ANNUAL REPORT
- --------------------------------------------------------------------------------
Massachusetts
Tax-Free Income
Fund
AUGUST 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Fund
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK AND TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
<PAGE>
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The Taxpayer Relief Act of 1997 recently signed into law by President
Clinton includes new twists and important changes to Individual Retirement
Account (IRA) laws. The provisions will, among other things, allow more people
to qualify for annual tax-deductible IRA contributions and to save tax-free for
college. They also allow IRA investors to withdraw money penalty-free from all
IRAs to buy a first home or pay for college expenses.
[A 1 x 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
For existing deductible IRAs, the law doubles income limits over the next
eight to 10 years for those eligible to deduct an annual IRA contribution of up
to $2,000. For individuals, the annual income cap will increase incrementally
from the current $25,000 to $50,000 by 2005. For couples, the limit would
increase from $40,000 today to $80,000 in 2007. The new law allows non-working
spouses to make IRA contributions even if their spouse is covered by a pension
plan at work, provided the couple's joint income is less than $150,000.
The law also creates two new IRA investment vehicles. One, called the
"Roth IRA" after its principal congressional sponsor, allows for non-deductible
annual contributions up to a $2,000 maximum. But income accumulates tax-free and
if the account has been open for five years, distributions are tax-free if they
are used after age 591/2 or upon death, disability or a first-time home
purchase. Withdrawals for higher-education expenses would not be subject to a
10% penalty. Eligible investors must earn less than $95,000 per year
individually or $150,000 per couple.
A second new IRA plan is called the "Education IRA," which allows non-
deductible contributions of up to $500 per year, per child under age 18.
Earnings in the account accumulate tax-free, and withdrawals are also not taxed
when applied toward undergraduate or graduate-level expenses. Eligible investors
are subject to the same income restrictions as the Roth IRA.
The law has also made some important changes in capital gains tax rates
and estate tax laws. But the devil is in the details, and so we recommend
exploring how you can benefit from the changes with your investment professional
and tax advisor. The Taxpayer Relief Act of 1997 gives investors new options
toward savings. It's a move we applaud.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ------------------------------------------------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Dianne Sales, CFA, Portfolio Manager
John Hancock
Massachusetts Tax-Free
Income Fund
Municipal bonds turn in solid performance
The bond market rode waves of volatility over the last 12 months. Fear about a
rebirth of inflation -- dreaded by bond holders for its erosive effects on fixed
income investments -- alternated during the year with elation over economic data
that showed inflation at barely noticeable levels. When the economy picked up
steam early this year and investors' concerns grew, the Federal Reserve Board
raised interest rates a quarter percentage point as an insurance policy against
inflation. Interest rates rose and bond prices fell both leading up to, and in
the wake of, the Fed action. In fact, the conflicting opinions of analysts who
held to the traditional theory that a surging economy inevitably leads to higher
inflation, and of those who embrace the "new era" belief that the economy can
grow at a faster pace today without inflation, added to the market's wavering.
But by the end of April, bonds staged a rally that lasted through July as it
became clear that the economy had slowed from its blistering first quarter 1997
pace and the Fed made no further attempts to rein it in.
Even with the increased volatility, bonds moved ahead overall during the
year. Municipal bond performance was further enhanced by the continuing positive
trends of reduced supply and strong demand. With this backdrop, John Hancock
Massachusetts Tax-Free Income Fund
[A 2 1/2" x 3 3/4" photo of Fund management team. Caption reads: "Dianne
Sales-Singer (seated) and Fund management team members (l-r); Mike Roye, Holly
Morris and Frank Lucibella".]
Performance
is boosted by
bonds with
attractive yield
and good call
protection.
3
<PAGE>
================================================================================
John Hancock Funds -- Massachusetts Tax-Free Income Fund
[Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into 10 sections. Going from top left to right;
Water & Sewer 9%; General Obligation 14%; Certificate of Participation 1%;
Education 17%; Electric 9%; Health 16%; Housing 9%; Industrial Development 10%;
Other 5%; Transportation 10%. Footnote below states "As a percentage of net
assets on August 31, 1997".]
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers." The first listing is Puerto Rico
Aqueduct and Sewer followed by an up arrow and the phrase "Good bond call
structure". The second listing is MIFA - American Hingham Water followed by an
up arrow and the phrase "Improving economy; essentiality of service." The third
listing is Housing bonds followed by a down arrow and the phrase "Short call
structure". A footnote below states "See `Schedule of Investments.' Investment
holdings are subject to change."]
"The state's
economy
keeps build-
ing at a
solid, steady
rate."
- ---------------------------------------------------------------------------
turned in a strong performance. For the 12 months ended August 31, 1997, the
Fund's Class A shares posted a total return of 9.85% at net asset value. By
comparison, the average Massachusetts municipal bond fund returned an average
8.55%, according to Lipper Analytical Services, Inc. 1 Please see pages six and
seven for longer-term performance. The Fund's Class B shares, which began on
October 3, 1996, returned 7.08% at net asset value from inception through August
31, 1997.
Strategy and performance review
Throughout the year, our careful management of portfolio duration helped the
Fund's performance. Duration is a measure of how much a bond's price changes in
response to changing interest rates. The shorter the duration, the less a bond's
price moves with rate changes. At the beginning of the period last September,
the Fund's duration was longer than average, helping us in last fall's market
rally. As the economy heated up earlier this year, we became more conservative
and made duration shorter than average, which helped in the market's spring
retreat. But in May when inflation fears ebbed, we reversed course and brought
duration back to neutral relative to our peers. We're keeping it there for now,
given the rally that's already occurred and the market's skittishness about the
economy's strength.
Performance boosts came during the year from our bonds with attractive
yields and good call protection (the length of time during which a security
cannot be redeemed prior to its maturity). In particular, our non-callable
bonds, those that cannot be redeemed before their scheduled maturity, did well.
Our focus on bonds with good structure has been a priority for the Fund over the
past several years. As we have discussed in previous reports, having strong call
protection helps the Fund maintain greater income stability by preventing a
greater portion of the Fund's holdings from being called away by municipalities
looking to refinance their debt at lower interest rates. Early calls can reduce
returns because bondholders are forced to reinvest the proceeds at lower yields.
By far the strongest contributors to the Fund's performance over the last
12 months were our uninsured, lower-rated bonds. Now that 65% of municipal bonds
coming to the market have bond insurance (a policy that ensures the timely
payment of principal and interest), the supply of lower-rated, uninsured bonds
has dwindled. At the same time, demand for these higher-yielding bonds has
increased, causing their prices to rise
4
<PAGE>
================================================================================
John Hancock Funds -- Massachusetts Tax-Free Income Fund
- --------------------------------------------------------------------------------
Bar chart with heading "Fund Performance" at top of left hand column. The chart
is scaled in increments of 2% from bottom to top, with 10% at the top and 0% at
the bottom. Within the chart there are three solid bars. The first represents
the 9.85% total return for the John Hancock Massachusetts Tax-Free Income Fund.
The second represents the 7.08% total return for the average Massachusetts Tax
Free Income Fund Class B. The third represents the 8.55% total return for the
Average Massachusetts municipal bond fund. A footnote below reads: "The total
return for John Hancock Massachusetts Tax-Free Income Fund is at net asset value
with all distributions reinvested. The average Massachusetts municipal bond fund
is tracked by Lipper Analytical Services, Inc. (1) See following two pages for
historical performance information. For class A shares and the average
Massachusetts municipal bond fund, returns are for the year ended August 31,
1997.
* For class B shares, return is from inception October 3, 1996 through August
31,1997.
- -----------------------------------------------------------------------------
significantly in the last 12 months. Our in-depth credit analysis has led us to
some uninsured bonds with solid underlying fundamentals, strong liquidity and
attractive yields.
Among our best-performing BBB-rated bonds were those issued by the
Massachusetts Industrial Financial Authority (MIFA) for American Hingham Water
Company, a private company providing essential water services to the Hingham
area south of Boston. Our uninsured holdings in the hospital sector have also
continued to perform very well, due to both the strength of the underlying
credits and ongoing hospital mergers. For example, New England Deaconess and
Beth Israel hospitals are moving ahead with their consolidation plans, gaining
all-important cost efficiencies in the process.
Non-rated bonds have also been strong performers. These are bonds that
have not been rated by any of the credit rating agencies for a variety of
reasons, ranging from the small size or structure of the offering, to the
industry involved, to a perceived higher degree of risk. But with careful
analysis and selection, non-rated bonds offer good opportunities. A perfect
example were our non-rated bonds issued by MIFA for a senior independent living
complex in East Longmeadow. These bonds are attractive because of the strong
demographics in the East Longmeadow area and because of the complex's attractive
design and well-established, respected management team.
A look ahead
We're encouraged by the prospects for the Massachusetts municipal bond market.
The state's economy keeps building at a solid, steady rate. Real estate has
rebounded sharply, unemployment is lower than the national average and state
revenues remain above expectations. In this positive environment, the state has
begun to address the backlog of infrastructure needs left over from the lean
years. That's good news not only for the state, but also for municipal bond
funds that have been constrained by the paucity of new bond issuance in
Massachusetts for several years now. We'll watch to see what opportunities
emerge, especially as the state makes clearer how it intends to pay for its
largest project to date --rebuilding the Central Artery in downtown Boston.
"...we'll
continue to
focus on
increasing
the Fund's
competitive
yield..."
