SEMIANNUAL REPORT
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[GRAPHIC OMITTED]
Massachusetts
Tax-Free Income
Fund
FEBRUARY 28, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
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-----------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
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
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
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 02109-1803
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=============================CHAIRMAN'S MESSAGE=================================
DEAR FELLOW SHAREHOLDERS:
Nineteen ninety-eight was a year that gave even veteran financial
market investors pause - and not a little heartburn. The stock market produced a
record fourth straight year of double-digit returns, but volatility was
breathtaking along the way. With the exception of the U.S. Treasury market, even
bonds - considered a safer alternative to stocks - went on a roller coaster
ride.
But there was one clear lesson from 1998: that sticking out the tough
times paid off. After reaching new highs last July, stocks plunged in August in
one of their worst sell-offs in years. The average U.S. diversified-equity
mutual fund fell 16.8% in the month of August alone. For many mutual fund
investors, it was the largest one-month loss they had ever experienced, since
the average equity fund had only had three such double-digit monthly losses in
the previous 20 years, most recently in October 1987. But, in a dramatic
reversal of fortune, the market staged a stunning rebound in the fourth quarter.
The average U.S. diversified-equity fund made up all its August lost ground and
then some, returning 18.8% between October and December. The final result for
the year: an average 14.52% return, as calculated by Lipper, Inc.
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[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
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Given the dramatic swings, investors who tried to time the market's ups
and downs encountered a sharp whipsaw. We are very encouraged to report that an
overwhelming majority of mutual fund investors sat tight during last summer's
discontent; some even used the market's drop to pick up bargains. It was a clear
sign that long-term investors are willing to accept the reality of shorter-term
volatility.
In the first two months of 1999, the financial markets showed more
stability and the Dow Jones Industrial Average approached record highs. While
volatility remains on many investors' minds, at this time of year thoughts also
turn to more taxing matters. In our view, now is a perfect time to focus on how
much of your hard-earned money you are able to keep. Part of a good tax-planning
strategy should involve a review of your portfolio to ensure that you are taking
advantage of all available ways to minimize and defer your tax payments - in an
effort to maximize investment returns.
We encourage you to work with your investment professional to consider
the various options. These include focusing on tax-exempt funds, contributing
the maximum to retirement plans, establishing or adding to IRAs and funding a
variable annuity. After all, while it's every American's responsibility to pay
taxes, there's no reason to pay more than your fair share.
Sincerely,
/s/Edward J. Boudreau, Jr.
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EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Dianne Sales, CFA, Frank A. Lucibella, CFA, and
Barry H. Evans, CFA, Portfolio Managers
John Hancock
Massachusetts Tax-Free
Income Fund
Supply pressures hold municipals back, then
ease at end of six-month period
Supply and demand were once again the primary factors affecting municipal bond
performance during the past six months. From September through year end, a glut
of municipal bonds flooded the market - a trend that characterized much of 1998.
In fact, the supply of new municipal bonds increased more than 40% in 1998
versus 1997, making it the second strongest year of municipal bond issuance on
record. This strong influx of new bonds, due to continued low interest rates,
put downward pressure on prices. The net result was that municipal bonds
underperformed U.S. Treasuries for most of 1998 and reached their most
attractive price levels versus Treasuries in the last decade. The one bright
spot was that many non-traditional buyers crossed over into the tax-exempt
market to take advantage of these incredible values. These so-called "crossover"
buyers provided an important source of demand for the flood of new issuance.
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock
Massachusetts Tax-Free Income Fund. Caption below reads "Fund management team
members (l-r): Barry Evans, Mike Roye, Dianne Sales, Frank Lucibella and Holly
Morris."]
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"...strong influx of new bonds...put downward pressure on prices."
3
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John Hancock Funds - Massachusetts Tax-Free Income Fund
"The Fund's performance benefited from excellent credit selection..."
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[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into ten sections (from top to left): Education 15%, Health
19%, Hospital 3%, Housing 6%, Electric Power 7%, Water & Sewer 8%, Other 10%,
Transportation 10%, Industrial Development 11% and General Obligation 11%. A
note below the chart reads "As a percentage of net assets on February 28,
1999."]
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In 1999, however, the tables turned and municipal bonds began to
outperform U.S. Treasuries. First, emerging-market concerns receded -
eliminating the "flight to quality" premium in the Treasury market. At the same
time, worries about stronger economic growth forced interest rates up and bond
prices down. In contrast, municipal bonds were already at such low price levels
that they had much less downside risk than Treasuries. Finally, tax-exempt
issuance dropped dramatically in January and February, relieving supply
pressures. As a result, municipal investors saw their holdings handily
outperform in early 1999.
Performance scorecard
For the six months ended February 28, 1999, John Hancock Massachusetts Tax-Free
Income Fund's Class A and Class B shares returned 1.99% and 1.64%, respectively,
at net asset value. By comparison, the average Massachusetts municipal bond fund
returned 1.78%, according to Lipper, Inc.1 Keep in mind that your net asset
value return will be different from the Fund's performance if you were not
invested in the Fund for the entire period and did not reinvest all
distributions. Please see pages six and seven for historical performance
information.
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[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is City of
Brockton followed by an up arrow with the phrase "Stronger-than-expected revenue
growth." The second listing is Zero coupon bonds followed by an up arrow with
the phrase "High sensitivity to falling interest rates." The third listing is
Hospital bonds followed by a down arrow with the phrase "Reimbursement levels
flat in the face of rising costs." A note below the table reads "See `Schedule
of Investments.' Investment holdings are subject to change."]
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The Fund's performance benefited from excellent credit selection, as
strong economic growth generated stronger-than-expected revenues, often leading
to credit upgrades. Performance in the first four months of the period also
benefited from a somewhat longer duration, providing gains as interest rates
fell. Duration measures how sensitive the Fund's share price is to interest-rate
changes. The longer the duration, the more sensitive the Fund's share price.
Throughout the period, we kept the Fund's duration relatively long in
order to take advantage of falling interest rates. However, when rates increased
suddenly in the first two months of 1999, our relatively long duration was a
slight disadvantage.
Call protection and credit analysis
We've maintained our strong emphasis on call protection, which guards a bond
from being redeemed by its issuer for a certain period of time. Call protection
is especially important in periods of falling interest rates, when issuers often
try to refinance their bonds at lower interest rates. If a bond gets "called
away" or redeemed early, investors are forced to reinvest their money in bonds
with lower yields. By consistently focusing on extending call protection, we
have been able to maintain the Fund's competitive yield in a falling
interest-rate environment.
We continued to search for lower-quality bonds with both attractive
yields and improving credit profiles. This strategy served us well over the
period, as credit spreads - the difference in yield between bonds with different
credit ratings continued to narrow in
4
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John Hancock Funds - Massachusetts Tax-Free Income Fund
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[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the six months ended February 28, 1999." The
chart is scaled in increments of 1% with 0% at the bottom and 3% at the top. The
first bar represents the 1.99% Total return for John Hancock Massachusetts
Tax-Free Income Fund Class A. The second bar represents the 1.64% total return
for John Hancock Massachusetts Tax-Free Income Fund Class B. The third bar
represents the 1.78% total return for Average Massachusetts municipal bond fund.
A note below the chart reads "Total returns for John Hancock Massachusetts
Tax-Free Income Fund are at net asset value with all distributions reinvested.
The average Massachusetts municipal bond fund is tracked by Lipper Analytical
Services, Inc. See the following two pages for historical performance
information."]
