... $ 55,753 $ 55,690 $ 52,444 $ 33,806 $ 20,878
Ratio of Expenses to Average Net Assets ....... 0.70% 0.70% 0.67% 0.60% 0.60%
Ratio of Adjusted Expenses to Average Net
Assets (a) ................................... 1.15% 1.23% 1.54% 1.68% 1.82%
Ratio of Net Investment Income to Average
Net Assets ................................... 5.67% 5.28% 5.63% 6.22% 6.57%
Ratio of Adjusted Net Investment Income to
Average Net Assets (a) ....................... 5.22% 4.75% 4.76% 5.14% 5.35%
Portfolio Turnover Rate ....................... 70% 23% 56% 48% 12%
Expense Reimbursement Per Share ............... $ 0.05 $ 0.06 $ 0.11 $ 0.13 $ 0.13
</TABLE>
(a) On an unreimbursed basis without expense reduction.
(b) Unaudited.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- California Portfolio
SCHEDULE OF INVESTMENTS
August 31, 1995
- --------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY EACH
PORTFOLIO OF THE TAX-EXEMPT SERIES FUND ON AUGUST 31, 1995. EACH SCHEDULE
CONSISTS OF ONE MAIN CATEGORY: TAX-EXEMPT LONG-TERM BONDS. THE TAX-EXEMPT BONDS
ARE FURTHER BROKEN DOWN BY STATE. UNDER EACH STATE IS A LIST OF THE SECURITIES
OWNED BY THE PORTFOLIO. 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
CALIFORNIA (95.15%)
Alameda, County of,
Cert of Part 1992 Cap Proj ......................... 6.750% 06-01-16 A $ 500 $ 517,945 6.52%
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj .......... 6.125 06-01-09 Baa** 1,000 1,000,970 6.12
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc ........... 6.950 10-01-21 A 250 262,405 6.62
Ins Hosp Rev Ser 1990 Children's Hosp San Diego .... 6.500 07-01-20 AAA 500 515,485 6.30
Rev 1990 Ser A Kaiser Permanente ................... 7.000 12-01-10 AA 600 645,948 6.50
Rev Ser 1994A Scripps Research Institute ........... 6.300 07-01-09 A** 500 512,170 6.15
Sec Rev 1991 Ser Hosp of the Good Samaritan ........ 7.000 09-01-21 A- 250 258,013 6.78
California Housing Finance Agency,
Home Mtg Rev 1986 Ser A ............................ 8.100 08-01-16 AA- 75 78,141 7.77
Home Mtg Rev 1988 Ser B ............................ 8.600 08-01-19 AA- 40 42,378 8.12
Home Mtg Rev 1988 Ser D ............................ 8.000 08-01-19 AA- 90 96,407 7.47
Home Mtg Rev 1989 Ser A ............................ 7.625 08-01-09 AA- 35 37,259 7.16
Home Mtg Rev 1989 Ser B ............................ 8.000 08-01-29 AA- 100 106,626 7.50
Home Mtg Rev 1989 Ser D ............................ 7.500 08-01-29 AA- 150 157,482 7.14
Home Mtg Rev 1990 Ser D ............................ 7.875 08-01-31 AA- 15 15,658 7.54
Home Mtg Rev 1991 Ser A ............................ 7.375 08-01-17 AA- 155 165,707 6.90
Home Mtg Rev 1991 Ser C ............................ 7.450 08-01-11 AA- 65 69,340 6.98
Home Mtg Rev 1994 Ser C ............................ 6.650 08-01-14 AA- 1,000 1,029,640 6.46
Hsg Rev 1991 Ser E ................................. 7.000 08-01-26 AAA 525 549,024 6.69
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co.. 6.900 12-01-17 A+ 500 523,580 6.59
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co... 6.625 06-01-09 A 500 518,560 6.39
California State Public Works Board,
Lease Rev 1994 Ser A Depart of Corrections
Calif State Prison-Monterey County (Soledad II)... 6.875 11-01-14 A- *500 531,825 6.46
Lease Rev Ref Ser A Various Univ Proj .............. 5.500 06-01-21 A- *1,250 1,123,250 6.12
Campbell, City of,
1991 Cert of Part Civic Center Proj ................ 6.750 10-01-17 A- 155 176,271 5.94
1991 Cert of Part Civic Center Proj ................ 6.750 10-01-17 A- 1,565 1,611,950 6.55
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- California Portfolio
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING*** OMITTED) VALUE ARKET+
- -------------------------- -------- -------- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No. 1 Redevel Proj ......................... 6.375% 10-01-12 BBB+ $ 500 $ 500,810 6.36%
Tax Alloc Ser 1993B Area No. 1 Redevel Proj ........................ 6.000 10-01-16 BBB+ 500 467,685 6.41
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj ............................. 7.350 08-01-20 A** 200 227,618 6.46
Central California Joint Powers Health Financing Auth,
Cert of Part Ser 1993 Community Hosp of Central Calif Proj ......... 5.250 02-01-13 A** 750 671,040 5.87
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992 ......................... 6.600 10-01-22 AAA 500 525,015 6.29
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj 1993 Ser ................. 6.100 07-01-13 BBB- 2,300 2,231,713 6.29
Cogeneration Proj Rev Carson Ice-Gen Proj 1993 Ser ................. 6.200 07-01-20 BBB- 1,000 957,230 6.48
Contra Costa Water District,
Wtr Treatment Rev Ser E ............................................ 6.250 10-01-12 AAA 1,000 1,070,820 5.84
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A ........................................ 7.100 08-01-21 NR 220 220,504 7.08
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj ............... 8.000 07-01-10 AAA 300 351,753 6.82
Fairfield Public Financing Auth,
1995 Rev Ser A Pennsylvania Ave Storm Drainage Proj ................ 6.500 08-01-21 A- *1,085 1,060,989 6.65
Fontana Public Financing Auth,
Sub Lien Tax Alloc Rev 1991 Ser A North Fontana Redevel Proj ....... 7.750 12-01-20 BBB 195 230,597 6.55
Tax Alloc Rev Ser 1990 Ser A North Fontana Redevel Proj ............ 7.250 09-01-20 A 325 343,577 6.86
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Current Int Ser 1995A ....................... 6.500 01-01-32 BBB- *1,490 1,464,327 6.61