- --------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Massachusetts Tax-Free Income Fund. Total
return is a performance measure that equals the sum of all income and capital
gains distributions, assuming reinvestment of these distributions, and the
change in the price of the Fund's shares, expressed as a percentage of the
Fund's net asset value per share. Performance figures include the maximum
applicable sales charge of 4.5% for Class A shares. The effect of the maximum
contingent deferred sales charge for Class B shares (maximum 5% and declining to
0% over six years) is included in Class B performance. Performance is affected
by a 12b-1 plan. Remember that all figures represent past performance and are no
guarantee of how the Fund will perform in the future. Also, keep in mind that
the total return and share price of the Fund's investments will fluctuate. As a
result, your Fund's shares may be worth more or less than their original cost,
depending on when you sell them.
Please note that a portion of the Fund's income may be subject to taxes,
and some investors may be subject to the Alternative Minimum Tax. Also note that
capital gains are taxable when distributed to shareholders.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
One Five Life
Year Years Of Fund
----- ----- -------
John Hancock Massachusetts Tax-Free
Income Fund: Class A 3.82% 32.98% 110.36%(1)
John Hancock Massachusetts Tax-Free
Income Fund: Class B 0.20%(2) N/A N/A
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
One Five Life
Year Years Of Fund
----- ----- -------
John Hancock Massachusetts Tax-Free
Income Fund: Class A(3) 3.82% 5.87% 7.86%(1)
John Hancock Massachusetts Tax-Free
Income Fund: Class B(3) 0.20%(2) N/A N/A
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1997
SEC 30-DAY
YIELD
----------
John Hancock Massachusetts Tax-Free
Income Fund: Class A 4.55%
John Hancock Massachusetts Tax-Free
Income Fund: Class B 4.05%
Notes to Performance
(1) Class A commenced operations on September 3, 1987.
(2) Class B commenced operations on October 3, 1996. Since inception not
annualized.
(3) The Adviser has voluntarily reduced a portion of the management fee and a
portion of the custodian fees have been reduced by balance credits during
the period. Without the reductions of expenses, the average annual total
returns for the one-year, five-year and since inception periods for Class
A shares would have been 3.44%, 5.30% and 6.91%, respectively. The average
annual total return since inception for Class B shares would have been
(0.24%).
6
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in John Hancock
Massachusetts Tax-Free Income Fund would be worth on August 31, 1997. They
assume that you invested on the day each class of shares started. They also
assume that you have reinvested all distributions. For comparison, we've shown
the same $10,000 investment in the Lehman Brothers Municipal Bond Index -- an
unmanaged index that includes approximately 15,000 bonds and is commonly used as
a measure of bond performance.
[Massachusetts Tax-Free Income Fund
Class A shares
Fist line chart has the heading Massachusetts Tax-Free Income Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines:
The first line represents the value of the hypothetical $10,000 investment made
in the Massachusetts Tax-Free Income Fund on September 3, 1987, before sales
charge, and is equal to $22,475 as of August 31, 1997. The second line
represents the value of the Lehman Brothers Municipal Bond Index and is equal to
$22,060 as of August 31, 1997. The third line represents the Massachusetts
Tax-Free Income Fund after sales charge and is equal to $21,463 as of August 31,
1997.]
[Massachusetts Tax-Free Income Fund
Class B shares
The second line chart has the heading Massachusetts Tax-Free Income Fund: Class
B, representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines: The first line represents the
represents the value of the Lehman Brothers Municipal Bond Index and is equal to
$10,774 as of August 31, 1997. The second line represents the value of the
hypothetical $10,000 investment made in the Massachusetts Tax-Free Income Fund
on October 3, 1996, before sales charge, and is equal to $10,709 as of August
31, 1997. The third line represents Massachusetts Tax-Free Income Fund after
sales charge and is equal to $10,209 as of August 31, 1997.]
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on August 31, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
August 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $51,967,425) ........... $55,490,045
Cash ....................................................... 235,506
Receivable for shares sold ................................. 202,694
Interest receivable ........................................ 817,504
Other assets ............................................... 38,984
------------
Total Assets ......................................... 56,784,733
------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased ............................. 26,513
Payable for futures variation margin - Note A .............. 10,625
Dividend payable ........................................... 24,201
Payable to John Hancock Advisers, Inc. .....................
and affiliates - Note B ................................... 22,481
Accounts payable and accrued expenses ...................... 29,890
------------
Total Liabilities .................................... 113,710
------------------------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 53,755,807
Accumulated net realized loss on investments
and financial futures contracts ........................... (627,734)
Net unrealized appreciation of investments
and financial futures contracts ........................... 3,524,279
Undistributed net investment income ........................ 18,671
------------
Net Assets ........................................... $56,671,023
========================================================================
Net Asset Value Per Share:
Class A - $54,253,305/4,476,959 ............................ $12.12
===============================================================================
Class B - $2,417,718/199,509 ............................... $12.12
===============================================================================
Maximum Offering Price Per Share*
Class A - ($12.12 x104.71%) ................................ $12.69
===============================================================================
*On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended August 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Interest ..................................................... $3,530,125
-----------
Expenses:
Investment management fee - Note B .......................... 281,471
Distribution and service fee - Note B
Class A ................................................... 166,352
Class B ................................................... 8,433
Transfer agent fee - Note B ................................. 64,911
Custodian fee ............................................... 47,801
Auditing fee ................................................ 21,506
Financial services fee - Note B ............................. 10,451
Printing .................................................... 8,907
Registration and filing fees ................................ 7,167
Trustees' fees .............................................. 3,990
Legal fees .................................................. 1,043
Miscellaneous ............................................... 862
Less management fee reduction - Note B ...................... (217,030)
-----------
Total Expenses ....................................... 405,864
----------------------------------------------------------------------
Less Expense Reductions -
Note B ............................................... (5,901)
----------------------------------------------------------------------
Net Expenses ......................................... 399,963
----------------------------------------------------------------------
Net Investment Income ................................ 3,130,162
----------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized gain on investments sold ........................ 35,828
Net realized loss on financial futures contracts ............. (45,380)
Change in net unrealized appreciation/depreciation
of investments .............................................. 2,136,051
Change in net unrealized appreciation/depreciation
of financial futures contracts .............................. 1,250
-----------
Net Realized and Unrealized Gain on
Investments and Financial
Futures Contracts .................................... 2,127,749
----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............................ $5,257,911
======================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ......................................... $ 3,094,690 $ 3,130,162
Net realized gain (loss) on investments sold and financial
futures contracts ............................................ 79,113 (9,552)
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts .................. (573,560) 2,137,301
------------ ------------
Net increase in Net Assets Resulting from Operations ........ 2,600,243 5,257,911
------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.6543 and $0.6624 per share, respectively) ..... (3,094,690) (3,076,399)
Class B - (none and $0.5409 per share, respectively) ........ -- (40,163)
------------ ------------
Total Distributions to Shareholders ............................ (3,094,690) (3,116,562)
------------ ------------
From Fund Share Transactions - Net : * ......................... 1,247,514 (639,088)
------------ ------------
Net Assets:
Beginning of period ........................................... 54,415,695 55,168,762
------------ ------------
End of period (including undistributed net investment income of
$5,145 and $18,671, respectively) ........................... $ 55,168,762 $ 56,671,023
============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------
1996 1997
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- -------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ..................................... 664,442 $ 7,865,907 465,463 $ 5,553,824
Shares issued to shareholders in reinvestment
of distributions ............................... 175,838 2,080,462 170,206 2,035,827
------- ----------- -------- ------------
840,280 9,946,369 635,669 7,589,651
Less shares repurchased ......................... (736,253) (8,698,855) (890,320) (10,619,595)
------- ----------- -------- ------------
Net increase (decrease) ......................... 104,027 $ 1,247,514 (254,651) ($ 3,029,944)
======= =========== ======== ============
CLASS B**
Shares sold ..................................... 199,045 $ 2,385,475
Shares issued to shareholders in reinvestment
of distributions ............................... 2,219 26,681
------- -----------
201,264 2,412,156
Less shares repurchased ......................... (1,755) (21,300)