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the municipal market. Against this backdrop, several of our lower-quality
holdings were big winners. For example, our Brockton General Obligation bonds
outperformed as economic growth and state funding expanded. In addition, our
Massachusetts Industrial Finance Agency issue for the Newton Group Home
performed strongly as construction and reservations advanced ahead of schedule.
Outlook
Looking ahead, we expect the Massachusetts economy to remain strong. The economy
is growing nicely with low unemployment and a strong real estate market. With
Governor Cellucci now firmly ensconced in office, we are keeping a close eye on
the budget to make sure that the state's strong fiscal situation remains intact.
Technicals remain favorable for tax-free bonds. In 1999, we anticipate
that new municipal bond issuance will decline roughly 20% as refunding
opportunities become more scarce. Lighter supply should help firm demand from
traditional buyers. What's more, municipal bonds still offer very attractive
values relative to U.S. Treasuries, indicating that they still have plenty of
upside potential.
Despite stronger-than-expected growth in the first few months of this
year, inflation has yet to pick up. And with most world economies still
sluggish, we believe that pricing power will remain limited for the foreseeable
future. A continued low-inflation environment should provide a positive backdrop
for municipal bonds.
However, should growth continue to outstrip expectations, we will look
to trim our duration to a more neutral position. Overall, our focus will remain
on our tried-and-true investment strategy - looking for value and attractive
yield opportunities, thinning exposure to sectors that are vulnerable to
widening credit spreads and finally, continuing to expand call protection.
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This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
1 Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"...we expect the Massachusetts economy to remain strong."
5
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John Hancock Funds - Massachusetts Tax-Free Income Fund
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A LOOK AT PERFORMANCE
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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 measures the change in value of an investment from the beginning to the
end of a period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.50%. Class B performance reflects a maximum contingent deferred
sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
Please note that a portion of the Fund's income may be subject to taxes, and
some investors may be subject to the Alternative Minimum Tax (AMT). Also note
that capital gains are taxable.
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CLASS A
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For the period ended December 31, 1998
ONE FIVE TEN
YEAR YEAR YEARS
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Cumulative Total Returns 2.27% 28.17% 103.70%
Average Annual Total Returns(1) 2.27% 5.09% 7.37%
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CLASS B
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For the period ended December 31, 1998
SINCE
ONE INCEPTION
YEAR (10/3/96)
------- --------
Cumulative Total Returns 1.31% 15.21%
Average Annual Total Returns(1) 1.31% 6.51%
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YIELDS
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As of February 28, 1999
SEC 30-DAY
YIELD
-------
John Hancock Massachusetts Tax-Free Income Fund: Class A 3.86%
John Hancock Massachusetts Tax-Free Income Fund: Class B 3.34%
Notes to Performance
(1) 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 ten-year
periods for Class A shares would have been 1.90%, 4.66% and 6.67%,
respectively. The average annual total returns for the one-year period
and since inception for Class B shares would have been 0.93% and 6.11%,
respectively.
6
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John Hancock Funds - Massachusetts Tax-Free Income Fund
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Massachusetts Tax-Free Income Fund would be worth, assuming all distributions
were reinvested for the period indicated. 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. Past performance is not indicative of future results.
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Line chart with the heading John Hancock Massachusetts Tax-Free Income Fund
Class A, representing the growth of a hypothetical $10,000 investment over the
life of the fund. With in the chart are three lines. The first line represents
the Lehman Brothers Municipal Bond Index and is equal to $23,114 as of February
28, 1999. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock Massachusetts Tax-Free Income Fund, before
sales charge, on August 31, 1988, and is equal to $22,197, as of February 28,
1999. The third line represents the same hypothetical investment made in the
John Hancock Massachusetts Tax-Free Income Fund, after sales charge, and is
equal to $21,200 as of February 28, 1999.
Line chart with the heading John Hancock 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 Lehman Brothers Municipal Bond Index and is equal to $12,065 as of February
28, 1999. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock Massachusetts Tax-Free Income Fund on
October 3, 1996, before sales charge, and is equal to $11,849 as of February 28,
1999. The third line represents the same hypothetical investment made in the
John Hancock Massachusetts Tax-Free Income Fund, after sales charge, and is
equal to $11,549 as of February 28, 1999.
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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 February 28, 1999. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
February 28, 1999 (Unaudited)
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Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $62,095,093)............... $67,237,777
Cash........................................................... 1,563,172
Receivable for investments sold................................ 71,391
Receivable for shares sold..................................... 158,446
Interest receivable............................................ 1,007,921
Receivable for futures variation margin - Note A............... 13,125
Other assets................................................... 43,443
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Total Assets........................ 70,095,275
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Liabilities:
Dividend payable............................................... 26,100
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 26,114
Accounts payable and accrued expenses ......................... 24,295
------------
Total Liabilities................... 76,509
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Net Assets:
Capital paid-in................................................ 65,168,967
Accumulated net realized loss on investments and
financial futures contracts................................... (255,367)
Net unrealized appreciation of investments and
financial futures contracts................................... 5,102,328
Undistributed net investment income............................ 2,838
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Net Assets.......................... $70,018,766
==================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $60,095,922/4,795,560 .............................. $12.53
============================================================================
Class B - $9,922,844/791,827.................................. $12.53
============================================================================
Maximum Offering Price Per Share*
Class A - ($12.53 x 104.71%).................................. $13.12
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* 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
Six months ended February 28, 1999 (Unaudited)
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Investment Income:
Interest....................................................... $1,954,542
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Expenses:
Investment management fee - Note B ........................... 166,385
Distribution and service fee - Note B
Class A ..................................................... 87,973
Class B ..................................................... 39,528
Transfer agent fee - Note B................................... 33,452
Custodian fee................................................. 25,827
Auditing fee ................................................. 10,511