Toll Rd Rev Fixed Rate Current Int Ser 1995A ....................... 6.000 01-01-34 BBB- *1,000 911,380 6.58
Fresno, City of,
Hlth Facil Rev Ser 1991 Saint Agnes Medical Center ................. 6.625 06-01-21 AA- 250 258,082 6.42
Los Angeles City Department of Water and Power,
Elec Plant Ref Rev Second Iss of 1993 .............................. 5.400 11-15-12 AA- 1,000 932,000 5.79
Los Angeles County Health Facilities Auth,
Lease Rev Ref Olive View Medical Center Proj ....................... 7.500 03-01-08 NR 450 493,119 6.84
Metropolitan Water District,
Waterworks Ref Rev Iss of 1986 ...................................... 6.750 06-01-22 AA+ 155 159,955 6.54
Wtr Rev Iss of 1991 ................................................. 6.625 07-01-12 AA 750 796,665 6.24
Moreno Valley, City of,
Cert of Part Ser 1995 City Hall Proj ............................... 6.500 11-01-16 Baa1** *1,500 1,502,880 6.49
Mount Diablo Hospital District,
Hosp Rev Ser A ..................................................... 6.000 12-01-05 AAA 1,640 1,756,538 5.60
Mountain View City Capital Improvements Financing Auth,
1992 Rev City Hall/Community Theatre Complex & Shoreline Regional Park
Community Tax Alloc Refinancing .................................. 6.500 08-01-16 AAA 600 622,854 6.26
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- California Portfolio
<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)
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj .......................... 7.000% 05-01-13 AAA $ 100 $ 115,259 6.07%
Rev 1992 Ser A Calif-Oregon Transm Proj .......................... 6.500 05-01-16 AAA 1,000 1,043,580 6.23
Oakland, Port of,
Port Rev Ser E ................................................... 6.400 11-01-07 AAA 1,000 1,068,480 5.99
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj ........... 6.800 01-01-19 A+ 500 509,895 6.67
Orange, County of,
Ser A of 1990 Spec Tax of Community Facil Dist No. 87-3
Mission Viejo .................................................. 7.800 08-15-15 NR 350 405,549 6.73
Ser A of 1992 Spec Tax of Community Facil Dist No. 88-1
Aliso Viejo .................................................... 7.350 08-15-18 AAA 1,000 1,179,940 6.23
Pasadena, City of,
1993 Ref Cert of Part Old Pasadena Parking Facil Proj ............ 6.250 01-01-18 A+ 1,000 1,031,670 6.06
Rancho Mirage, City of, Joint Powers Financing Auth,
Civic Center Rev Ref Ser 1991A ................................... 7.500 04-01-17 BBB 195 225,580 6.48
Civic Center Rev Unref Ser 1991A ................................. 7.500 04-01-17 BBB 55 58,112 7.10
Riverside County Asset Leasing Corp,
Leasehold Rev 1993 Ser A County of Riverside Hosp Proj ........... 6.500 06-01-12 A 1,000 1,028,750 6.32
Sacramento City Financing Auth,
Lease Rev Ref Ser A .............................................. 5.375 11-01-14 AAA 500 475,565 5.65
San Bernardino, County of,
Cert of Part Medical Center Fin Proj ............................. 5.500 08-01-17 A- *1,000 885,010 6.21
Cert of Part Ser B Cap Facil Proj ................................ 6.875 08-01-24 AAA 350 407,361 5.91
Trans Auth Sales Tax Rev Ser A ................................... 5.400 03-01-10 AAA 1,000 972,580 5.55
San Diego County Regional Transportation Commission,
Sales Tax Rev 1991 Ser A ......................................... 7.000 04-01-06 AA- 90 97,484 6.46
San Diego County Water Auth,
Wtr Rev Cert of Part Reg ......................................... 5.681 04-22-09 AAA *800 803,712 5.65
San Diego, City of,
Ind'l Dev Rev 1986 Ser A San Diego Gas & Elec Co. ................ 7.625 07-01-21 A+ 300 312,126 7.33
San Francisco State Building Auth,
Lease Ref Rev 1993 Ser A Dept of Gen Serv ........................ 5.000 10-01-13 A- 2,245 1,974,365 5.69
San Jose Financing Auth,
Reassessment Rev 1994 Ser C ...................................... 6.750 09-02-11 NR 980 1,001,423 6.61
San Jose, City of,
1986 Cert of Part Convention Center Proj ......................... 7.875 09-01-10 NR 300 317,691 7.44
San Mateo County Joint Powers Financing Auth,
Lease Rev 1994 Ser A San Mateo County Hlth Center ................ 6.125 07-15-14 AAA 250 251,650 6.08
Santa Barbara, County of,
1990 Cert of Part ................................................ 7.50 02-01-11 A+ 250 282,098 6.65
1991 Cert of Part ................................................ 6.400 02-01-11 A+ 250 255,895 6.25
Santa Rosa, City of,
Wastewater Rev 1992 Ser A Subregional Wastewater Proj ............ 6.500 09-01-22 AAA 500 519,650 6.25
Southern California Home Financing Auth,
Single Family Mtg Rev 1990 Iss B ................................. 7.750 03-01-24 AAA 45 47,632 7.32
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- California Portfolio
<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)
Southern California Public Power Auth,
Pwr Proj Rev 1987 Ref Ser A Palo Verde Proj ..................... 6.875% 07-01-15 AA- $ 215 $ 221,729 6.67%
Torrance City Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj .................... 7.125 09-01-21 BBB 500 515,175 6.92
University of California, The Regents of,
1993 Ref Cert of Part UCLA Central Chiller/Cogeneration Facil ... 5.400 11-01-11 Aa** *1,000 934,440 5.78
-----------
45,245,586
-----------
GUAM (1.07%)
Guam Airport Auth,
Gen Rev 1993 Ser B .............................................. 6.600 10-01-10 BBB 500 508,235 6.49
-----------
TOTAL TAX-EXEMPT LONG TERM BONDS
(Cost $ 43,938,622) (96.22%) $45,753,821
======= ===========
</TABLE>
*Securities, other than short term investments, newly added to the portfolio
during the period ended August 31, 1995.