------- -----------
Net increase .................................... 199,509 $ 2,390,856
======= ===========
</TABLE>
**Class B commenced operations on October 3, 1996.
The Statement of Changes in Net Assets shows how the value of net assets 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 the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ................. $ 11.75 $ 12.43 $ 11.56 $ 11.76 $ 11.66
------- ------- ------- ------- -------
Net Investment Income ................................ 0.67 0.63 0.65 0.65 0.66
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts ..................... 0.82 (0.75) 0.20 (0.10) 0.46
------- ------- ------- ------- -------
Total from Investment Operations ................ 1.49 (0.12) 0.85 0.55 1.12
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ................ (0.67) (0.63) (0.65) (0.65) (0.66)
Distributions from Net Realized Gain on
Investments Sold ................................... (0.14) (0.12) -- -- --
------- ------- ------- ------- -------
Total Distributions ............................. (0.81) (0.75) (0.65) (0.65) (0.66)
------- ------- ------- ------- -------
Net Asset Value, End of Period ....................... $ 12.43 $ 11.56 $ 11.76 $ 11.66 $ 12.12
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (2) ....... 13.29% (0.97%) 7.66% 4.78% 9.85%
Total Adjusted Investment Return at Net
Asset Value (2,3) ................................... 12.38% (1.50%) 7.21% 4.30% 9.45%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............. $50,019 $54,122 $54,416 $55,169 $54,253
Ratio of Expenses to Average Net Assets .............. 0.67% 0.70% 0.70% 0.75%(4) 0.71%(4)
Ratio of Adjusted Expenses to Average Net Assets (1) . 1.58% 1.23% 1.15% 1.18% 1.11%
Ratio of Net Investment Income to Average Net Assets . 5.61% 5.28% 5.67% 5.53% 5.59%
Ratio of Adjusted Net Investment Income to Average
Net Assets (1) ...................................... 4.70% 4.75% 5.22% 5.05% 5.19%
Portfolio Turnover Rate .............................. 79% 29% 24% 36% 12%
Expense and Fee Reduction Per Share .................. $ 0.11 $ 0.06 $ 0.05 $ 0.06 $ 0.05
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
OCTOBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
TO AUGUST 31, 1997
---------------------------
<S> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period............................................... $ 11.84
-------
Net Investment Income ............................................................. 0.54
Net Realized and Unrealized Gain on Investments and Financial Futures Contracts.... 0.28
-------
Total from Investment Operations.................................................. 0.82
-------
Less Distributions:
Dividends from Net Investment Income ............................................. (0.54)
-------
Net Asset Value, End of Period..................................................... $ 12.12
=======
Total Investment Return at Net Asset Value (2)..................................... 7.08%(6)
Total Adjusted Investment Return at Net Asset Value (2,3).......................... 6.72%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)........................................... $2,418
Ratio of Expenses to Average Net Assets............................................ 1.41%(4,5)
Ratio of Adjusted Expenses to Average Net Assets (1)............................... 1.81%(5)
Ratio of Net Investment Income to Average Net Assets............................... 4.82%(5)
Ratio of Adjusted Net Investment Income to Average Net Assets (1).................. 4.42%(5)
Portfolio Turnover Rate............................................................ 12%
Expense and Fee Reduction Per Share ............................................... $ 0.04
</TABLE>
(1) Unreimbursed, without fee reduction.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into consideration
fee reductions by the Adviser during the periods shown.
(4) The Ratio of Expenses to Average Net Assets for the periods ending on or
after August 31, 1996 excludes the effect of balance credits described in
Note B. If these expense reductions were included, the Ratio of Expenses to
Average Net Assets would have been 0.70% for both periods for Class A and
1.40% for Class B.
(5) Annualized.
(6) Not Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
Schedule of Investments
August 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Massachusetts Tax-Free Income Fund on August 31, 1997. It has one main category:
tax-exempt long-term bonds. The tax-exempt bonds are further broken down by
state and territory. Under each state or territory is a list of the securities
owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
Massachusetts (86.86%)
Boston City Industrial Development Financing Auth,
Sewage Facil Rev 1991 Ser Harbor Elec Energy Co Proj ..... 7.375% 05-15-15 BBB $250 $271,755 6.78%
Boston Water and Sewer Commission,
Gen Rev 1991 Ser A Sr Ser ................................ 7.000 11-01-18 AAA 500 558,580 6.27
Gen Rev 1992 Ser A Sr Ser ................................ 5.750 11-01-13 A 500 525,305 5.47
Boston, City of,
GO 1990 Ser A ............................................ 7.375 02-01-10 A+ 350 381,458 6.77
GO 1991 Ser A MBIA ....................................... 6.750 07-01-11 AAA 350 385,441 6.13
GO 1992 Ser A AMBAC ...................................... 6.500 07-01-12 AAA 500 546,495 5.95
Rev Boston City Hosp FHA-Ins Mtg Ser A ................... 7.625 02-15-21 Aaa 500 552,940 6.89
Brockton, City of,
State Qualified Municipal Purpose Ln of 1993 ............. 6.125 06-15-18 A- 2,000 2,083,320 5.88
Holyoke, City of,
GO School Proj Ln Act of 1948 ............................ 7.650 08-01-09 Baa 1,000 1,117,720 6.84
Massachusetts Bay Transportation Auth,
Gen Trans Sys Rev Ref 1994 Ser A ......................... 7.000 03-01-14 A+ 1,000 1,186,700 5.90
Massachusetts Educational Financing Auth,
Ed Ln Rev Iss D Ser 1991A ................................ 7.250 01-01-09 AAA 445 478,807 6.74
Massachusetts Health and Educational Facilities Auth,
Rev Anna Jaques Hosp Iss Ser B .......................... 6.875 10-01-12 Baa1 1,250 1,334,213 6.44
Rev Bentley College Iss Ser H ........................... 6.875 07-01-12 AAA 250 274,077 6.27
Rev Boston College Iss Ser J ............................ 6.625 07-01-21 AAA 1,000 1,087,610 6.09
Rev Charlton Memorial Hosp Iss Ser B .................... 7.250 07-01-13 A 2,250 2,457,742 6.64
Rev Community Colleges Prog Iss Ser A ................... 6.600 10-01-22 AAA 250 271,183 6.08
Rev Dana-Farber Cancer Institute Ser G-1 ................ 6.250 12-01-22 A 500 525,840 5.94
Rev Lowell Gen Hosp Iss Ser A ........................... 8.400 06-01-11 A- 600 691,200 7.29
Rev Melrose-Wakefield Hosp Iss Ser B .................... 6.350 07-01-06 A- 500 531,635 5.97
Rev New England Baptist Hosp Iss Ser B .................. 7.350 07-01-17 BBB+ 250 266,752 6.89
Rev New England Deaconess Hosp Iss Ser D ................ 6.875 04-01-22 A 2,210 2,393,253 6.35
Rev Northeastern Univ Iss Ser E ......................... 6.550 10-01-22 AAA 1,000 1,098,130 5.96
Rev Ref Worcester Polytechnic Institute Iss Ser E ....... 6.625 09-01-17 AAA 250 277,695 5.96
Rev Reg Inverse Floater Ser 1993 ........................ 7.550# 08-15-23 AAA 500 510,000 7.40
Rev Smith College Iss Ser D ............................. 5.750 07-01-24 AA- 500 504,435 5.70
Rev Tufts Univ Iss Ser C Preref ......................... 7.400 08-01-18 A+ 430 452,119 7.04
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts (continued)
Massachusetts Housing Finance Agency,
Rev Insured Rental Hsg 1994 Ser A ....................... 6.600% 07-01-14 AAA $1,100 $1,160,082 6.26%
Rev Residential Devel FNMA Coll Ser C ................... 6.875 11-15-11 AAA 2,000 2,163,480 6.36
Rev Residential Devel FNMA Coll Ser D ................... 6.800 11-15-12 AAA 500 536,500 6.34
Single Family Hsg Rev Ser 5 ............................. 8.375 06-01-15 A+ 50 51,051 8.20
Single Family Hsg Rev Ser 7 ............................. 8.400 12-01-16 A+ 100 102,757 8.17
Single Family Hsg Rev Ser 7 ............................. 8.100 06-01-20 A+ 80 82,360 7.87
Single Family Hsg Rev Ser 9 ............................. 8.100 12-01-21 A+ 100 103,264 7.84
Single Family Hsg Rev Ser 13 ............................ 7.950 06-01-23 A+ 165 174,717 7.51
Single Family Hsg Rev Ser 18 ............................ 7.350 12-01-16 A+ 550 582,230 6.94
Massachusetts Industrial Finance Agency,
Resource Recovery Rev Ref Ser 1993 A Mass
Refusetech Inc Proj .................................... 6.300 07-01-05 BBB 1,825 1,952,166 5.89
Rev Assumption College Iss 1996 ......................... 6.000 07-01-26 AAA 1,000 1,037,850 5.78
Rev Dana Hall School Iss ................................ 5.800 07-01-17 BBB- 1,090 1,098,448 5.76
Rev Ref Emerson College Iss Ser 1991A ................... 8.900 01-01-18 BBB- 250 276,403 8.05
Rev Ref Holy Cross College Iss 1996 ..................... 5.500 03-01-20 AAA 500 498,080 5.52
Rev Ref Holy Cross College Iss II Ser 1992 .............. 6.375 11-01-15 A+ 500 550,980 5.79
Rev Ser C Glenmeadow Retirement Community ............... 8.375 02-15-18 BB+ 1,000 1,052,830 7.95
Rev Wtr Treatment American Hingham Proj ................. 6.900 12-01-29 BBB 1,310 1,405,918 6.43
Rev Wtr Treatment American Hingham Proj ................. 6.750 12-01-20 BBB 2,000 2,128,700 6.34
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+ 500 545,705 6.18
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the
Commonwealth of Mass ................................... 6.750 07-01-06 BBB+ 1,500 1,630,350 6.21
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of the
Commonwealth of Mass ................................... 6.750 07-01-17 BBB+ 400 431,892 6.25
Pwr Supply Sys Rev 1992 Ser C A Pub Corp of the
Commonwealth of Mass ................................... 6.625 07-01-10 AAA 1,000 1,098,350 6.03
Pwr Supply Sys Rev 1993 Reg Inverse Floater ............. 7.020# 07-01-18 AAA 1,300 1,230,125 7.47
Massachusetts Port Auth,
Rev AMT Ser B ........................................... 5.300 07-01-16 AA- 1,000 984,240 5.38
Rev Ref Ser 1992 A ...................................... 6.000 07-01-23 AA- 1,370 1,394,701 5.89
Rev Special Facil Ser A USAir Proj ...................... 5.750 09-01-16 AAA 1,000 1,016,300 5.66
Massachusetts Water Resource Auth,
Gen Rev Ref 1993 Ser B .................................. 5.500 03-01-17 A 400 395,756 5.56
Gen Rev Ref 1993 Ser B .................................. 5.000 03-01-22 A 360 331,841 5.42
Gen Rev Ref 1993 Ser C .................................. 4.750 12-01-23 A 1,000 882,480 5.38
Massachusetts, The Commonwealth of,
GO Consol Ln of 1991 Ser D ............................... 6.875 07-01-10 A+ 1,500 1,658,460 6.22
Nantucket, Town of,
GO Municipal Purpose Ln of 1991 .......................... 6.800 12-01-11 A1 450 500,053 6.12
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil Proj 7.000 04-01-22 A- 750 836,543 6.28
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts (continued)
Springfield, City of,
GO School Proj Ln Act of 1992 Ser B ...................... 7.100% 09-01-11 Baa $500 $565,930 6.27%
----------
49,224,947
----------
Puerto Rico (11.06%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico ............................................. 8.096# 07-01-11 AAA 2,000 2,397,500 6.86
Puerto Rico Highway and Transportation Auth,
Highway Rev Cap Rites Ser Y .............................. 6.250 07-01-14 A 1,000 1,106,050 5.65
Puerto Rico Infrastructure Financing Auth,
Spec Tax Rev Ser 1988A ................................... 7.750 07-01-08 BBB+ 450 473,148 7.37
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Rate Securities Ser 1996 .............. 8.070# 07-01-11 AAA 1,000 1,198,750 6.86
GO Pub Imp Unltd Ref Ser 1994 ............................ 6.400 07-01-11 A 1,000 1,089,650 5.87
----------
6,265,098
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $51,967,425) (97.92%) 55,490,045
------ -----------
TOTAL INVESTMENTS (97.92%) $55,490,045
====== ===========
</TABLE>
* Credit ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Services, Fitch or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available.