Printing...................................................... 5,303
Financial services fee - Note B............................... 4,795
Registration and filing fees ................................. 3,742
Trustees' fees ............................................... 1,661
Miscellaneous................................................. 813
Legal fees ................................................... 615
Less management fee reduction - Note B........................ (112,184)
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Total Expenses ................... 268,421
------------------------------------------------
Less Expense Reductions -
Note B............................ (7,812)
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Net Expenses...................... 260,609
------------------------------------------------
Net Investment Income............. 1,693,933
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Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized gain on investments sold ......................... 85,574
Net realized loss on financial futures contracts............... (49,310)
Change in net unrealized appreciation/depreciation
of investments................................................ (381,058)
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................... (58,109)
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Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ...... (402,903)
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Net Increase in Net Assets
Resulting from Operations ........ $1,291,030
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SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
===============================FINANCIAL STATEMENTS=============================
John Hancock Funds - Massachusetts Tax-Free Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED FEBRUARY 28, 1999
AUGUST 31, 1998 (UNAUDITED)
--------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income............................................................. $3,095,586 $1,693,933
Net realized gain on investments sold and financial futures contracts ............ 335,961 36,264
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts...................................................... 2,017,216 (439,167)
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Net Increase in Net Assets Resulting from Operations............................ 5,448,763 1,291,030
----------- ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.6589 and $0.3235 per share, respectively) .......................... (2,934,706) (1,517,027)
Class B - ($0.5717 and $0.2795 per share, respectively)........................... (179,625) (176,906)
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Total Distributions to Shareholders............................................... (3,114,331) (1,693,933)
----------- ------------
From Fund Share Transactions - Net:* ............................................... 5,328,172 6,088,042
----------- -----------
Net Assets:
Beginning of period .............................................................. 56,671,023 64,333,627
----------- -----------
End of period (including undistributed net investment income of
$2,838 and $2,838, respectively) ............................................... $64,333,627 $70,018,766
=========== ===========
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED FEBRUARY 28, 1999
AUGUST 31, 1998 (UNAUDITED)
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -----------
CLASS A
Shares sold............................. 697,518 $8,640,665 378,925 $4,778,797
Shares issued to shareholders in
reinvestment of distributions ......... 155,305 1,923,826 78,214 986,049
---------- ------------ ---------- ------------
852,823 10,564,491 457,139 5,764,846
Less shares repurchased ................ (716,685) (8,867,549) (274,676) (3,463,747)
---------- ------------ ---------- ------------
Net increase............................ 136,138 $1,696,942 182,463 $2,301,099
CLASS B
Shares sold............................. 323,749 $4,023,426 312,703 $3,945,351
Shares issued to shareholders in
reinvestment of distributions.......... 9,129 113,319 8,657 109,099
---------- ------------ ---------- ------------
332,878 4,136,745 321,360 4,054,450
Less shares repurchased................. (40,691) (505,515) (21,229) (267,507)
---------- ------------ ---------- ------------
Net increase............................ 292,187 $3,631,230 300,131 $3,786,943
========== ============ ========== ============
</TABLE>
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:
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<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, SIX MONTHS ENDED
------------------------------------------------------------- FEBRUARY 28, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
---------- ---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ... $12.43 $11.56 $11.76 $11.66 $12.12 $12.60
-------- -------- -------- -------- ------- --------
Net Investment Income................... 0.63 0.65 0.65 0.66 0.66(7) 0.32(7)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial Futures
Contracts ............................ (0.75) 0.20 (0.10) 0.46 0.48 (0.07)
--------- -------- -------- -------- ------- ---------
Total from Investment Operations...... (0.12) 0.85 0.55 1.12 1.14 0.25
--------- -------- -------- -------- ------- ---------
Less Distributions:
Dividends from Net Investment Income... (0.63) (0.65) (0.65) (0.66) (0.66) (0.32)
Distributions from Net Realized Gain on
Investments Sold ..................... (0.12) - - - - -
---------- --------- --------- -------- ------- ---------
Total Distributions................... (0.75) (0.65) (0.65) (0.66) (0.66) (0.32)
---------- --------- --------- -------- ------- ---------
Net Asset Value, End of Period ......... $11.56 $11.76 $11.66 $12.12 $12.60 $12.53
========== ========= ========= ======== ======= =========
Total Investment Return at
Net Asset Value (2).................... (0.97%) 7.66% 4.78% 9.85% 9.66% 1.99%(6)
Total Adjusted Investment Return at
Net Asset Value (2,3).................. (1.50%) 7.21% 4.30% 9.45% 9.27% 1.81%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $54,122 $54,416 $55,169 $54,253 $58,137 $60,096
Ratio of Expenses to Average Net Assets. 0.70% 0.70% 0.75%(4) 0.71%(4) 0.71%(4) 0.71%(4,5)
Ratio of Adjusted Expenses to
Average Net Assets (1)................ 1.23% 1.15% 1.18% 1.11% 1.10% 1.06%(5)
Ratio of Net Investment Income to
Average Net Assets.................... 5.28% 5.67% 5.53% 5.59% 5.28% 5.17%(5)
Ratio of Adjusted Net Investment
Income to Average Net Assets (1)....... 4.75% 5.22% 5.05% 5.19% 4.89% 4.81%(5)
Portfolio Turnover Rate................. 29% 24% 36% 12% 6% 4%
Expense and Fee Reduction Per Share..... $0.06 $0.05 $0.06 $0.05 $0.05(7) $0.02(7)
</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)
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<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 3, 1996 SIX MONTHS ENDED
(COMMENCEMENT OF OPERATIONS) YEAR ENDED FEBRUARY 28, 1999
TO AUGUST 31, 1997 AUGUST 31, 1998 (UNAUDITED)
---------------------------- --------------- -----------------
<S> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period............ $11.84 $12.12 $12.60
---------- ---------- ----------
Net Investment Income........................... 0.54 0.57(7) 0.28(7)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts.... 0.28 0.48 (0.07)
---------- ---------- ----------
Total from Investment Operations........... 0.82 1.05 0.21
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income........... (0.54) (0.57) (0.28)
---------- ---------- ----------
Net Asset Value, End of Period.................. $12.12 $12.60 $12.53
========== ========== ==========
Total Investment Return at Net Asset Value (2).. 7.08%(6) 8.89% 1.64%(6)
Total Adjusted Investment Return at
Net Asset Value (2,3)......................... 6.72%(6) 8.50% 1.46%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)........ $2,418 $6,197 $9,923
Ratio of Expenses to Average Net Assets ..... 1.41%(4,5) 1.41%(4) 1.41%(4,5)
Ratio of Adjusted Expenses to
Average Net Assets (1)......................... 1.81%(5) 1.80% 1.76%(5)
Ratio of Net Investment Income to
Average Net Assets............................. 4.82%(5) 4.58% 4.47%(5)
Ratio of Adjusted Net Investment Income to
Average Net Assets (1)......................... 4.42%(5) 4.19% 4.11%(5)
Portfolio Turnover Rate ........................ 12% 6% 4%
Expense and Fee Reduction Per Share............. $0.04 $0.05(7) $0.02(7)
</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 Class A and 1.40% for
Class B.
(5) Annualized.
(6) Not annualized.
(7) Based on the average of the shares outstanding at the end of each month.