**Rated by Moody's Investors Services, Fitch or John Hancock Adviser's, Inc.
where Standard & Poors ratings are not available. NR not rated.
***Credit Ratings are unaudited.
+The yield is unaudited and not calculated in accordance with guidelines
established by the U.S. Securities and Exchange Commission.
The percentage shown for each category is the total value of that category
as a percentage of the net assets of the Portfolio.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- Massachusetts Portfolio
<TABLE>
SCHEDULE OF INVESTMENTS
August 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
MASSACHUSETTS (88.90%)
Boston City Industrial Development Financing Auth,
Sewage Facil Rev 1991 Ser Harbor Elec Energy Co Proj ................ 7.375% 05-15-15 BBB $ 250 $ 262,750 7.02%
Boston Water and Sewer Commission,
Gen Rev 1991 Ser A Sr Ser ........................................... 7.000 11-01-18 AAA 500 572,470 6.11
Gen Rev 1992 Ser A Sr Ser ........................................... 5.750 11-01-13 A 500 496,060 5.80
Boston, City of,
GO 1990 Ser A ....................................................... 7.375 02-01-10 A 350 395,479 6.53
GO 1991 Ser A MBIA .................................................. 6.750 07-01-11 AAA 350 394,604 5.99
GO 1992 Ser A AMBAC ................................................. 6.500 07-01-12 AAA 500 530,070 6.13
Rev Boston City Hosp FHA Ins Mtg Ser A .............................. 7.625 02-15-21 Aaa** 500 572,145 6.66
Brockton, City of,
State Qualified Municipal Purpose Ln of 1993 ........................ 6.125 06-15-18 A- 1,000 999,880 6.13
Greater New Bedford Regional Refuse Management District,
Ma GO Landfill ...................................................... 5.875 05-01-13 Baa** 915 884,201 6.08
Holyoke, City of,
GO School Proj Ln Act of 1948 ....................................... 7.650 08-01-09 Baa** *1,000 1,099,380 6.96
Massachusetts Bay Transportation Auth,
Gen Trans Sys Rev Ref 1993 MBIA Ser A ............................... 5.500 03-01-22 AAA 985 918,818 5.90
Gen Trans Sys Rev Ref 1994 Ser A .................................... 7.000 03-01-14 A+ *1,000 1,137,510 6.15
Gen Trans Sys Rev Ref 1995 Ser A .................................... 5.750 03-01-18 A+ *1,000 968,150 5.94
Massachusetts Educational Financing Auth,
Ed Ln Rev Iss D Ser 1991A ........................................... 7.250 01-01-09 AAA 510 551,947 6.70
Massachusetts Health and Educational Facilities Auth,
Rev Anna Jaques Hosp Iss Ser B ...................................... 6.875 10-01-12 Baa1** 1,250 1,264,587 6.80
Rev Bentley College Iss Ser H ....................................... 6.875 07-01-12 AAA 250 269,792 6.37
Rev Boston College Iss Ser J ........................................ 6.625 07-01-21 AAA 1,000 1,049,960 6.31
Rev Charlton Memorial Hosp Iss Ser B ................................ 7.250 07-01-13 A- 2,250 2,360,430 6.91
Rev Community Colleges Prog Iss Ser A ............................... 6.600 10-01-22 AAA 250 258,073 6.39
Rev Dana Farber Cancer Institute Ser G-1 ............................ 6.250 12-01-22 A *1,000 988,260 6.32
Rev Faulkner Hosp Iss Ser C ......................................... 6.000 07-01-13 Baa1** 750 697,958 6.45
Rev Faulkner Hosp Iss Ser C ......................................... 6.000 07-01-23 Baa1** 1,000 878,070 6.83
Rev Lowell Gen Hosp Iss Ser A ....................................... 8.400 06-01-11 Baa1** 600 655,218 7.69
Rev Melrose-Wakefield Hosp Iss Ser B ................................ 6.350 07-01-06 A- 500 514,570 6.17
Rev Melrose-Wakefield Hosp Iss Ser B ................................ 5.875 07-01-18 A- 1,000 923,820 6.36
Rev New England Baptist Hosp Iss Ser B .............................. 7.350 07-01-17 BBB+ 250 257,293 7.14
Rev New England Deaconess Hosp Iss Ser D ............................ 6.875 04-01-22 A 2,710 2,793,766 6.67
Rev New England Medical Center Hosp Iss Ser D ....................... 7.200 07-01-10 A1** 280 293,376 6.87
Rev Northeastern Univ Iss Ser E ..................................... 6.550 10-01-22 AAA 1,000 1,050,140 6.24
Rev Ref Worcester Polytechnic Institute Iss Ser E ................... 6.625 09-01-17 A+ 250 264,300 6.27
Rev Saint Elizabeth's Hosp of Boston Iss Ser B FHA Ins Proj ......... 7.750 08-01-27 AA 350 380,656 7.13
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- Massachusetts Portfolio
<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 (CONTINUED)
Rev Smith College Iss Ser D ......................................... 5.750% 07-01-24 AA- $ 560 $ 541,598 5.95%
Rev Tufts Univ Iss Ser C ............................................ 7.400 08-01-18 A+ 90 98,896 6.73
Rev Tufts Univ Iss Ser C ............................................ 7.400 08-01-18 AAA 430 476,126 6.68