+ The yield is not calculated in accordance with guidelines established by the
U.S. Securities & Exchange Commission and is unaudited.
# Represents rate in effect on August 31, 1997.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
Portfolio Concentration
August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Massachusetts Tax-Free Income Fund invests primarily in securities issued in
the state of Massachusetts and its various political subdivisions. The
performance of this Fund is closely tied to the economic conditions within the
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 the Fund are shown in the schedule of
investments. In addition, concentration of investments can be aggregated by
various categories.
The table below shows the Fund's investment at August 31, 1997 assigned to
various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTIONS NET ASSETS
- -------------------- ----------
General Obligation .............................................. 13.96%
Revenue Bonds - Certificate of Participation .................... 1.48
Revenue Bonds - Education ....................................... 16.82
Revenue Bonds - Electric Power .................................. 8.71
Revenue Bonds - Health .......................................... 16.33
Revenue Bonds - Housing ......................................... 8.75
Revenue Bonds - Industrial Development Bond ..................... 10.16
Revenue Bonds - Other ........................................... 2.69
Revenue Bonds - Transportation .................................. 10.04
Revenue Bonds - Water & Sewer ................................... 8.98
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 97.92%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Exempt Series Fund (the "Trust") is a diversified open-end
management investment company registered under the Investment Company Act of
1940. The Trust consists of two series: John Hancock Massachusetts Tax-Free
Income Fund (the "Fund") and John Hancock New York Tax-Free Income Fund. The
other series of the Trust is reported in separate financial statements. The
investment objective of the Fund is to provide as high a level of current income
exempt from both federal income taxes and Massachusetts personal income taxes as
is consistent with preservation of capital.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses subject to the approval of the Trustees may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan. On October 3, 1996, Class B shares of beneficial interest were sold to
commence class activity.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $524,746 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent such carryforwards are used by the
Fund, no capital gains distribution will be made. The carryforwards expire as
follows: August 31, 2003 -- $387,469, August 31, 2004 -- $137,277. Additionally,
net capital losses of $5,384 attributable to security transactions incurred
after October 31, 1996 are treated as arising on the first day (September 1,
1997) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Inter-
16
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
nal Revenue Code. The Fund records market discount on bonds purchased after
April 30, 1993 at time of disposition.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses that are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and relative
sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Fund had no borrowing
activity for the period ended August 31, 1997.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it will be required to deposit
with its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of the
financial futures contract being traded. Each day, the futures contract is
valued at the official settlement price on the board of trade or U.S.
commodities exchange on which it trades. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market," will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund gains and/or losses can be affected as a result of futures contracts.
At August 31, 1997, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
DEC 97 20 U.S. TREASURY BONDS LONG $1,250
======
At August 31, 1997, the Fund had deposited $36,000 in a segregated account
to cover margin requirements on open financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked to market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the price
volatility of financial instruments. Writing puts and buying calls will tend to
increase the Fund's exposure to the underlying instrument
17
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
and buying puts and writing calls will tend to decrease the Fund's exposure to
the underlying instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended August 31,
1997.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.500% of the first $250,000,000 of the
Fund'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 the Fund's average daily net asset value in excess of $1,250,000,000.
The Adviser has voluntarily agreed to limit the Fund's expenses further to
the extent required to prevent expenses from exceeding 0.70% and 1.40% of the
average net assets attributable to Class A and Class B, respectively.
Accordingly, for the period ended August 31, 1997, the reduction in the
Adviser's fee collectively with any additional amounts not borne by the Fund by
virtue of the expense limit amounted to $217,030. This limitation may be
discontinued at any time.
The Fund has an agreement with its custodian bank under which $5,901 of
custodian fees have been reduced by balance credits applied during the period
ended August 31, 1997. If the Fund had not entered into this agreement, the
assets not invested, on which these balance credits were earned, could have
produced taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended August
31, 1997, net sales charges received with regard to sales of Class A shares
amounted to $153,486. Out of this amount, $15,682 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $76,086
was paid as sales commissions to unrelated broker-dealers and $61,718 was paid
as sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses for providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended August 31, 1997
the contingent deferred sales charges received by JH Funds amounted to zero.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets,
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments
18
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
may be service fees as defined by the amended Rules of Fair Practice of the
National Association of Securities Dealers. Under the amended Rules of Fair
Practice, curtailment of a portion of the Fund's 12b-1 payments could occur
under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as another asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At August 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $409.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended August 31, 1997, aggregated $6,626,863 and $7,249,824, respectively. There
were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended August 31, 1997.
The cost of investments owned at August 31, 1997 for federal income tax
purposes was $51,967,425. Gross unrealized appreciation and depreciation of
investments aggregated $3,522,620 and none respectively, resulting in net
unrealized appreciation of $3,522,620.
NOTE D --
Reclassification of accounts
During the year ended August 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $93, a
decrease in undistributed net investment income of $74 and a decrease in capital
paid-in of $19. This represents the amount necessary to report these balances on
a tax basis, excluding certain temporary differences, as of August 31, 1997.
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.
19
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- Massachusetts Tax-Free Income Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
John Hancock Massachusetts Tax-Free Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments (except for credit 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 Massachusetts Tax-Free Income Fund (the "Fund") at August 31,
1997, and the results of its operations, the changes in its 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 at August 31, 1997 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 14, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended August 31,
1997.
None of the 1997 income dividends qualify for the corporate dividends
received deduction. Shareholders, who are not subject to the alternative minimum
tax, received income dividends which are 99.99% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 14.40%.
None of the income dividends were derived from U.S. Treasury Bills.
For specific information on exception provisions in your state, consult
your local state tax office or your tax advisor.
Shareholders will receive a 1997 U.S. Treasury Department Form 1099-DIV in
January, 1998. This will reflect the total of all distributions which are
taxable for calendar year 1997.
20
<PAGE>
================================================================================
NOTES
John Hancock Funds -- Massachusetts Tax-Free Income Fund
21
<PAGE>
================================================================================
NOTES
John Hancock Funds -- Massachusetts Tax-Free Income Fund
22
<PAGE>
================================================================================
NOTES
John Hancock Funds -- Massachusetts Tax-Free Income Fund
23
<PAGE>
================================================================================
[A 1/2" x 1/2" John Hancock Funds logo --------------
in upper left hand corner of the page. A Bulk Rate
box sectioned in quadrants with a U.S. Postage
triangle in upper left, a circle in PAID
upper right, a cube in lower left and a Randolph, MA
diamond in lower right. A tag line below Permit No. 75
reads: "A Global Investment Management --------------
Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Massachusetts Tax-Free Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
[A recycled logo in lower left hand corner
with caption "Printed on Recycled Paper."]
7700A 8/97
10/97
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
New York
Tax-Free
Income Fund
AUGUST 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Fund
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK AND TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
<PAGE>
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The Taxpayer Relief Act of 1997 recently signed into law by President Clinton
includes new twists and important changes to Individual Retirement Account (IRA)
laws. The provisions will, among other things, allow more people to qualify for
annual tax-deductible IRA contributions and to save tax-free for college. They
also allow IRA investors to withdraw money penalty-free from all IRAs to buy a
first home or pay for college expenses.
[A 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief Executive Officer,
flush right, next to second paragraph]
For existing deductible IRAs, the law doubles income limits over the next
eight to 10 years for those eligible to deduct an annual IRA contribution of up
to $2,000. For individuals, the annual income cap will increase incrementally
from the current $25,000 to $50,000 by 2005. For couples, the limit would
increase from $40,000 today to $80,000 in 2007. The new law allows non-working
spouses to make IRA contributions even if their spouse is covered by a pension
plan at work, provided the couple's joint income is less than $150,000.