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Massachusetts Tax-Free Income Fund
Schedule of Investments
February 28, 1999 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Massachusetts Tax-Free Income Fund on February 28, 1999. It has one main
category: tax-exempt long-term bonds. The tax-exempt bonds are 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
Massachusetts (87.15%)
Boston City Industrial Development Financing Auth,
Sewage Facil Rev 1991
Ser Harbor Elec Energy Co Proj .................. 7.375% 05-15-15 BBB $250 $267,765 6.89%
Boston Water and Sewer Commission,
Gen Rev 1991 Ser A Sr Ser......................... 7.000 11-01-18 AAA 500 554,670 6.31
Gen Rev 1992 Ser A Sr Ser......................... 5.750 11-01-13 A+ 500 555,185 5.18
Boston, City of,
GO 1990 Ser A..................................... 7.375 02-01-10 A+ 350 370,254 6.97
GO 1991 Ser A MBIA ............................... 6.750 07-01-11 AAA 350 382,351 6.18
GO 1992 Ser A AMBAC .............................. 6.500 07-01-12 AAA 500 554,015 5.87
Rev Boston City Hosp FHA-Ins Mtg Ser A ........... 7.625 02-15-21 AAA 500 539,515 7.07
Rev Deutsches Altenheim 1998 Ser A................ 5.950 10-01-18 AAA 1,000 1,077,060 5.52
Brockton, City of,
State Qualified Municipal Purpose Ln of 1993...... 6.125 06-15-18 A 2,000 2,166,100 5.66
Holyoke, City of,
GO School Proj Ln Act of 1948..................... 7.650 08-01-09 AA 1,000 1,113,910 6.87
Massachusetts Bay Transportation Auth,
Gen Trans Sys Rev Ref Ser 1994A................... 7.000 03-01-14 AA- 1,000 1,241,050 5.64
Gen Trans Sys Rev Ser 1997D....................... 5.000 03-01-22 AA- 2,250 2,204,775 5.10
Massachusetts Development Finance Agency,
Concord-Assabet Family Servs Rev Ref.............. 6.000 11-01-28 Ba2 1,000 986,390 6.08
Rev Lasell Village Proj Ser 1998A................. 6.375 12-01-25 BBB- 1,000 987,360 6.46
Rev YMCA Greater Boston Iss....................... 5.450 11-01-28 BBB+ 1,000 988,310 5.51
Massachusetts Educational Financing Auth,
Ed Ln Rev Iss D Ser 1991A ........................ 7.250 01-01-09 AAA 400 427,128 6.79
Massachusetts Health and Educational Facilities Auth,
Rev Anna Jaques Hosp Iss Ser B.................... 6.875 10-01-12 Baa1 1,250 1,337,950 6.42
Rev Bentley College Iss Ser H..................... 6.875 07-01-12 AAA 250 273,805 6.28
Rev Boston College Iss Ser J Preref............... 6.625 07-01-21 AAA 965 1,049,891 6.09
Rev Boston College Iss Ser J Unref Bal............ 6.625 07-01-21 AAA 35 37,839 6.13
Rev Brandeis Univ Iss Ser I ...................... 4.750 10-01-28 AAA 1,000 942,420 5.04
Rev Charlton Memorial Hosp Iss Ser B.............. 7.250 07-01-13 A 2,250 2,480,962 6.58
Rev Community Colleges Prog Iss Ser A............. 6.600 10-01-22 AAA 250 279,390 5.91
Rev Dana-Farber Cancer Institute Ser G-1.......... 6.250 12-01-22 A 500 547,445 5.71
Rev Lowell Gen Hosp Iss Ser A..................... 8.400 06-01-11 A3 600 673,500 7.48
Rev Melrose-Wakefield Hosp Iss Ser B.............. 6.350 07-01-06 AAA 500 550,840 5.76
Rev Milford-Whitinsville Regional Hosp Rev Ser C.. 5.250 07-15-18 BBB- 800 767,088 5.48
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Massachusetts Tax-Free Income Fund
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 Health and Educational
Facilities Auth (cont.),
Rev New England Baptist Hosp Iss Ser B............. 7.350% 07-01-17 AAA $250 $276,220 6.65%
Rev New England Deaconess Hosp Iss Ser D........... 6.875 04-01-22 AAA 2,210 2,456,349 6.19
Rev Northeastern Univ Iss Ser E ................... 6.550 10-01-22 AAA 1,000 1,104,080 5.93
Rev Ref Harvard Pilgrim Health Ser A .............. 5.000 07-01-18 AAA 1,000 984,100 5.08
Rev Ref Worcester Polytechnic Institute Iss Ser E.. 6.625 09-01-17 AAA 250 278,370 5.95
Rev Reg Inverse Floater Ser 1993 .................. 8.150# 08-15-23 AAA 500 563,125 7.24
Rev Smith College Iss Ser D ....................... 5.750 07-01-24 AA- 500 529,720 5.43
Massachusetts Housing Finance Agency,
Rev Insured Rental Hsg 1994 Ser A ................. 6.600 07-01-14 AAA 1,045 1,127,304 6.12
Rev Residential Devel FNMA Coll Ser C ............. 6.875 11-15-11 AAA 2,000 2,173,480 6.33
Rev Residential Devel FNMA Coll Ser D ............. 6.800 11-15-12 AAA 500 539,130 6.31
Single Family Hsg Rev Ser 13 ...................... 7.950 06-01-23 A+ 40 41,304 7.70
Single Family Hsg Rev Ser 18 ...................... 7.350 12-01-16 A+ 550 579,117 6.98
Massachusetts Industrial Finance Agency,
Assisted Living Facil Rev Newton Group Properties
LLC Proj .......................................... 8.000 09-01-27 BB 1,000 1,086,400 7.36
Assisted Living Facil Rev TNG Marina Bay LLC Proj.. 7.500 12-01-27 BB 1,000 1,032,990 7.26
Resource Recovery Rev Ref Ogden Haverhill Proj
Ser 1998A......................................... 5.600 12-01-19 BBB 1,000 1,005,900 5.57
Resource Recovery Rev Ref Ser 1993A Mass
Refusetech Inc Proj............................... 6.300 07-01-05 BBB 1,825 1,970,252 5.84
Rev Assumption College Iss 1996 ................... 6.000 07-01-26 AAA 1,000 1,084,360 5.53
Rev Dana Hall School Iss .......................... 5.800 07-01-17 BBB- 1,090 1,138,374 5.55
Rev Glenmeadow Retirement Community Ser C ......... 8.375 02-15-18 BBB+ 1,000 1,263,420 6.63
Rev Ref Emerson College Iss Ser 1991A.............. 8.900 01-01-18 BBB- 250 278,428 7.99
Rev Ref Holy Cross College Iss 1996 ............... 5.500 03-01-20 AAA 500 521,275 5.28
Rev Ref Holy Cross College Iss II Ser 1992 ........ 6.375 11-01-15 AA- 500 555,250 5.74
Rev St Johns High School Inc. ..................... 5.350 06-01-28 BBB+ 1,000 985,370 5.43
Rev Wtr Treatment American Hingham Proj ........... 6.750 12-01-20 BBB 2,000 2,170,200 6.22
Rev Wtr Treatment American Hingham Proj ........... 6.900 12-01-29 BBB 1,310 1,429,184 6.32
Massachusetts Municipal Wholesale Electric Co.,
Pwr Supply Sys Rev 1992 Ser B Pub Corp of
the Commonwealth of Mass ........................ 6.750 07-01-05 BBB+ 500 544,810 6.19
Pwr Supply Sys Rev 1992 Ser B Pub Corp of
the Commonwealth of Mass ......................... 6.750 07-01-06 BBB+ 1,500 1,634,430 6.19
Pwr Supply Sys Rev 1992 Ser B Pub Corp of
the Commonwealth of Mass ......................... 6.750 07-01-17 BBB+ 400 433,888 6.22
Pwr Supply Sys Rev 1992 Ser C Pub Corp of
the Commonwealth of Mass.......................... 6.625 07-01-10 AAA 1,000 1,100,920 6.02
Pwr Supply Sys Rev 1993 Reg Inverse Floater........ 7.120# 07-01-18 AAA 1,300 1,378,000 6.72
Massachusetts Port Auth,
Rev Ref Ser 1992 A ................................ 6.000 07-01-23 AA- 1,370 1,470,558 5.59
Rev Special Facil Ser A USAir Proj ................ 5.750 09-01-16 AAA 1,000 1,068,720 5.38
Massachusetts Turnpike Auth,
Metro Highway Sys Rev Sr Lien Cap Apprec Ser 1997C. Zero 01-01-20 AAA 1,000 345,740 5.16
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Massachusetts Tax-Free Income Fund
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 Water Resource Auth,
Gen Rev Ref 1993 Ser B............................. 5.500% 03-01-17 A $400 $412,576 5.33%
Gen Rev Ref 1993 Ser B............................. 5.000 03-01-22 A 360 349,459 5.15
Gen Rev Ref 1993 Ser C ............................ 4.750 12-01-23 A 1,000 935,020 5.08
Massachusetts, Commonwealth of,
GO Consol Ln of 1991 Ser D ........................ 6.875 07-01-10 AA- 500 547,610 6.28
GO Consol Ln Ser 1998C ............................ Zero 08-01-18 AA- 1,000 373,730 5.13
Nantucket, Town of,
GO Municipal Purpose Ln of 1991 ................... 6.800 12-01-11 AAA 450 497,196 6.15
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional
Facil Proj........................................ 7.000 04-01-22 AA- 750 833,910 6.30
Springfield, City of,
GO School Proj Ln Act of 1992 Ser B................ 7.100 09-01-11 AA 500 564,430 6.29
----------
61,021,667
----------
Puerto Rico (8.88%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth
of Puerto Rico.................................... 8.220# 07-01-11 AAA 2,000 2,610,000 6.30
Puerto Rico Highway and Transportation Auth,
Highway Rev Cap Rites Ser Y ....................... 6.250 07-01-14 A 1,000 1,162,070 5.38
Puerto Rico, Commonwealth of,
GO Pub Imp Inverse Rate Securities Ser 1996........ 8.262# 07-01-11 AAA 1,000 1,305,000 6.33
GO Ref Pub Imp Ser 1994 ........................... 6.400 07-01-11 AAA 1,000 1,139,040 5.62
----------
6,216,110
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $62,095,093) (96.03%) 67,237,777
--------- -----------
OTHER ASSETS AND LIABILITIES, NET (3.97%) 2,780,989
--------- -----------
TOTAL NET ASSETS (100.00%) $70,018,766
========= ===========
</TABLE>
* Credit ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Service, 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 February 28, 1999.