Massachusetts Housing Finance Agency,
Rev Insured Rental Hsg 1994 Ser A ................................... 6.600 07-01-14 AAA 1,100 1,129,832 6.43
Rev Residential Devel FNMA Coll Ser C ............................... 6.875 11-15-11 AAA 2,000 2,108,760 6.52
Rev Residential Devel FNMA Coll Ser D ............................... 6.800 11-15-12 AAA 500 522,450 6.51
Single Family Hsg Rev Ser 5 ......................................... 8.375 06-01-15 A+ 50 53,530 7.82
Single Family Hsg Rev Ser 7 ......................................... 8.40 12-01-16 A+ 100 108,016 7.78
Single Family Hsg Rev Ser 7 ......................................... 8.100 06-01-20 A+ 85 90,873 7.58
Single Family Hsg Rev Ser 9 ......................................... 8.100 12-01-21 A+ 100 107,261 7.55
Single Family Hsg Rev Ser 13 ........................................ 7.950 06-01-23 A+ 195 207,925 7.46
Single Family Hsg Rev Ser 16 ........................................ 7.900 06-01-14 A+ 95 101,467 7.40
Single Family Hsg Rev Ser 18 ........................................ 7.350 12-01-16 A+ 550 587,592 6.88
Massachusetts Industrial Finance Agency,
Resource Recovery Rev Ref Ser 1993 A Mass Refusetech Inc Proj ....... 6.300 07-01-05 BBB 1,825 1,889,678 6.08
Rev Phillips Academy ................................................ 5.375 09-01-23 AA 695 639,956 5.84
Rev Ref Emerson College Iss Ser 1991A ............................... 8.900 01-01-18 NR 250 275,083 8.09
Rev Ref Holy Cross College Iss II Ser 1992 .......................... 6.375 11-01-15 A+ 500 512,310 6.22
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the Commonwealth of Mass. 6.750 07-01-05 BBB+ 500 545,345 6.19
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the Commonwealth of Mass. 6.750 07-01-06 BBB+ 1,500 1,627,050 6.22
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the Commonwealth of Mass. 6.750 07-01-17 BBB+ 400 422,536 6.39
Pwr Supply Sys Rev Ser C A Pub Corp of the Commonwealth of Mass ..... 6.625 07-01-10 AAA 1,000 1,075,290 6.16
Pwr Supply Sys Rev Ser D A Pub Corp of the
Commonwealth of Mass AMBAC.......................................... 6.000 07-01-06 AAA 1,000 1,069,150 5.61
Massachusetts Port Auth,
Rev Ref Ser 1992 A .................................................. 6.000 07-01-13 AA- 1,000 994,490 6.03
Rev Ref Ser 1992 A .................................................. 6.000 07-01-23 AA- *1,620 1,596,121 6.09
Rev Ref Ser 1993 B .................................................. 5.000 07-01-13 AA- 500 444,650 5.62
Massachusetts Water Resource Auth,
Gen Rev Ref 1993 Ser B .............................................. 5.500 03-01-17 A 400 374,640 5.87
Gen Rev Ref 1993 Ser B .............................................. 5.000 03-01-22 A *360 310,392 5.80
Massachusetts, the Commonwealth of,
GO Consol Ln of 1991 Ser D .......................................... 6.87 07-01-10 A+ 1,750 1,983,170 6.07
GO Consol Ln of 1995 Ser C .......................................... 5.625 08-01-14 AAA *1,000 971,060 5.79
Spec Oblig Rev 1994 Ser A ........................................... 5.800 06-01-14 AA- 1,000 989,750 5.86
Nantucket, Town of,
GO Municipal Purpose Ln of 1991 ..................................... 6.800 12-01-11 A** 450 485,208 6.31
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj .......... 7.000 04-01-22 A- 750 816,645 6.43
Springfield, City of,
GO School Proj Ln Act of 1992 Ser B ................................. 7.100 09-01-11 Baa** 500 537,675 6.60
-----------
$48,378,258
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- Massachusetts Portfolio
<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>
PUERTO RICO (8.18%)
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref Ser W .............................. 5.500% 07-01-13 A $*1,000 $ 949,790 5.79%
Puerto Rico Infrastructure Financing Auth,
Spec Tax Rev Ser 1988A ............................. 7.750 07-01-08 BBB+ 450 498,163 7.00
Puerto Rico Ports Auth,
Spec Facil Rev 1993 Ser A American Airlines
Inc Proj ........................................... 6.300 06-01-23 BB+ 2,000 1,966,260 6.41
Puerto Rico, Commonwealth of,
GO Pub Imp Unltd Ref Ser 1994 ...................... 6.400 07-01-11 A 1,000 1,034,640 6.19
-----------
4,448,853
-----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $50,866,573) ( 97.08%) $52,827,111
======= ===========
</TABLE>
*Securities other than short-term investments newly added to the portfolio
during the period ended August 31, 1995.
**Rated by Moody's Investors Services, Fitch or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available. NR not rated.
***Credit ratings are unaudited.
+The yield is unaudited and not calculated in accordance with the guidelines
established by the U.S. Securities and Exchange Commission.