The law also creates two new IRA investment vehicles. One, called the
"Roth IRA" after its principal congressional sponsor, allows for non-deductible
annual contributions up to a $2,000 maximum. But income accumulates tax-free and
if the account has been open for five years, distributions are tax-free if they
are used after age 591/2 or upon death, disability or a first-time home
purchase. Withdrawals for higher-education expenses would not be subject to a
10% penalty. Eligible investors must earn less than $95,000 per year
individually or $150,000 per couple.
A second new IRA plan is called the "Education IRA," which allows
non-deductible contributions of up to $500 per year, per child under age 18.
Earnings in the account accumulate tax-free, and withdrawals are also not taxed
when applied toward undergraduate or graduate-level expenses. Eligible investors
are subject to the same income restrictions as the Roth IRA.
The law has also made some important changes in capital gains tax rates
and estate tax laws. But the devil is in the details, and so we recommend
exploring how you can benefit from the changes with your investment professional
and tax advisor. The Taxpayer Relief Act of 1997 gives investors new options
toward savings. It's a move we applaud.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Frank Lucibella, CFA, Portfolio Manager
John Hancock New York
Tax-Free Income Fund
Low inflation, strong local economy
help buoy New York municipals
Troubled by contradictory news on the job, retail spending and consumer price
fronts, bond prices see-sawed during much of the first half of the Fund's fiscal
year beginning September 1, 1996. While many cheer strong economic reports, bond
investors fear them because they worry that such strength may be an indication
that inflation is on the rise. Inflation, of course, is the bugaboo of bond
investing because it eats away at the value of bonds' fixed-income payments. In
March, the Federal Reserve Board raised short-term interest rates one-quarter of
a percentage point, in a pre-emptive effort to stave off any future inflation.
That action rattled bond investors who pushed bond prices lower and yields
higher in February and March.
It really wasn't until April when bond prices showed definitive signs of
sustained improvement. At that point, there was plenty for bond investors to
cheer about. Even though the U.S. unemployment rate hit a 23-year low, there
were no real signs that wages -- often a large contributor to higher inflation
- -- were on the rise. Adding further fuel to the bond market's optimism was
Federal Reserve Board Chairman Alan Greenspan's July testimony to Congress.
While he admitted puzzlement that despite the economy's strong growth and low
unemployment no inflationary pressures were brewing, he strongly hinted that no
further interest-rate hikes were on the immediate horizon.
For the year ended August 31, 1997, John
"...bonds
issued by
New York City
were some of
our best
performers..."
[A 2 1/4" x 3 3/4" photo of the Fund management team. Caption reads: "Frank
Lucibella (seated) and Fund management team members (l-r): Mike Roye, Tom
Goggins, Dianne Sales, and Holly Morris".]
3
<PAGE>
================================================================================
John Hancock Funds -- New York Tax-Free Income Fund
"We continued
to emphasize
non-callable
securities..."
- --------------------------------------------------------------------------------
[Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into 9 sections. Going from top clockwise; General
Obligation 11%; Education 15%; Electric 6%; Health 14%; Housing 14%; Industrial
Development 8%; Other 16%; Transportation 8%; Water & Sewer 8%. A footnote below
states "As a percentage of net assets on August 31, 1996."]
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers". The first listing is New York
City followed by an up arrow and the phrase "Perceived improvements in credit
quality". The second listing is Visy Paper followed by an up arrow and the
phrase "Successful startup/strong demand". The third listing is Insured bonds
followed by a horizontal arrow and the phrase "Abundance of supply". A footnote
below states "See `Schedule of Investments'. Investment holdings are subject to
change".]
- -----------------------------------------------------------------------------
Hancock New York Tax-Free Income Fund's Class A shares posted a total return of
9.48% at net asset value, which was ahead of the average New York municipal bond
fund's 8.93% return for the same period, according to Lipper Analytical
Services, Inc.(1) The Fund's Class B shares, which began on October 3, 1996, had
a total return of 6.82% at net asset value from inception through August 31,
1997. Please see pages six and seven for longer-term performance.
Winners: New York City, high-coupon bonds
Throughout the past year, our holdings in bonds issued by New York City were
some of our best performers, buoyed by three fundamental developments. First was
the perception that the credit quality of these bonds had improved. The rising
stock market has been an overwhelming positive for the fortunes of many Wall
Street firms, which are dominant players in the city's economy. Thanks to rising
personal income and corporate tax receipts and falling expenditures, New York
City's fiscal picture has enjoyed substantial improvement over the past couple
of years. Second, there was a healthy demand for New York City bonds. In an
environment where nearly half of all bonds issued across the state were insured,
uninsured New York City bonds were sought after by investors searching for
yields in excess of those offered by insured bonds. Third, the city reached the
statutory cap of the amount of general obligation (GO) debt it can issue. Given
that, and the formation of the Transitional Finance Authority -- which will
issue additional debt for the city -- the expectation is that there isn't going
to be a lot of New York City GO debt issued over the next couple of years. The
anticipated lack of future supply also helped New York City bonds rally. Bonds
issued by the New York City Industrial Development Agency for Visy Paper were
boosted because there was a low supply of high-yielding bonds and because of the
successful startup of this plant, which recycles the city's waste paper into
corrugated cardboard.
We also saw strong performance from some of our long-held bonds. These
bonds were issued when interest rates were much higher, with coupons at roughly
8%. That compares with newly issued bonds that have coupons in the 5.50% to
5.75% range. Not only did these older, higher-coupon bonds generally enjoy price
appreciation during the period, but they also helped to boost the Fund's income.
Strategy overview
Throughout the period, we focused on bonds with maturities of between 15 and 20
years. The yield spread -- the difference in yields between bonds of various
maturities -- was quite tight. In
4
<PAGE>
================================================================================
John Hancock Funds -- New York Tax-Free Income Fund
- --------------------------------------------------------------------------------
[Bar chart with heading "Fund Performance" at top of left hand column. The chart
is scaled in increments of 2% from bottom to top, with 10% at the top and 0% at
the bottom. Within the chart there are three solid bars. The first represents
the 9.48% total return for John Hancock New York Tax-Free Income Fund Class A.
The second represents the 6.82% total return for the John Hancock New York
Tax-Free Income Fund Class B. The third represents the 8.93% total return for
the Average New York municipal bond fund. A footnote below states "The total
return for John Hancock New York Tax-Free Income Fund is at net asset value with
all distributions reinvested. The average New York municipal bond fund is
tracked by Lipper Analytical Services, Inc. (1). See the following two pages for
historical performance information. For Class A shares and the average New York
municipal bond fund, returns are for the year ended August 31, 1997. * For Class
B shares, return is from inception October 3, 1996 through August 31, 1997."]
- --------------------------------------------------------------------------------
our view, bonds with longer maturities didn't offer enough additional yield to
compensate for their added interest-rate sensitivity. So we chose
intermediate-maturity bonds where we thought the risk/return payoff was most
attractive. It was in the intermediate range that the muni market saw its
strongest demand and therefore best performance compared to longer-maturity
bonds.
We also continued to emphasize non-callable securities, which can't be
redeemed by their issuer before their maturity. The upside to non-callable
securities is that they tend to perform better than callable securities (which
can be redeemed prior to maturity) when interest rates fall, and generally do no
worse than callable bonds when rates rise. Their downside is that they generally
offer less yield. During the period, non-callables offered about 10 basis points
(0.10%) less in yield on average than callable securities. However, we believed
that on a total return basis, non-callables were more attractive.
Outlook
For now, the economic backdrop appears favorable for municipal bonds. The
economy continues to look moderately strong, yet all appears to be quiet on the
inflationary front. However, we're not necessarily ruling out another small
interest rate boost. If the Federal Reserve Board sees something it believes
could be inflationary -- such as a stronger-than-expected employment report --
it's likely to act swiftly to curtail inflation before it becomes problematic.
But even a small, quarter-percentage point hike in interest rates probably
wouldn't the rattle the bond markets to a great extent. As for the New York
municipal market, we're optimistic. Given the recent strength of the state's
economy, we believe that eventually many New York municipal issuers could
receive higher credit ratings.
"For now,
the economic
backdrop
appears
favorable for
municipal
bonds."
- ------------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
John Hancock Funds -- New York Tax-Free Income Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock New York Tax-Free Income Fund. Total return
is a performance measure that equals the sum of all income and capital gains
distributions, assuming reinvestment of these distributions, and the change in
the price of the Fund's shares, expressed as a percentage of the Fund's net
asset value per share. Performance figures include the maximum applicable sales
charge of 4.5% for Class A shares. The effect of the maximum contingent deferred
sales charge for Class B shares (maximum 5% and declining to 0% over six years)
is included in Class B performance. Performance is affected by a 12b-1 plan.
Remember that all figures represent past performance and are no guarantee of how
the Fund will perform in the future. Also, keep in mind that the total return
and share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost, depending on
when you sell them.
Please note that a portion of the Fund's income may be subject to taxes,
and some investors may be subject to the Alternative Minimum Tax. Also note that
capital gains are taxable when distributed to shareholders.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
------- ------- --------
John Hancock New York Tax-Free
Income Fund: Class A 3.37% 32.73% 111.96%(1)
John Hancock New York Tax-Free
Income Fund: Class B (0.23%)(2) N/A N/A
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
------- ------- --------
John Hancock New York Tax-Free
Income Fund: Class A(3) 3.37% 5.83% 7.97%(1)
John Hancock New York Tax-Free
Income Fund: Class B(3) (0.23%)(2) N/A N/A
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of August 31, 1997
SEC 30-DAY
YIELD
--------------
John Hancock New York Tax-Free
Income Fund: Class A 4.47%
John Hancock New York Tax-Free
Income Fund: Class B 3.97%
Notes to Performance
(1) Class A shares commenced operations on September 13, 1987.