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 - Massachusetts Tax-Free Income Fund
Portfolio Concentration
February 28, 1999 (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 investments at February 28, 1999 assigned to
various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ----------------
General Obligation ........................................... 10.57%
Revenue Bonds - Education..................................... 14.54
Revenue Bonds - Electric Power................................ 7.27
Revenue Bonds - Facility...................................... 1.19
Revenue Bonds - Health ....................................... 19.46
Revenue Bonds - Highway....................................... 0.49
Revenue Bonds - Hospital ..................................... 2.57
Revenue Bonds - Housing....................................... 6.37
Revenue Bonds - Industrial Development ....................... 11.18
Revenue Bonds - Other......................................... 4.44
Revenue Bonds - Transportation ............................... 10.21
Revenue Bonds - Water & Sewer ................................ 7.74
-------
TOTAL TAX-EXEMPT LONG-TERM BONDS 96.03%
========
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
============================NOTES TO FINANCIAL STATEMENTS=======================
John Hancock Funds - Massachusetts Tax-Free Income Fund
(UNAUDITED)
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, Class B and Class C shares. The Fund issued
Class C shares for the first time on April 1, 1999. 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.
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,
Inc., 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
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $223,313 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 - $79,391, August 31, 2004 - $137,277 and August 31,
2005 - $6,645.
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 Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the time of disposition.
16
<PAGE>
============================NOTES TO FINANCIAL STATEMENTS=======================
John Hancock Funds - Massachusetts Tax-Free Income Fund
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 which 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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund based on its borrowings. In
addition, a commitment fee is charged based on the average daily unused portion
of the line of credit and is allocated among the participating funds. The Fund
had no borrowing activity for the period ended February 28, 1999.
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's gains and/or losses can be affected as a result of futures contracts.
At February 28, 1999, open positions in financial futures contracts
were as follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
JUN 99 20 U.S. TREASURY BONDS LONG $40,765
=======
At February 28, 1999, the Fund had deposited $36,000 in a segregated
account to cover margin requirements on open financial futures contracts.
OPTIONS The Fund may purchase options contracts. Listed options will be valued
at the last quoted sales price on the exchange on which they are primarily
traded. Over-the-counter options are valued at the mean between the last bid and
asked prices. 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.
17
<PAGE>
============================NOTES TO FINANCIAL STATEMENTS=======================
John Hancock Funds - Massachusetts Tax-Free Income Fund
The Fund may use options 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 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 options
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 Statement of
Assets and Liabilities.
There were no written option transactions for the period ended February
28, 1999.
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 February 28, 1999, 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 $112,184. This limitation may not be
discontinued until after January 1, 2000.
The Fund has an agreement with its custodian bank under which $7,812 of
custodian fees have been reduced by balance credits applied during the period
ended February 28, 1999. 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
February 28, 1999, net sales charges received with regard to sales of Class A
shares amounted to $122,970. Out of this amount, $13,615 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$68,528 was paid as sales commissions to unrelated broker-dealers and $40,827
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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 5.00% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the 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 February 28,
1999 the contingent deferred sales charges received by JH Funds amounted to
$40,827.
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 shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses, at an annual
18
<PAGE>
============================NOTES TO FINANCIAL STATEMENTS=======================
John Hancock Funds - Massachusetts Tax-Free Income Fund
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 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 Fund. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Stephen L. Brown, 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 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 February 28, 1999 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 February 28, 1999, aggregated $6,613,914 and $2,827,964, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended February 28, 1999.
The cost of investments owned at February 28, 1999 for federal income
tax purposes was $62,095,093. Gross unrealized appreciation and depreciation of
investments aggregated $5,156,294 and $13,610, respectively, resulting in net
unrealized appreciation of $5,142,684.
19
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS -------------------
A Global Investment Management Firm Bulk Rate
U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713(TDD) Randolph, MA
INTERNET:www.jhancock.com/funds Permit No. 75
-------------------
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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.
[LOGO] Printed on Recycled Paper 770SA 2/99
4/99
<PAGE>
SEMIANNUAL REPORT
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[GRAPHIC OMITTED]
New York
Tax-Free
Income Fund
FEBRUARY 28, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Firm
<PAGE>
-----------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
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
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
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 02109-1803
---------------------------------------
================================CHAIRMAN'S MESSAGE==============================
DEAR FELLOW SHAREHOLDERS:
Nineteen ninety-eight was a year that gave even veteran financial
market investors pause - and not a little heartburn. The stock market produced a
record fourth straight year of double-digit returns, but volatility was
breathtaking along the way. With the exception of the U.S. Treasury market, even
bonds - considered a safer alternative to stocks - went on a roller coaster
ride.
But there was one clear lesson from 1998: that sticking out the tough
times paid off. After reaching new highs last July, stocks plunged in August in
one of their worst sell-offs in years. The average U.S. diversified-equity
mutual fund fell 16.8% in the month of August alone. For many mutual fund
investors, it was the largest one-month loss they had ever experienced, since
the average equity fund had only had three such double-digit monthly losses in
the previous 20 years, most recently in October 1987. But, in a dramatic
reversal of fortune, the market staged a stunning rebound in the fourth quarter.
The average U.S. diversified-equity fund made up all its August lost ground and
then some, returning 18.8% between October and December. The final result for
the year: an average 14.52% return, as calculated by Lipper, Inc.
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[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
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Given the dramatic swings, investors who tried to time the market's ups
and downs encountered a sharp whipsaw. We are very encouraged to report that an
overwhelming majority of mutual fund investors sat tight during last summer's
discontent; some even used the market's drop to pick up bargains. It was a clear
sign that long-term investors are willing to accept the reality of shorter-term
volatility.
In the first two months of 1999, the financial markets showed more
stability and the Dow Jones Industrial Average approached record highs. While
volatility remains on many investors' minds, at this time of year thoughts also
turn to more taxing matters. In our view, now is a perfect time to focus on how
much of your hard-earned money you are able to keep. Part of a good tax-planning
strategy should involve a review of your portfolio to ensure that you are taking
advantage of all available ways to minimize and defer your tax payments - in an
effort to maximize investment returns.