The percentage shown for each investment category is the total of that
category as a percentage of the net assets of the Portfolio.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- New York Portfolio
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
August 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
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
NEW YORK (91.79%)
34th Street Partnership, Inc,
34th Street Business Imp Dist Cap Imp Bonds Ser 1993 ...... 5.500% 01-01-23 A1** $ 500 $ 455,360 6.04%
Albany, County of,
Ref Ser 1993 .............................................. 5.000 10-01-12 AAA 600 552,036 5.43
Battery Park City Auth,
Jr Rev Ref Ser 1993A ...................................... 5.000 11-01-13 AA 2,500 2,210,300 5.66
Dutchess County Resource Recovery Agency,
Solid Waste Mgmt Sys Rev Ser 1990 A ....................... 7.500 01-01-09 AAA 250 279,235 6.71
Grand Central District Management Association Inc,
Business Imp District Cap Imp Ser 1994 .................... 5.125 01-01-14 A 500 447,105 5.73
Metropolitan Transportation Auth,
Commuter Facil 1987 Serv Contract Ser 3 ................... 7.375 07-01-08 BBB 1,000 1,133,760 6.50
Commuter Facil 1992 Serv Contract Ser N ................... 7.125 07-01-09 BBB 1,000 1,080,800 6.59
New York City Housing Development Corp,
Multi-Family Mtg Rev FHA Ins Mtg Ln 1993 Ser A ............ 6.550 10-01-15 AAA 1,000 1,035,140 6.33
New York City Industrial Development Agency,
Spec Facil Rev 1990 American Airlines Inc Proj ............ 8.000 07-01-20 BB+ 400 426,604 7.50
Spec Facil Rev 1994 Terminal One Group Assn L.P. Proj ..... 6.000 01-01-19 A *1,000 957,590 6.27
New York City Municipal Water Finance Auth,
Wtr & Swr Sys Rev 1994 Ser B .............................. 5.500 06-15-19 A- 1,000 922,140 5.96
Wtr & Swr Sys Rev 1994 Ser F MBIA ......................... 5.500 06-15-23 AAA *1,000 937,810 5.86
New York Local Government Assistance Corp,
Ser 1991 A Pub Benefit Corp. .............................. 7.250 04-01-18 A 1,000 1,152,120 6.29
Ser 1992 A Pub Benefit Corp. .............................. 6.875 04-01-19 A *2,000 2,169,920 6.34
Ser 1993 E Pub Benefit Corp. .............................. 5.250 04-01-16 A 500 457,630 5.74
New York State Dormitory Auth,
City Univ Rev Iss Ser U ................................... 6.375 07-01-08 BBB 500 508,375 6.27
City Univ Sys Consol Rev Construction
2nd Generation Ser 1993A................................... 6.000 07-01-20 BBB 1,000 987,180 6.08
City Univ Sys Consol Rev Ser 1990A ........................ 7.625 07-01-20 BBB+ 485 560,825 6.59
Court Facil Lease Rev Ser 1993A ........................... 5.500 05-15-10 BBB+ *1,000 941,260 5.84
Court Facil Lease Rev Ser 1993A ........................... 5.375 05-15-16 BBB+ *2,000 1,793,800 5.99
Court Facil Lease Rev Ser 1993A ........................... 5.500 05-15-23 BBB+ *1,000 900,480 6.11
Genessee Valley Presbyterian Nursing Center FHA-Ins Mtg
Rev Ser 1992B ........................................... 6.850 08-01-16 AAA 250 269,020 6.37
KMH Homes Inc FHA-Ins Mtg Rev Ser 1991 .................... 6.950 08-01-31 AAA 1,200 1,263,192 6.60
Manhattanville College Ins Rev Ser 1990 ................... 7.500 07-01-22 AAA 305 351,040 6.52
Skidmore College Rev Ser 1993 ............................. 5.250 07-01-13 AAA 1,000 942,470 5.57
State Univ Ed Facil Rev Ser 1990A ......................... 7.700 05-15-12 BBB+ 300 346,869 6.66
State Univ Ed Facil Rev Ser 1993A ......................... 5.500 05-15-19 BBB+ *1,000 920,500 5.98
United Hlth Serv Inc FHA-Ins Mtg Rev Ser 1989 ............. 7.350 08-01-29 AAA 200 215,914 6.81
Univ of Rochester Rev Ser 1987 ............................ 6.500 07-01-09 A+ 625 650,344 6.25
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- New York Portfolio
<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)
Upstate Community Colleges 1988A Iss ......................... 7.750% 07-01-18 Baa1** $ 300 $ 333,558 6.97%
Vassar College Rev Ser 1990 .................................. 7.250 07-01-15 AA- 250 273,562 6.63
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1986 A Consol Edison Co of NY Inc Proj .... 7.500 11-15-21 A+ 200 208,946 7.18
Elec Facil Rev Ser 1989 A Consol Edison Co of NY Inc Proj .... 7.750 01-01-24 A+ 200 215,264 7.20
Elec Facil Rev Ser 1989 A Long Island Lighting Co Proj ....... 7.150 09-01-19 BB+ 500 505,760 7.07
Elec Facil Rev Ser 1989 B Consol Edison Co of NY Inc Proj .... 7.375 07-01-24 A+ 200 212,380 6.95
Elec Facil Rev Ser 1990 A Consol Edison Co of NY Inc Proj .... 7.500 07-01-25 A+ 260 280,582 6.95
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj ....... 7.150 06-01-20 BB+ 1,000 1,011,520 7.07
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj .... 7.500 01-01-26 A+ 420 453,755 6.94
Elec Facil Rev Ser 1992 B Long Island Lighting Co Proj ....... 7.150 02-01-22 BB+ 1,000 1,011,520 7.07
Elec Facil Rev Ser 1992 C Long Island Lighting Co Proj ....... 6.900 08-01-22 BB+ 500 500,630 6.89
Elec Facil Rev Ser 1993 Consol Edison Co of NY Inc Proj ...... 6.000 03-15-28 A+ 500 490,865 6.11
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A ......... 7.500 06-15-12 A 630 703,634 6.72
State Wtr Poll Control Revolving Fund Rev Ser 1991 E ......... 6.875 06-15-10 A 400 435,664 6.31
New York State Housing Finance Agency,
Ins Multi-Family Mtg Hsg 1992 Ser C .......................... 6.450 08-15-14 AAA 500 513,645 6.28
Ins Multi-Family Mtg Hsg 1994 Ser C .......................... 6.450 08-15-14 AAA 1,000 1,030,610 6.26
State Univ Construction 1986 Ser A ........................... 8.000 11-01-16 AAA 250 262,075 7.63
New York State Medical Care Facilities Finance Agency,
FHA-Ins Mtg St Lukes Roosevelt Rev Ser A ..................... 5.600 08-15-13 AAA 815 801,390 5.70