(2) Class B shares commenced operations on October 3, 1996. Since inception
not annualized.
(3) The Adviser has voluntarily reduced a portion of the management fee and a
portion of the custodian fees have been reduced by balance credits during
the period. Without the reductions of expenses, the average annual total
returns for the one-year, five-year and since inception periods for Class
A shares would have been 2.97%, 5.28% and 6.96%, respectively. The average
annual total return since inception for Class B shares would have been
(0.84%).
6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in John Hancock New
York Tax-Free Income Fund would be worth on August 31, 1997. They assume that
you invested on the day each class of shares started. They also assume that you
have reinvested all distributions. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Municipal Bond Index -- an unmanaged index
that includes approximately 15,000 bonds and is commonly used as a measure of
bond performance.
[New York Tax-Free Income Fund
Class A shares
Line chart with the heading New York Tax-Free Income Fund: Class A, representing
the growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the New York Tax-Free Income Fund on September 13, 1987, before contingent
deferred sales charge, and is equal to $22,694 as of August 31, 1997.The second
line represents the value of the Lehman Brothers Municipal Bond Index and is
equal to $22,060 as of August 31, 1997. The third line represents the New York
Tax-Free Income Fund, after contingent deferred sales charge and is equal to
$21,673 as of August 31, 1997.]
[New York Tax-Free Income Fund
Class B shares
The second line chart with the heading New York Tax-Free Income Fund: Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines:
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $10,774 as of August 31, 1997. The second line represents the
value of the hypothetical $10,000 investment made in the New York Tax-Free
Income Fund on October 3, 1996, before contingent deferred sales charge, and is
equal to $10,682 as of August 31, 1997. The third line represents the New York
Tax-Free Income Fund after contingent deferred sales charge and is equal to
$10,182 as of August 31, 1997.]
7
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on August 31, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
August 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $51,913,970) ........... $55,818,437
Receivable for shares sold ................................. 25,413
Interest receivable ........................................ 803,357
Other assets ............................................... 3,030
------------
Total Assets ............................. 56,650,237
-----------------------------------------------------------
Liabilities:
Due to Custodian ........................................... 71,303
Dividend payable ........................................... 23,791
Payable to John Hancock Advisers, Inc. .....................
and affiliates - Note B ................................... 22,812
Accounts payable and accrued expenses ...................... 32,630
------------
Total Liabilities ........................ 150,536
-----------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 53,068,781
Accumulated net realized loss on investments and
financial futures contracts ............................... (506,675)
Net unrealized appreciation of investments ................. 3,904,883
Undistributed net investment income ........................ 32,712
------------
Net Assets ............................... $56,499,701
===========================================================
Net Asset Value Per Share:
Class A - $54,085,596/4,416,264 ............................ $12.25
==============================================================================
Class B - $2,414,105/197,120 ............................... $12.25
==============================================================================
Maximum Offering Price Per Share*
Class A - ($12.25 x104.71%) ................................ $12.83
==============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended August 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Interest ................................................... $3,600,828
------------
Expenses:
Investment management fee - Note B ........................ 286,258
Distribution and service fee - Note B
Class A ................................................. 168,625
Class B ................................................. 10,435
Transfer agent fee - Note B ............................... 66,705
Custodian fee ............................................. 49,727
Auditing fee .............................................. 22,542
Financial services fee - Note B ........................... 10,630
Printing .................................................. 10,610
Registration and filing fees .............................. 6,007
Trustees' fees ............................................ 4,060
Miscellaneous ............................................. 508
Legal fees ................................................ 356
Less management fee reduction - Note B .................... (222,709)
------------
Total Expenses ........................... 413,754
-----------------------------------------------------------
Less Expense Reductions -
Note B ................................... (5,779)
-----------------------------------------------------------
Net Expenses ............................. 407,975
-----------------------------------------------------------
Net Investment Income .................... 3,192,853
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized gain on investments sold ...................... 163,998
Net realized loss on financial futures contracts ........... (81,265)
Change in net unrealized appreciation/depreciation
of investments ............................................ 1,937,077
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................ (38,545)
------------
Net Realized and Unrealized Gain on
Investments and Financial Futures
Contracts ................................ 1,981,265
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................ $5,174,118
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ...................................................... $ 3,123,980 $ 3,192,853
Net realized gain (loss) on investments sold and financial futures contracts (200,732) 82,733
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts ............................................... (40,997) 1,898,532
------------ ------------
Net Increase in Net Assets Resulting from Operations ..................... 2,882,251 5,174,118
------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.6609 and $0.6740 per share, respectively) .................. (3,123,980) (3,142,726)
Class B - (none and $0.5386 per share, respectively) ..................... -- (49,467)
------------ ------------
Total Distributions to Shareholders ...................................... (3,123,980) (3,192,193)
------------ ------------
From Fund Share Transactions - Net*: .......................................... 717,513 (1,710,975)
------------ ------------
Net Assets:
Beginning of period ........................................................ 55,752,967 56,228,751
------------ ------------
End of period (including undistributed net investment income of
$15,420 and $32,712, respectively) ....................................... $ 56,228,751 $ 56,499,701
============ ============
</TABLE>
*Analysis of Fund Shares Transactions:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1996 1997
------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 555,889 $ 6,667,694 513,776 $ 6,184,441
Shares issued to shareholders in reinvestment of distributions 188,248 2,255,924 185,671 2,241,144
---------- ----------- ---------- ------------
744,137 8,923,618 699,447 8,425,585
Less shares repurchased ...................................... (685,056) (8,206,105) (1,036,573) (12,505,667)
---------- ----------- ---------- ------------
Net increase (decrease) ...................................... 59,081 $ 717,513 (337,126) ($ 4,080,082)
========== =========== ========== ============
CLASS B**
Shares sold .................................................. 204,126 $ 2,454,367
Shares issued to shareholders in reinvestment of distributions 2,793 33,906
---------- ------------
206,919 2,488,273
Less shares repurchased ...................................... (9,799) (119,166)
---------- ------------
Net increase ................................................. 197,120 $ 2,369,107
========== ============
</TABLE>
** Class B commenced operations on October 3, 1996.
The Statement of Changes in Net Assets shows how the value of net assets 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 the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................ $11.90 $12.63 $11.73 $11.88 $11.83
------- ------- ------- ------- -------
Net Investment Income ........................................... 0.68 0.64 0.65 0.66 0.67
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts ............................... 0.87 (0.77) 0.15 (0.05) 0.42
------- ------- ------- ------- -------
Total from Investment Operations ............................ 1.55 (0.13) 0.80 0.61 1.09
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .......................... (0.68) (0.64) (0.65) (0.66) (0.67)
Distributions from Net Realized Gain on Investments Sold ...... (0.14) (0.13) -- -- --
------- ------- ------- ------- -------
Total Distributions ......................................... (0.82) (0.77) (0.65) (0.66) (0.67)
------- ------- ------- ------- -------
Net Asset Value, End of Period .................................. $12.63 $11.73 $11.88 $11.83 $12.25
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (2) .................. 13.70% (1.05%) 7.19% 5.21% 9.48%
Total Adjusted Investment Return and Net Asset Value (2,3) ...... 12.83% (1.58%) 6.74% 4.77% 9.08%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $52,444 $55,690 $55,753 $56,229 $54,086
Ratio of Expenses to Average Net Assets ......................... 0.67% 0.70% 0.70% 0.73%(4) 0.71%(4)
Ratio of Adjusted Expenses to Average Net Assets (1) ............ 1.54% 1.23% 1.15% 1.14% 1.11%
Ratio of Net Investment Income to Average Net Assets ............ 5.63% 5.28% 5.67% 5.51% 5.61%
Ratio of Adjusted Net Investment Income to Average Net Assets (1) 4.76% 4.75% 5.22% 5.07% 5.21%
Portfolio Turnover Rate ......................................... 56% 23% 70% 76% 46%
Expense and Fee Reduction Per Share ............................. $0.11 $0.06 $0.05 $0.05 $0.05
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
FOR THE PERIOD FROM
OCTOBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
TO AUGUST 31, 1997
----------------------------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................... $11.99
------
Net Investment Income .......................................... 0.54
Net Realized and Unrealized Gain on Investments ................ 0.26
------
Total from Investment Operations ............................ 0.80
------
Less Distributions:
Dividends from Net Investment Income .......................... (0.54)
------
Net Asset Value, End of Period ................................. $12.25
======
Total Investment Return at Net Asset Value (2) ................. 6.82%(6)
Total Adjusted Investment Return at Net Asset Value (2,3) ...... 6.46%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ....................... $2,414
Ratio of Expenses to Average Net Assets ........................ 1.41%(4,5)
Ratio of Adjusted Expenses to Average Net Assets (1) ........... 1.81%(5)
Ratio of Net Investment Income to Average Net Assets ........... 4.79%(5)
Ratio of Adjusted Net Investment Income to Average Net
Assets (1) 4.39%(5)
Portfolio Turnover Rate ........................................ 46%
Expense and Fee Reduction Per Share ............................ $0.04
(1) Unreimbursed, without fee reduction.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into consideration
fee reductions by the Adviser during the periods shown.