We encourage you to work with your investment professional to consider
the various options. These include focusing on tax-exempt funds, contributing
the maximum to retirement plans, establishing or adding to IRAs and funding a
variable annuity. After all, while it's every American's responsibility to pay
taxes, there's no reason to pay more than your fair share.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Frank A. Lucibella, CFA, Barry H. Evans, CFA,
and Dianne Sales, CFA, Portfolio Managers
John Hancock New York
Tax-Free Income Fund
Growing inflationary concerns, excess supply
put pressure on municipals
Municipal bonds posted weak returns during the six-month period from September
1, 1998 to February 28, 1999, although they gained significant ground on their
Treasury counterparts later in the period. At the beginning, however,
expectations of deflation, slower U.S. growth and a flight to safety from global
economic turmoil caused Treasury prices to rise and their yields, which move in
the opposite direction of their prices, to fall to 30-year lows. To prevent
global economic woes from worsening and infecting the U.S. economy, the Federal
Reserve Board cut interest rates three times between September and November,
calming world markets.
During this favorable interest-rate environment, U.S. Treasuries were the only
investment of choice for global investors seeking a safe harbor from the
economic storm. That left most other fixed-income investments - including
municipals - out in the cold. Furthermore, the benefits municipals derived from
falling interest rates were offset by strong municipal supply and weak investor
demand. The supply of municipal bonds expanded significantly when issuers rushed
to refinance old debt and issue new debt at low rates before year end. But since
the typical municipal bond offered yields that were lower than 5%, demand for
them was rather weak.
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock New York
Tax-Free Income Fund. Caption below reads "Fund management team members (l-r):
Barry Evans, Mike Roye, Dianne Sales, Frank Lucibella and Holly Morris."]
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"The supply of municipal bonds expanded significantly..."
3
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John Hancock Funds - New York Tax-Free Income Fund
"We continued to focus on non-callable bonds..."
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[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into nine sections (from top to left): Other 22%, Industrial
Development 5%, Transportation 6%, Water & Sewer 7%, Health 11%, General
Obligation 11%, Electric Power 11%, Housing 13% and Education 14%. A note below
the chart reads "As a percentage of net assets on February 28, 1999."]
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As a result of too much supply overwhelming weak demand, by the end of 1998
municipal bonds had become as cheap relative to Treasuries as they had been in
more than a decade.
By the end of 1998, however, bond investors became increasingly
troubled by signs that the U.S. economy was growing at an unexpectedly healthy
clip, which ultimately fanned fears that inflation and interest rates were
headed higher. Inflation is bad for bond holders because it eats away at the
value of the fixed payments bonds offer. In response, bond yields rose and their
prices fell. Municipals proved more resilient than Treasuries, in large part
because they were already so inexpensive compared to their U.S. government
counterparts.
Performance scorecard
For the six-month period that ended February 28, 1999, John Hancock New York
Tax-Free Income Fund's Class A and Class B shares posted
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[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is New York
State bonds followed by an up arrow with the phrase "Some boosted by advance
refunding." The second listing is Non-callable bonds followed by an up arrow
with the phrase "Insulated from early redemptions." The third listing is New
York City bonds followed by a sideways arrow with the phrase "Pause to take a
breather." A note below the table reads "See `Schedule of Investments.'
Investment holdings are subject to change."]
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total returns of 2.06% and 1.71%, respectively, at net asset value. Those
returns were in line with the 1.91% return for the average New York municipal
bond fund for the same period, according to Lipper, Inc.1 Keep in mind that your
net asset value return will be different from the Fund's if you were not
invested in the Fund for the entire period and did not reinvest all
distributions. Longer-term performance information can be found on pages six and
seven.
Strategy review
Throughout the period we responded to the choppy market environment by modifying
the Fund's duration - which is a measure of its interest rate sensitivity -
based on our view of where interest rates were headed. The longer the Fund's
duration, the more its share price will rise when interest rates fall, and fall
when rates rise. Our periodic, but modest, lengthening and shortening of
duration mostly proved to be beneficial for performance. The exception came
during the final weeks of 1998, when our shorter duration cost us a bit when the
bond market rallied briefly.
We continued to focus on non-callable bonds, which can't be redeemed by
their issuer before maturity, and bonds with good call protection. Non-callable
bonds were attractive, in part, because they can't be redeemed - or called - by
their issuers before maturity. That protection from calls comes in very handy
when interest rates are falling, because it insulates us from having to forfeit
a high-yielding bond back to the issuer and potentially needing to reinvest the
proceeds at lower interest rates. We also focused on bonds with good call
protection, emphasizing those that are protected from calls for a specified
number of years. Although they tend to offer
4
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John Hancock Funds - New York Tax-Free Income Fund
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[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the six months ended February 28, 1999." The
chart is scaled in increments of 1% with 0% at the bottom and 3% at the top. The
first bar represents the 2.06% Total return for John Hancock New York Tax-Free
Income Fund Class A. The second bar represents the 1.71% total return for John
Hancock New York Tax-Free Income Fund Class B. The third bar represents the
1.91% total return for Average New York municipal bond fund. A note below the
chart reads "Total returns for John Hancock New York Tax-Free Income Fund are at
net asset value with all distributions reinvested. The average New York
municipal bond fund is tracked by Lipper Analytical Services, Inc. See the
following two pages for historical performance information."]
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slightly lower yields (less than 0.10% in most cases) we think that
call-protected bonds offer good total return potential.
During the period, we stayed focused on higher-quality securities. With
yields of only 0.10 to 0.20 percentage points higher than insured bonds,
lower-quality securities - those rated BBB or lower - generally didn't offer
enough additional yield to compensate for their added credit risk, in our view.
At the end of the period, more than 75% of the Fund's net assets were in bonds
rated A or above.
Leaders and laggards
Some of our best performers during the period were bonds that were advance
refunded by their issuer. Although the process is rather detailed, the final
outcome of an advance refunding is that the bond's price goes up, because the
municipal bond becomes backed by high-quality U.S. Treasury securities. That was
the case with some of the Fund's holdings in general obligation bonds issued by
New York State, as well as some issued by the New York City Municipal Water
Finance Authority. Although there weren't really any out-and-out disappointments
during the period, the Fund's holdings in bonds issued by New York City were not
refunded, and ended the period more or less flat.
Outlook
We're cautiously optimistic about the municipal market. Over the short term, we
could see continued volatility as countervailing economic indicators temporarily
sway investors one way or another. But over the longer term, we think interest
rates will continue to decline as many parts of the world struggle to lift
themselves out of recessionary - and even depressionary - conditions, and the
U.S. potentially heads for slower growth. Given that view, we're likely to
remain neutral during the coming months, not positioning our duration too long
or too short until there are more definitive signs about where rates ultimately
are headed. As for the New York market, we're optimistic that the state will
finalize and pass its budget within a reasonable period of time, which will
likely be viewed as a positive. In addition, we think that the state's economic
prospects are good, especially if Wall Street remains strong.
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This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
1 Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"...we're likely to remain neutral during the coming months..."
5
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John Hancock Funds - New York Tax-Free Income Fund
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A LOOK AT PERFORMANCE
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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
measures the change in value of an investment from the beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.50%. Class B performance reflects a maximum contingent deferred
sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
Please note that a portion of the Fund's income may be subject to taxes, and
some investors may be subject to the Alternative Minimum Tax (AMT). Also note
that capital gains are taxable.