Hosp & Nursing Home FHA-Ins Mtg Rev 1988 Ser C ............... 7.700 02-15-22 AAA 450 503,703 6.88
Hosp & Nursing Home Ins Mtg Rev 1992 Ser B ................... 6.950 02-15-32 AAA 1,000 1,053,430 6.60
Mental Hlth Serv Facil Imp Rev 1990 Ser B .................... 7.875 08-15-20 BBB+ 90 98,562 7.19
Mental Hlth Serv Facil Imp Rev 1990 Ser B .................... 7.875 08-15-20 AAA 150 175,578 6.73
Mental Hlth Serv Facil Imp Rev 1991 Ser A .................... 7.750 08-15-11 BBB+ 60 65,778 7.07
Mental Hlth Serv Facil Imp Rev 1991 Ser A .................... 7.750 08-15-11 AAA 165 193,619 6.60
Mental Hlth Serv Facil Imp Rev 1991 Ser B .................... 7.625 08-15-17 BBB+ 245 268,640 6.95
Mental Hlth Serv Facil Imp Rev 1991 Ser C Preref ............. 7.300 02-15-21 AAA 300 348,732 6.28
Mental Hlth Serv Facil Imp Rev 1991 Ser C Unref Bal .......... 7.300 02-15-21 A 100 107,363 6.80
Sec Hosp Rev 1991 Ser A ...................................... 7.350 08-15-11 BBB 250 263,660 6.97
New York State Mortgage Agency,
Homeowner Mtg Rev Ser 27 ..................................... 6.900 04-01-15 Aa** *1,175 1,234,596 6.57
Homeowner Mtg Rev Ser 28 ..................................... 7.050 10-01-23 Aa** 500 519,495 6.79
Homeowner Mtg Rev Ser 31A .................................... 5.375 10-01-17 Aa** 500 450,155 5.97
Homeowner Mtg Rev Ser BB-2 ................................... 7.950 10-01-15 Aa** *230 246,026 7.43
Homeowner Mtg Rev Ser EE-4 ................................... 7.800 10-01-13 Aa** 300 321,363 7.28
Homeowner Mtg Rev Ser JJ ..................................... 7.500 10-01-17 Aa** 330 350,259 7.07
Homeowner Mtg Rev Ser VV ..................................... 7.375 10-01-11 Aa** 195 208,627 6.89
New York State Power Auth,
Gen Purpose Ser W ............................................ 6.500 01-01-08 AA- 250 275,690 5.89
Gen Purpose Ser Y ............................................ 6.500 01-01-11 AA- 250 264,430 6.15
Gen Purpose Ser Y ............................................ 6.750 01-01-18 AA- 250 267,630 6.31
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Series Fund -- New York Portfolio
<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 Thruway Auth,
Local Highway & Bridge Serv Contract Ser 1991 .............. 7.250% 01-01-10 BBB $ 300 $ 320,388 6.79%
New York State Urban Development Corp,
Rev Correctional Facil Ser 1993 ............................ 5.500 01-01-15 BBB 2,900 2,648,512 6.02
Rev Ser 1990 Onondaga County Convention Center Proj ........ 7.875 01-01-20 BBB 250 275,222 7.15
New York, City of,
GO Fiscal 1991 Ser B ....................................... 8.250 06-01-07 BBB+ 200 236,406 6.98
GO Fiscal 1991 Ser D ....................................... 8.000 08-01-04 BBB+ 250 283,768 7.05
GO Fiscal 1991 Ser F ....................................... 8.200 11-15-03 BBB+ 250 288,152 7.11
GO Fiscal 1992 Ser A ....................................... 7.750 08-15-12 BBB+ 250 274,790 7.05
GO Fiscal 1992 Ser B ....................................... 7.000 10-01-13 BBB+ *500 521,780 6.71
GO Fiscal 1992 Ser C ....................................... 7.500 08-01-21 BBB+ 250 267,000 7.02
GO Fiscal 1992 Ser H ....................................... 7.000 02-01-22 BBB+ 620 641,824 6.76
GO Fiscal 1995 Ser A-1 ..................................... 6.500 08-01-14 BBB+ *1,000 1,007,340 6.45
New York, State of,
GO Environmental Quality Fiscal 1994 ....................... 6.500 12-01-14 A- *1,000 1,062,230 6.12
North Country Development Auth,
Solid Waste Mgt Sys Rev Ser 1992A .......................... 6.750 07-01-12 Baa** 490 496,517 6.66
Onondaga County Industrial Development Agency,
Civic Facil Rev 1993 Ser B Community Gen Hosp
of Greater Syracuse Proj 6.625 01-01-18 BBB 1,000 984,420 6.73
Triborough Bridge and Tunnel Auth,
Spec Oblig Ref Ser 1991B ................................... 6.875 01-01-15 A- 500 537,880 6.39
-----------
51,177,744
-----------
PUERTO RICO (6.36%)
Puerto Rico Electric Power Auth,
Pwr Rev Ser X .............................................. 5.500 07-01-25 A- *1,330 1,231,115 5.94
Puerto Rico Public Building Auth,
Gtd Rev Gov't Facil Ser A .................................. 6.250 07-01-15 AAA *1,110 1,179,131 5.88
Puerto Rico, Commonwealth of,
GO Pub Imp Unltd Ref Ser 1994 .............................. 6.400 07-01-11 A 500 517,320 6.19
University of Puerto Rico,
Univ Rev Ser M ............................................. 5.250 06-01-25 AAA *675 617,267 5.74
-----------
3,544,833
-----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $ 52,675,229) ( 98.15%) 54,722,577
------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Financial Statements
John Hancock Funds - Tax-Exempt Series Fund -- New York Portfolio
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000'S MARKET
STATE, ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------------- -------- -------- ---------- ------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (2.71%)
Investment in a joint repurchase agreement transaction with
UBS Securities Inc., Dated 08-31-95, due 09-01-95
(secured by U.S. Treasury Bill, 5.540% due 05-30-96,
by U.S. Treasury Bonds, 12.50% thru 14.00% due 11-15-10
thru 08-15-14, and by U.S. Treasury Notes, 4.375% thru 7.25%
due 08-15-96 thru 12-31-98) - Note A........................................... 5.800% 09-01-95 $ 1,512 $ 1,512,000
-----------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 3.00%............................................................. 660
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,512,660) ( 2.71%) 1,512,660
-------- -----------
TOTAL INVESTMENTS (100.86%) $56,235,237
======== ===========
</TABLE>
* Securities, other than short term investments, newly added to the portfolio
during the period ended August 31, 1995.