(4) The Ratio of Expenses to Average Net Assets for the periods ending on or
after August 31, 1996 excludes the effect of balance credits described in
Note B. If these expense reductions were included, the Ratio of Expenses to
Average Net Assets would have been 0.70% for Class A and 1.40% for Class B.
(5) Annualized.
(6) Not Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
Schedule of Investments
August 31, 1997
- -----------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
New York Tax-Free Income Fund on August 31, 1997. The schedule consists of one
main category: tax-exempt long-term bonds. The tax-exempt bonds are further
broken down by state or territory. Under each state or territory is a list of
the securities owned by the Fund.
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000S 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 (91.37%)
Dutchess County Resource Recovery Agency,
Solid Waste Mgmt Sys Rev Ser 1990 A ......................... 7.500% 01-01-09 AAA $250 $271,050 6.92%
Glen Cove Housing Auth,
Rev Sr Living Facil The Mayfair Proj ........................ 8.250 10-01-26 BB+ 1,000 1,064,560 7.75
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of Technology Proj ....... 7.500 03-01-26 BB- 1,500 1,594,935 7.05
Metropolitan Transportation Auth,
Commuter Facil 1987 Serv Contract Ser 3 ..................... 7.375 07-01-08 BBB 1,000 1,159,460 6.36
Commuter Facil 1992 Serv Contract Ser N ..................... 7.125 07-01-09 BBB 1,000 1,102,360 6.46
Transit Facil Rev Ser J ..................................... 6.500 07-01-18 AAA 1,000 1,107,220 5.87
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 1,057,380 6.19
New York City Industrial Development Agency,
Civic Facil Rev College of New Rochelle Proj ................ 5.750 09-01-17 Baa2 1,000 1,000,850 5.75
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj ........ 7.950 01-01-28 BB 1,000 1,126,260 7.06
Spec Facil Rev 1990 American Airlines Inc Proj .............. 8.000 07-01-20 BBB- 400 422,228 7.58
Spec Facil Rev 1997 United Airlines Inc Proj ................ 5.650 10-01-32 BB+ 1,000 976,820 5.78
New York City Municipal Water Finance Auth,
Wtr & Swr Sys Rev Ser 1996 .................................. 6.250 06-15-20 A- 1,000 1,074,930 5.81
New York Local Government Assistance Corp,
Rev Ref 1993 Ser C .......................................... 5.500 04-01-17 A 1,000 1,014,370 5.42
Rev Ref Cap Apprec Ser 1993 C ............................... Zero 04-01-14 AAA 1,100 454,476 5.40
Ser 1991 A Pub Benefit Corp. ................................ 7.250 04-01-18 AAA 1,000 1,115,780 6.50
Ser 1992 A Pub Benefit Corp. ................................ 6.875 04-01-19 A 2,000 2,237,200 6.15
Ser 1992C A Pub Benefit Corp. ............................... 6.000 04-01-12 A 200 216,850 5.53
New York State Dormitory Auth,
City Univ Rev Iss Ser U ..................................... 6.375 07-01-08 BBB+ 500 531,720 5.99
City Univ Sys Consol Rev Ser 1990A .......................... 7.625 07-01-20 BBB 485 537,739 6.88
Genessee Valley Presbyterian Nursing Center FHA-Ins Mtg
Rev Ser 1992B ............................................... 6.850 08-01-16 AA 250 270,700 6.33
KMH Homes Inc FHA-Ins Mtg Rev Ser 1991 ...................... 6.950 08-01-31 AA 1,200 1,292,760 6.45
Manhattanville College Ins Rev Ser 1990 ..................... 7.500 07-01-22 AAA 305 337,156 6.78
Nyack Hosp Rev Ser 1996 ..................................... 6.250 07-01-13 Baa2 500 520,690 6.00
State Univ Ed Facil Rev Ser 1990A ........................... 7.700 05-15-12 Aa 300 332,055 6.96
State Univ Ed Facil Rev Ser 1993A ........................... 5.500 05-15-19 A 2,000 2,002,340 5.49
State Univ Ed Facil Rev Ser 1993A ........................... 5.250 05-15-15 A 1,000 999,920 5.25
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
New York (continued)
United Hlth Serv Inc FHA-Ins Mtg Rev Ser 1989 ............. 7.350% 08-01-29 AAA $200 $213,330 6.89%
Univ of Rochester Rev Ser 1987 ............................ 6.500 07-01-09 A+ 625 638,612 6.36
Upstate Community Colleges 1988A Iss ...................... 7.750 07-01-18 BBB+ 300 315,387 7.37
Vassar College Rev Ser 1990 ............................... 7.250 07-01-15 AAA 250 274,700 6.60
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 AA- 200 204,478 7.34
Elec Facil Rev Ser 1989 A Consol Edison Co of NY Inc Proj . 7.750 01-01-24 A+ 200 205,010 7.56
Elec Facil Rev Ser 1989 B Consol Edison Co of NY Inc Proj . 7.375 07-01-24 A+ 200 206,286 7.15
Elec Facil Rev Ser 1990 A Consol Edison Co of NY Inc Proj . 7.500 07-01-25 A+ 260 274,919 7.09
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj . 7.500 01-01-26 A+ 420 448,699 7.02
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A ...... 7.500 06-15-12 A 630 695,615 6.79
State Wtr Poll Control Revolving Fund Rev Ser 1991 E ...... 6.875 06-15-10 A 400 439,668 6.25
New York State Housing Finance Agency,
Ins Multi-Family Mtg Hsg 1992 Ser C ....................... 6.450 08-15-14 AAA 500 522,450 6.17
Ins Multi-Family Mtg Hsg 1994 Ser B ....................... 6.250 08-15-14 AAA 750 788,813 5.94
Ins Multi-Family Mtg Hsg 1994 Ser C ....................... 6.450 08-15-14 Aa 1,000 1,049,080 6.15
New York State Medical Care Facilities Finance Agency,
Hosp & Nursing Home FHA-Ins Mtg Rev 1988 Ser C ............ 7.700 02-15-22 AAA 450 475,110 7.29
Hosp & Nursing Home Ins Mtg Rev 1992 Ser B ................ 6.950 02-15-32 AA 1,000 1,086,840 6.39
Mental Hlth Serv Facil Imp Rev 1990 Ser B Preref .......... 7.875 08-15-20 AAA 175 195,771 7.04
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal ....... 7.875 08-15-20 A- 65 72,194 7.09
Mental Hlth Serv Facil Imp Rev 1991 Ser A Preref .......... 7.750 08-15-11 AAA 205 231,279 6.87
Mental Hlth Serv Facil Imp Rev 1991 Ser A Unref Bal ....... 7.750 08-15-11 A- 20 22,377 6.93
Mental Hlth Serv Facil Imp Rev 1991 Ser B Preref .......... 7.625 08-15-17 A- 80 89,481 6.82
Mental Hlth Serv Facil Imp Rev 1991 Ser B Unref Bal ....... 7.625 08-15-17 A- 165 186,988 6.73
Mental Hlth Serv Facil Imp Rev 1991 Ser C Preref .......... 7.300 02-15-21 AAA 365 410,508 6.49
Mental Hlth Serv Facil Imp Rev 1991 Ser C Unref Bal ....... 7.300 02-15-21 A- 35 38,715 6.60
Rev Mental Hlth Serv Ser E ................................ 6.250 08-15-19 AAA 1,500 1,601,670 5.85
Sec Hosp Rev 1991 Ser A ................................... 7.350 08-15-11 BBB 250 274,035 6.71
New York State Mortgage Agency,
Homeowner Mtg Rev Ser 27 .................................. 6.900 04-01-15 Aa 1,175 1,264,617 6.41
Homeowner Mtg Rev Ser 28 .................................. 7.050 10-01-23 Aa 500 530,445 6.65
Homeowner Mtg Rev Ser 57 .................................. 6.300 10-01-17 Aa 500 528,105 5.96
Homeowner Mtg Rev Ser BB-2 ................................ 7.950 10-01-15 Aa 230 235,078 7.78
Homeowner Mtg Rev Ser EE-4 ................................ 7.800 10-01-13 Aa 300 318,423 7.35
Homeowner Mtg Rev Ser JJ .................................. 7.500 10-01-17 Aa 330 348,793 7.10
Homeowner Mtg Rev Ser VV .................................. 7.375 10-01-11 Aa 195 208,008 6.91
New York State Power Auth,
Gen Purpose Ser W ......................................... 6.500 01-01-08 AA- 250 282,340 5.76
Gen Purpose Ser Y ......................................... 6.500 01-01-11 AA- 250 268,260 6.06
Gen Purpose Ser Y ......................................... 6.750 01-01-18 AA- 250 271,060 6.23
New York State Thruway Auth,
Local Highway & Bridge Serv Contract Ser 1991 ............. 7.250 01-01-10 BBB+ 300 332,037 6.55
New York State Urban Development Corp,
Rev Ser 1990 Onondaga County Convention Center Proj ....... 7.875 01-01-20 BBB 250 282,340 6.97
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY CREDIT (000S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING* OMITTED) VALUE MARKET +
- -------------------------- ---- ---- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
New York (continued)
Rev Ser 7 Correctional Cap Facil Proj ..................... 5.700% 01-01-16 BBB $1,000 $1,003,230 5.68%
New York, City of,
GO Fiscal 1991 Ser B ...................................... 8.250 06-01-07 A 200 246,016 6.71
GO Fiscal 1991 Ser D Preref ............................... 8.000 08-01-04 Aaa 220 251,959 6.99
GO Fiscal 1991 Ser D Unref Bal ............................ 8.000 08-01-04 A 30 33,675 7.13
GO Fiscal 1991 Ser F Preref ............................... 8.200 11-15-03 A 45 52,262 7.06
GO Fiscal 1991 Ser F Unref Bal ............................ 8.200 11-15-03 A 205 233,112 7.21
GO Fiscal 1992 Ser A Preref ............................... 7.750 08-15-12 Aaa 60 68,248 6.81
GO Fiscal 1992 Ser A Unref Bal ............................ 7.750 08-15-12 A 190 212,357 6.93
GO Fiscal 1992 Ser B ...................................... 7.000 10-01-13 A 500 549,775 6.37
GO Fiscal 1992 Ser C ...................................... 7.500 08-01-21 A 250 281,183 6.67
GO Fiscal 1992 Ser H ...................................... 7.000 02-01-22 A 620 675,583 6.42
GO Fiscal 1996 Ser C ...................................... 5.875 02-01-16 A 1,000 1,013,220 5.80
GO Fiscal 1996 Ser G ...................................... 5.750 02-01-17 A 1,000 1,002,280 5.74
New York, State of,
GO Environmental Quality Fiscal 1994 ...................... 6.500 12-01-14 A 1,000 1,110,040 5.86
North Country Development Auth,
Solid Waste Mgt Sys Rev Preref Ser 1992 A ................. 6.750 07-01-12 Baa 265 282,167 6.34
Solid Waste Mgt Sys Rev Unref Bal Ser 1992 A .............. 6.750 07-01-12 Baa 225 234,232 6.48
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 1,064,880 6.22
Port Auth of New York and New Jersey,
Spec Proj KIAC Partners Proj Ser 4 ........................ 6.750 10-01-19 BBB 2,500 2,692,100 6.27
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser 1993 .................................. Zero 01-01-21 AAA 1,500 421,845 5.51
Spec Oblig Ref Ser 1991B .................................. 6.875 01-01-15 A- 500 543,060 6.33
----------
51,624,554
----------
Puerto Rico (7.42%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico ............................................... 8.096# 07-01-11 AAA 2,000 2,397,500 6.86
Puerto Rico Public Building Auth,
Rev Gtd Govt Facil Ser A .................................. 6.250 07-01-12 AAA 1,110 1,251,558 5.54
Puerto Rico, Commonwealth of,
GO Pub Imp Unltd Ref Ser 1994 ............................. 6.400 07-01-11 A 500 544,825 5.87
----------
4,193,883
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $51,913,970) (98.79%) $55,818,437
====== ===========
</TABLE>
* Credit ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Services, Fitch or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available.