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CLASS A
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For the period ended December 31, 1998
ONE FIVE TEN
YEAR YEARS YEARS
------- ------- --------
Cumulative Total Returns 1.49% 26.15% 103.97%
Average Annual Total Returns(1) 1.49% 4.76% 7.39%
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CLASS B
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For the period ended December 31, 1998
SINCE
ONE INCEPTION
YEAR (10/3/96)
------- ---------
Cumulative Total Returns 0.54% 13.82%
Average Annual Total Returns(1) 0.54% 5.94%
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YIELDS
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As of February 28, 1999
SEC 30-DAY
YIELD
-------
John Hancock New York Tax-Free Income Fund: Class A 3.86%
John Hancock New York Tax-Free Income Fund: Class B 3.33%
Notes to Performance
(1) 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 ten-year
periods for Class A shares would have been 1.12%, 4.34% and 6.73%,
respectively. The average annual total returns for the one-year period
and since inception for Class B shares would have been 0.17% and 5.55%,
respectively.
6
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John Hancock Funds - New York Tax-Free Income Fund
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
New York Tax-Free Income Fund would be worth, assuming all distributions were
reinvested for the period indicated. 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. Past performance is not indicative of future results.
- --------------------------------------------------------------------------------
Line chart with the heading John Hancock New York Tax-Free Income Fund Class A,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. With in the chart are three lines. The first line represents the
Lehman Brothers Municipal Bond Index and is equal to $23,114 as of February 28,
1999. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock New York Tax-Free Income Fund, before sales
charge, on August 31, 1988, and is equal to $22,606, as of February 28, 1999.
The third line represents the same hypothetical investment made in the John
Hancock New York Tax-Free Income Fund, after sales charge, and is equal to
$21,596 as of February 28, 1999.
Line chart with the heading John Hancock 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 Lehman
Brothers Municipal Bond Index and is equal to $12,065 as of February 28, 1999.
The second line represents the value of the hypothetical $10,000 investment made
in the John Hancock New York Tax-Free Income Fund on October 3, 1996, before
sales charge, and is equal to $11,717 as of February 28, 1999. The third line
represents the same hypothetical investment made in the John Hancock New York
Tax-Free Income Fund, after sales charge, and is equal to $11,417 as of February
28, 1999.
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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 February 28, 1999. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
February 28, 1999 (Unaudited)
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Assets:
Investments at value - Note C:
Tax-exempt long-term bonds (cost - $55,699,891)............... $59,965,659
Cash .......................................................... 1,640,276
Receivable for investments sold ............................... 1,006,778
Receivable for shares sold .................................... 5,793
Interest receivable............................................ 814,883
Other assets................................................... 23,491
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Total Assets..................... 63,456,880
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Liabilities:
Payable for investments purchased ............................. 3,255,778
Dividend payable............................................... 18,720
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 3,490
Accounts payable and accrued expenses ......................... 33,962
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Total Liabilities................ 3,311,950
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Net Assets:
Capital paid-in ............................................... 55,834,654
Accumulated net realized gain on investments and
financial futures contracts................................... 28,609
Net unrealized appreciation of investments..................... 4,266,184
Undistributed net investment income............................ 15,483
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Net Assets....................... $60,144,930
================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $52,074,731/4,182,535.............................. $12.45
=============================================================================
Class B - $8,070,199/648,182 ................................. $12.45
=============================================================================
Maximum Offering Price Per Share*
Class A - ($12.45 x 104.71%).................................. $13.04
=============================================================================
* 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
Six months ended February 28, 1999 (Unaudited)
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Investment Income:
Interest....................................................... $1,723,354
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Expenses:
Investment management fee - Note B ........................... 149,171
Distribution and service fee - Note B
Class A...................................................... 78,110
Class B...................................................... 37,977
Transfer agent fee - Note B ................................... 32,447
Custodian fee.................................................. 25,098
Auditing fee .................................................. 10,389
Printing....................................................... 4,991
Financial services fee - Note B................................ 4,299
Registration and filing fees................................... 2,575
Trustees' fees................................................. 1,468
Miscellaneous ................................................. 792
Legal fees..................................................... 556
Less management fee reduction - Note B......................... (97,410)
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Total Expenses ..................... 250,463
---------------------------------------------------
Less Expense Reductions -
Note B ............................. (15,039)
---------------------------------------------------
Net Expenses........................ 235,424
---------------------------------------------------
Net Investment Income .............. 1,487,930
---------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized gain on investments sold ......................... 515,914
Net realized loss on financial futures contracts .............. (55,803)
Change in net unrealized appreciation/depreciation
of investments................................................ (747,113)
------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ........ (287,002)
---------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .......... $1,200,928
===================================================
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - New York Tax-Free Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED FEBRUARY 28, 1999
AUGUST 31, 1998 (UNAUDITED)
--------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ........................................................ $2,985,176 $1,487,930
Net realized gain on investments sold and financial futures contracts ........ 614,815 460,111
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts ................................................. 1,108,414 (747,113)
------------- -------------
Net Increase in Net Assets Resulting from Operations......................... 4,708,405 1,200,928
------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6593 and $0.3169 per share, respectively)...................... (2,827,611) (1,321,856)
Class B - ($0.5715 and $0.2732 per share, respectively)...................... (173,645) (166,074)
Distributions from net realized gain on investments sold
Class A - (none and $0.1139 per share, respectively)......................... - (473,690)
Class B - (none and $0.1139 per share, respectively)......................... - (74,569)
------------- -------------
Total Distributions to Shareholders ......................................... (3,001,256) (2,036,189)
------------- -------------
From Fund Share Transactions - Net:* .......................................... (10,091) 2,783,432
------------- -------------
Net Assets:
Beginning of period........................................................... 56,499,701 58,196,759
------------- -------------
End of period (including undistributed net investment income of $15,483 and
$15,483, respectively)....................................................... $58,196,759 $60,144,930
============= =============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED FEBRUARY 28, 1999
AUGUST 31, 1998 (UNAUDITED)