** Rated by Moody's Investors Services, Fitch or John Hancock Adviser's, Inc.
where Standard & Poors ratings are not available. NR not rated.
*** Credit ratings are unaudited.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities and Exchange Commission.
The percentage shown for each category is the total value of that category
as a percentage of the net assets of the Portfolio.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Financial Statements
John Hancock Funds - Tax-Exempt Series Fund
PORTFOLIO CONCENTRATION (UNAUDITED)
- -------------------------------------------------------------------------------
THE CALIFORNIA, MASSACHUSETTS, AND NEW YORK PORTFOLIOS INVEST PRIMARILY IN
SECURITIES ISSUED BY THE STATES OF CALIFORNIA, MASSACHUSETTS AND NEW YORK
RESPECTIVELY, AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF THESE
PORTFOLIOS IS CLOSELY TIED TO ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATE
AND THE FINANCIAL CONDITION OF THE STATE AND ITS AGENCIES AND MUNICIPALITIES.
THE CONCENTRATION OF INVESTMENTS BY STATES AND CREDIT RATINGS FOR INDIVIDUAL
SECURITIES HELD BY EACH PORTFOLIO 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 EACH PORTFOLIO'S INVESTMENTS AT AUGUST
31, 1995 ASSIGNED TO THE VARIOUS SECTOR CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF EACH
PORTFOLIO'S NET ASSETS:
---------------------------------
CALIFORNIA MASSACHUSETTS NEW YORK
SECTOR DISTRIBUTION PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------- ---------- ------------- ---------
<S> <C> <C> <C>
General Obligation......................................................................... - % 14.40% 10.14%
Revenue Bonds - Certificate of Participation............................................... 16.97 1.50 -
Revenue Bonds - Education.................................................................. 4.47 13.02 18.16
Revenue Bonds - Electric Power............................................................. 10.20 8.71 1.45
Revenue Bonds - Health..................................................................... 14.43 23.12 11.86
Revenue Bonds - Housing.................................................................... 5.04 9.22 11.07
Revenue Bonds - Industrial Development Bond................................................ 1.73 7.57 16.61
Revenue Bonds - Other...................................................................... 22.21 1.81 15.76
Revenue Bonds - Pollution Control Facilities............................................... 2.19 1.63 2.21
Revenue Bonds - Transportation............................................................. 10.56 12.88 5.51
Revenue Bonds - Water & Sewer.............................................................. 8.42 3.22 5.38
----- ----- -----
TOTAL TAX-EXEMPT LONG-TERM BONDS 96.22% 97.08% 98.15%
===== ===== =====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Notes to Financial Statements
John Hancock Funds - Tax-Exempt Series Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Exempt Series Fund (the "Fund") is an
open-end non-diversified investment management company, registered under the
Investment Company Act of 1940. The Fund is organized as a Massachusetts
business trust under the laws of the Commonwealth of Massachusetts. As of August
31, 1995, the Fund consisted of three separate series portfolios: the California
Portfolio, the Massachusetts Portfolio, and the New York Portfolio (the
"Portfolios"). The Trustees may authorize the creation of additional portfolios
from time to time to satisfy various investment objectives. Significant
accounting policies of each portfolio are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolios 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.
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 its taxable income, including any net gains on investments, to
its shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes and to the extent provided by regulations, to offset
future net realized capital gains, the California Portfolio has a capital loss
carryforward available of $35,841 expiring August 31, 2003, the Massachusetts
Portfolio has capital loss carryforwards available of $2,465 expiring August 31,
2002 and $396,511 expiring August 31, 2003 and the New York Portfolio has a
capital loss carryforward available of $77,663 expiring August 31, 2003. To the
extent that such carryforwards are used by the Portfolios, no capital gain
distribution will be made. Expired capital loss carryforwards are reclassified
to capital paid-in, in the year of expiration.
Additionally, federal income tax regulations require that net capital losses
attributed to security transactions which occurred after October 31, 1994 be
treated as arising on the first day (September 1, 1995) of the Portfolio's next
taxable year. For the Massachusetts Portfolio and the New York Portfolio the
losses amounted to $230,732 and $287,053, respectively.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
Each Portfolio records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Each portfolio records
dividends from net investment income daily and distributes monthly.
EXPENSES The majority of the expenses of the Fund are directly identifiable to
an individual Portfolio. Expenses which are not identifiable to a specific
Portfolio are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Portfolios.
PREMIUM AND DISCOUNT For tax-exempt issues, the Portfolios amortize 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 Portfolios accrete 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
portfolios record market discount on bonds purchased after April 30, 1993 at the
time of disposition.
27
<PAGE>
Notes to Financial Statements
John Hancock Funds - Tax-Exempt Series Fund
FINANCIAL FUTURES CONTRACTS The Portfolios may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates and other market conditions. At the time the
Portfolio 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 Portfolio as unrealized gains or
losses.
When the contracts are closed, the Portfolio 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 Portfolios 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
Portfolio's gains and/or losses can be affected as a result of futures
transactions.
At August 31, 1995 there were no open positions in financial futures
contracts.