+ The yield is not calculated in accordance with guidelines established by the
U.S. Securities & Exchange Commission and is unaudited. Zero Coupon yields
are at yield to maturity.
# Represents rate in effect on August 31, 1997.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
==============================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
Portfolio Concentration
August 31, 1997 (Unaudited)
- -------------------------------------------------------------------------------
The New York Tax-Free Income Fund invests primarily in securities issued by the
state of New York and its various political subdivisions. The performance of the
Fund is closely tied to the economic conditions within the 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 the Fund are shown in the schedule of investments. In
addition, the concentration of investments can be aggregated by various sector
categories.
The table below shows the Fund's investments at August 31, 1997 assigned to the
various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF THE FUND'S
SECTOR DISTRIBUTIONS NET ASSETS
- -------------------- ----------
General Obligation ............................................ 11.11%
Revenue Bonds - Education ..................................... 15.16
Revenue Bonds - Electric Power ................................ 6.22
Revenue Bonds - Health ........................................ 14.24
Revenue Bonds - Housing ....................................... 14.01
Revenue Bonds - Industrial Development Bond ................... 7.75
Revenue Bonds - Other ......................................... 13.89
Revenue Bonds - Transportation ................................ 8.26
Revenue Bonds - Water & Sewer ................................. 8.15
-----
TOTAL TAX-EXEMPT LONG-TERM BONDS 98.79%
=====
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Tax-Exempt Series Fund (the "Trust") is a diversified open-end
management investment company registered under the Investment Company Act of
1940. The Trust consists of two series: John Hancock New York Tax-Free Income
Fund (the "Fund") and John Hancock Massachusetts Tax-Free Income Fund. The other
series of the Trust is reported in separate financial statements. The investment
objective of the Fund is to provide as high a level of current income exempt
from both federal income taxes and New York personal income taxes as is
consistent with preservation of capital.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses subject to the approval of the Trustees may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan. On October 3, 1996, Class B shares of beneficial interest were sold to
commence class activity.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $292,545 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent such carryforwards are used by the
Fund, no capital gains distribution will be made. The carryforwards expire as
follows: August 31, 2003 -- $75,132 and August 31, 2004 -- $217,413.
Additionally, net capital losses of $62,129 attributable to security
transactions occurring after October 31, 1996 are treated as arising on the
first day (September 1, 1997) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or
16
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
the date of purchase over the life of the security, as required by the Internal
Revenue Code. The Fund records market discount on bonds purchased after April
30, 1993 at time of disposition.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses that are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and relative
sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Fund had no borrowing
activity for the period ended August 31, 1997.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it will be required to deposit
with its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of the
financial futures contract being traded. Each day, the futures contract is
valued at the official settlement price on the board of trade or U.S.
commodities exchange on which it trades. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market," will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund gains and/or losses can be affected as a result of futures contracts.
At August 31, 1997, there were no open positions in financial futures
contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked to market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the price
volatility of financial instruments. Writing puts and buying calls will tend to
increase the Fund's exposure to the underlying instrument and buying puts and
writing calls will tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual expo-
17
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
sure will be limited to the change in value of the contract over the period the
contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended August 31,
1997.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.500% of the first $250,000,000 of the
Fund'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 the Fund's average daily net asset value in excess of $1,250,000,000.
The Adviser has voluntarily agreed to limit the Fund's expenses further to
the extent required to prevent expenses from exceeding 0.70% and 1.40% of the
average net assets attributable to Class A and Class B, respectively.
Accordingly, for the period ended August 31, 1997, the reduction in the
Adviser's fee collectively with any additional amounts not borne by the Fund by
virtue of the expense limit amounted to $222,709. This limitation may be
discontinued at any time.
The Fund has an agreement with its custodian bank under which $5,779 of
custodian fees have been reduced by balance credits applied during the period
ended August 31, 1997. If the Fund had not entered into this agreement, the
assets not invested, on which these balance credits were earned, could have
produced taxable income.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended August
31, 1997, net sales charges received with regard to sales of Class A shares
amounted to $155,262. Out of this amount, $20,879 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $36,663
was paid as sales commissions to unrelated broker-dealers and $97,720 was paid
as sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses for providing distribution- related services to the Fund in
connection with the sale of Class B shares. For the period ended August 31, 1997
the contingent deferred sales charges received by JH Funds amounted to $2,301.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets,
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
18
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
JHMLICo. The Fund pays transfer agent fees based on the number of shareholder
accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are Directors and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At August 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $416.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended August 31, 1997, aggregated $25,824,964 and $26,925,359, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended August 31, 1997.
The cost of investments owned at August 31, 1997 for federal income tax
purposes was $51,913,970. Gross unrealized appreciation and depreciation of
investments aggregated $3,905,197 and $730, respectively, resulting in net
unrealized appreciation of $3,904,467.
NOTE D -
Reclassification of accounts
During the year ended August 31, 1997, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of $16,553,
an increase in undistributed net investment income of $16,632 and a decrease in
capital paid-in of $79. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of August
31, 1997. 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.
19
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- New York Tax-Free Income Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
John Hancock New York Tax-Free Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments (except for credit 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 New York Tax-Free Income Fund (the "Fund") at August 31, 1997,
and the results of its operations, the changes in its 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 at August 31, 1997 by
correspondence with the custodian provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 14, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended August 31,
1997.
None of the 1997 income dividends qualify for the corporate dividends
received deduction. Shareholders, who are not subject to the alternative minimum
tax, received income dividends which are 99.53% tax-exempt. The percentage of
income dividends from the Fund subject to the alternative minimum tax is 14.65%.
None of the income dividends were derived from U.S. Treasury Bills.
For specific information on exception provisions in your state, consult
your local state tax office or your tax advisor.
Shareholders will receive a 1997 U.S. Treasury Department Form 1099-DIV in
January, 1998. This will reflect the total of all distributions which are
taxable for calendar year 1997.
20
<PAGE>
================================================================================
NOTES
John Hancock Funds -- New York Tax-Free Income Fund
21
<PAGE>
================================================================================
NOTES
John Hancock Funds -- New York Tax-Free Income Fund
22
<PAGE>
================================================================================
NOTES
John Hancock Funds -- New York Tax-Free Income Fund
23
<PAGE>
================================================================================
[A 1/2" x 1/2" John Hancock Funds logo --------------
in upper left hand corner of the page. A Bulk Rate
box sectioned in quadrants with a U.S. Postage
triangle in upper left, a circle in PAID
upper right, a cube in lower left and a Randolph, MA
diamond in lower right. A tag line below Permit No. 75
reads: "A Global Investment Management --------------
Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Massachusetts Tax-Free Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
7600A 8/97
10/97
[A recycled logo in lower left hand corner
with caption "Printed on Recycled Paper."]