NOTE B --
MANAGEMENT FEE, ADMINISTRATIVE SERVICES AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, each Portfolio pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.500% of the first $250,000,000 of such
Portfolio's average daily net asset value, (b) 0.450% of the next $250,000,000,
(c) 0.425% of the next $500,000,000, (d) 0.400% of the next $250,000,000 and (e)
0.300% of each Portfolio's average daily net asset value in excess of
$1,250,000,000.
In the event normal operating expenses of each Portfolio, exclusive of
certain expenses prescribed by state law, are in excess of the most restrictive
state limit where the Portfolio is registered to sell shares of beneficial
interest, 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 California Portfolio'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.
The Adviser has agreed to limit each Portfolio's expenses further to the
extent required to prevent expenses from exceeding 0.70% of each Portfolio's
average daily net asset value, exclusive of certain expenses prescribed by state
law. Accordingly, for the period ended August 31, 1995, the reduction in the
Adviser's fee collectively with any additional amounts not borne by each
Portfolio by virtue of the expense limit for the California Portfolio, the
Massachusetts Portfolio, and the New York Portfolio amounted to $178,982,
$202,898, and $212,967, respectively. This waiver may be discontinued at any
time. Furthermore, payments to the custodian have been reduced by balance
credits applied to each portfolio for the period ended August 31, 1995. For the
California Portfolio, the Massachusetts Portfolio, and the New York Portfolio
the reduction amounted to $33,672, $33,886 and $32,865, respectively.
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 August 31, 1995, the table that follows details for each Portfolio
the amount of net sales charges received by the distributor and dealer of each
portfolio's shares and the amount of commissions paid to sales personnel of
affiliated broker-dealers. John Hancock Distributors, Inc. ("Distributors"),
Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro")
are affiliated broker-dealers. The Adviser's indirect parent, John Hancock
28
<PAGE>
Notes to Financial Statements
John Hancock Funds - Tax-Exempt Series Fund
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. The balance
is either retained and used for printing prospectuses, advertising, sales
literature, and other purposes or paid as sales commissions to sales personnel
of unrelated broker-dealers.
<TABLE>
<CAPTION>
CALIFORNIA MASSACHUSETTS NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31, 1995:
Net sales charges received ..... $153,765 $181,355 $205,880
Less commissions paid
to affiliated broker-dealers .. ( 117,079) ( 149,892) ( 162,413)
to unrelated broker-dealers ... ( 16,346) ( 9,113) ( 18,737)
-------- -------- --------
Balance retained .............. $ 20,340 $ 22,350 $ 24,730
======== ======== ========
</TABLE>
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the three Portfolios, the Fund has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of
1940. Accordingly, each Portfolio makes payments to JH Funds for distribution
and service expenses at an annual rate not to exceed 0.30% of the Portfolio's
average daily net assets to reimburse JH Funds for their distribution/service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock 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. Effective January 1, 1995, each Portfolio pays
transfer agent fees based on transaction volume and the number of shareholder
accounts. Prior to January 1, 1995, each Portfolio paid Investor Services a
monthly transfer agent fee equivalent, on an annual basis, to 0.25% of each
Portfolio's average daily net asset value, plus out of pocket expenses incurred
by Investor Services on behalf of the Fund for proxy mailings.
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 each Portfolio. 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. Each Portfolio will make investments into
other John Hancock Funds, as applicable, to cover their liability with regard to
the deferred compensation. Investments to cover each Portfolio's deferred
compensation liability will be recorded on each Portfolio's books as an other
asset. The deferred compensation liability will be marked to market on a
periodic basis and income earned by the investment will be recorded on each
Portfolio's books.
NOTE C --
INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
CALIFORNIA MASSACHUSETTS NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31, 1995:
LONG-TERM MUNICIPAL OBLIGATIONS
Purchases .................. $16,009,240 $12,210,364 $36,796,584
Proceeds ................... 18,942,975 12,952,082 37,135,539
</TABLE>
There were no purchases or sales of long-term U.S. government and agency
obligations for the period ended August 31, 1995.
<TABLE>
AT AUGUST 31, 1995:
<S> <C> <C> <C>
Cost of investments for
Federal income tax
purposes ................... $43,938,622 $50,866,573 $54,187,229
=========== =========== ===========
Gross unrealized
appreciation of
investments................. $ 2,012,986 $ 2,262,566 $ 2,458,668
Gross unrealized
depreciation of
investments................. ( 197,787) ( 302,028) ( 411,320)
----------- ----------- -----------
Net unrealized
appreciation of
investments................. $ 1,815,199 $ 1,960,538 $ 2,047,348
=========== =========== ===========
</TABLE>
29
<PAGE>
Notes to Financial Statements
John Hancock Funds - Tax-Exempt Series Fund
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended August 31, 1995, the Portfolios have reclassified amounts
to reflect increases in accumulated net investment income and accumulated
realized loss on investments of $2,761 for the California Portfolio, $1,994 for
the Massachusetts Portfolio and $8,092 for the New York Portfolio. These
represent the cumulative amounts necessary to report these balances on a tax
basis, excluding certain temporary differences, as of August 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. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
NOTE E --
SUBSEQUENT EVENT
On September 15, 1995 the California Portfolio of the John Hancock Tax-Exempt
Series Fund merged with the John Hancock California Tax-Free Income Fund. The
transaction was approved by the shareholders on September 8, 1995 and was
accounted for as a tax-free business combination.
30
<PAGE>
John Hancock Funds - Tax-Exempt Series Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
John Hancock Tax-Exempt Series Fund
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments (except for Moody's and Standard & Poor's
ratings and yields at market), and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the three Portfolios (California
Portfolio, Massachusetts Portfolio and New York Portfolio) comprising John
Hancock Tax-Exempt Series Fund (the "Fund") at August 31,1995, the results of
their operations, the changes in their net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at August 31,1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 17, 1995