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ------------ ------------ ------------
CLASS A
Shares sold...................................................... 459,988 $5,734,004 175,816 $2,216,738
Shares issued to shareholders in reinvestment of distributions... 164,528 2,048,356 106,247 1,332,467
----------- ------------- ---------- ------------
624,516 7,782,360 282,063 3,549,205
Less shares repurchased ......................................... (891,788) (11,085,177) (248,520) (3,128,977)
----------- ------------- ---------- ------------
Net increase (decrease).......................................... (267,272) ($3,302,817) 33,543 $420,228
=========== ============= ========== ============
CLASS B
Shares sold ..................................................... 286,752 $3,574,224 284,844 $3,592,120
Shares issued to shareholders in reinvestment of distributions... 8,420 104,922 9,426 118,075
----------- ------------- ---------- ------------
295,172 3,679,146 294,270 3,710,195
Less shares repurchased.......................................... (30,917) (386,420) (107,463) (1,346,991)
----------- ------------- ---------- ------------
Net increase..................................................... 264,255 $3,292,726 186,807 $2,363,204
=========== ============= ========== ============
</TABLE>
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:
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<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, SIX MONTHS ENDED
--------------------------------------------------- FEBRUARY 28, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
------- ------- -------- --------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $12.63 $11.73 $11.88 $11.83 $12.25 $12.62
--------- -------- -------- -------- -------- --------
Net Investment Income .............................. 0.64 0.65 0.66 0.67 0.66(7) 0.32(7)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts........ (0.77) 0.15 (0.05) 0.42 0.37 (0.06)
--------- -------- -------- -------- -------- --------
Total from Investment Operations ................. (0.13) 0.80 0.61 1.09 1.03 0.26
--------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income............... (0.64) (0.65) (0.66) (0.67) (0.66) (0.32)
Distributions from Net Realized Gain on
Investments Sold................................... (0.13) - - - - (0.11)
--------- -------- -------- -------- -------- --------
Total Distributions............................... (0.77) (0.65) (0.66) (0.67) (0.66) (0.43)
--------- -------- -------- -------- -------- --------
Net Asset Value, End of Period...................... $11.73 $11.88 $11.83 $12.25 $12.62 $12.45
========= ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (2)...... (1.05%) 7.19% 5.21% 9.48% 8.64% 2.06%(6)
Total Adjusted Investment Return at
Net Asset Value (2,3) ............................. (1.58%) 6.74% 4.77% 9.08% 8.24% 1.87%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $55,690 $55,753 $56,229 $54,086 $52,373 $52,075
Ratio of Expenses to Average Net Assets............. 0.70% 0.70% 0.73%(4) 0.71%(4) 0.70% 0.75%(4,5)
Ratio of Adjusted Expenses to Average Net Assets (1) 1.23% 1.15% 1.14% 1.11% 1.10% 1.08%(5)
Ratio of Net Investment Income to Average Net Assets 5.28% 5.67% 5.51% 5.61% 5.26% 5.08%(5)
Ratio of Adjusted Net Investment Income to
Average Net Assets (1)............................. 4.75% 5.22% 5.07% 5.21% 4.86% 4.70%(5)
Portfolio Turnover Rate ............................ 23% 70% 76% 46% 46% 29%
Expense and Fee Reduction Per Share................. $0.06 $0.05 $0.05 $0.05 $0.05(7) $0.04(7)
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
distributions 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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 3, 1996 SIX MONTHS ENDED
(COMMENCEMENT OF OPERATIONS) YEAR ENDED FEBRUARY 28, 1999
TO AUGUST 31, 1997 AUGUST 31, 1998 (UNAUDITED)
---------------------------- ---------------- ------------------
<S> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period............................. $11.99 $12.25 $12.62
---------- ---------- ----------
Net Investment Income............................................ 0.54 0.57(7) 0.27(7)
Net Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts..................................... 0.26 0.37 (0.06)
---------- ---------- ----------
Total from Investment Operations ............................. 0.80 0.94 0.21
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ........................... (0.54) (0.57) (0.27)
Distributions from Net Realized Gain on Investments Sold ....... - - (0.11)
---------- ---------- ----------
Total Distributions .......................................... (0.54) (0.57) (0.38)
---------- ---------- ----------
Net Asset Value, End of Period .................................. $12.25 $12.62 $12.45
========== ========== ==========
Total Investment Return at Net Asset Value (2)................... 6.82%(6) 7.88% 1.71%(6)
Total Adjusted Investment Return at Net Asset Value (2,3)........ 6.46%(6) 7.48% 1.52%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $2,414 $5,824 $8,070
Ratio of Expenses to Average Net Assets.......................... 1.41%(4,5) 1.40% 1.45%(4,5)
Ratio of Adjusted Expenses to Average Net Assets (1)............. 1.81%(5) 1.80% 1.78%(5)
Ratio of Net Investment Income to Average Net Assets............. 4.79%(5) 4.56% 4.38%(5)
Ratio of Adjusted Net Investment Income to Average Net Assets (1) 4.39%(5) 4.16% 4.00%(5)
Portfolio Turnover Rate.......................................... 46% 46% 29%
Expense and Fee Reduction Per Share.............................. $0.04 $0.05(7) $0.04(7)
</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 Class A and 1.40% for Class B.
(5) Annualized.
(6) Not annualized.
(7) Based on the average of the shares outstanding at the end of each month.
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - New York Tax-Free Income Fund
Schedule of Investments
February 28, 1999 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
New York Tax-Free Income Fund on February 28, 1999. The schedule consists of one
main category: tax-exempt long-term bonds. The tax-exempt bonds are 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 (89.89%)
Cattaraugus County Industrial Development Agency,
Civic Facil Rev Ref St Bonaventure Univ Proj Ser 1998A .... 5.000% 09-15-13 BBB $660 $640,068 5.16%
Dutchess County Resource Recovery Agency,
Resource Recovery Rev Solid Waste Sys Ser A** ............. 5.450 01-01-14 AAA 1,000 1,029,110 5.30
Solid Waste Mgmt Sys Rev Ser 1990 A........................ 7.500 01-01-09 AAA 250 264,008 7.10
Glen Cove Housing Auth,
Rev Sr Living Facil The Mayfair Proj....................... 8.250 10-01-26 BB+ 1,000 1,131,030 7.29
Islip Community Development Agency,
Community Dev Rev Ref NY Institute of Technology Proj ..... 7.500 03-01-26 BB- 1,500 1,645,815 6.84
Long Island Power Auth,
Elec Sys Gen Rev Ser 1998A ................................ 5.125 12-01-22 AAA 1,000 1,002,890 5.11
Elec Sys Gen Rev Ser A ................................... 5.500 12-01-29 A- 1,000 1,030,890 5.34
Metropolitan Transportation Auth,
Commuter Facil Rev 1987 Serv Contract Ser 3 ............... 7.375 07-01-08 BBB+ 1,000 1,176,100 6.27
Commuter Facil Rev 1992 Serv Contract Ser N ............... 7.125 07-01-09 BBB+ 1,000 1,111,770 6.41
Transit Facil Rev Ref Serv Contract Ser 8.................. 5.375 07-01-21 BBB+ 500 510,510 5.26
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 1,074,220 6.10
New York City Industrial Development Agency,
Brooklyn Navy Yard Cogen Partners ......................... 6.200 10-01-22 BBB- 1,000 1,117,430 5.55
Civic Facil Rev College of New Rochelle Proj............... 5.750 09-01-17 Baa2 1,000 1,044,110 5.51
Rev Ref LaGuardia Assoc LP Proj............................ 6.000 11-01-28 BB+ 500 492,725 6.09
Spec Facil Rev 1990 American Airlines Inc Proj ............ 5.400 07-01-19 BBB- 250 252,835 5.34
New York City Municipal Water Finance Auth,
Wtr & Swr Sys Rev Fiscal 1996 Ser B ....................... 6.250 06-15-20 AAA 1,000 1,148,010 5.44
Wtr & Swr Sys Rev Ref Ser 1997A ........................... 5.125 06-15-21 A 2,000 2,000,580 5.12
Water & Swr Sys Rev Ref Ser 1997B ......................... 5.250 06-15-29 A 300 301,731 5.22
New York Local Government Assistance Corp,
Rev Ref 1993 Ser C ........................................ 5.500 04-01-17 A+ 1,000 1,076,410 5.11
Rev Ref Cap Apprec Ser 1993 C ............................. Zero 04-01-14 AAA 1,100 528,088 4.92
Ser 1992 A Pub Benefit Corp .............................. 6.875 04-01-19 A+ 2,000 2,225,440 6.18
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - New York Tax-Free Income Fund
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)
New York State Dormitory Auth,
City Univ Rev Iss Ser U Unref Bal.......................... 6.375% 07-01-08 BBB+ $210 $228,247 5.87%
Genessee Valley Presbyterian Nursing Center FHA-Ins
Mtg Rev Ser 1992B......................................... 6.850 08-01-16 AA 250 270,125 6.34
Hamilton College Rev Ref .................................. 4.750 07-01-20 AAA 500 482,410 4.92
KMH Homes Inc FHA-Ins Mtg Rev Ser 1991 .................... 6.950 08-01-31 AA 1,200 1,285,008 6.49
Manhattanville College Ins Rev Ser 1990.................... 7.500 07-01-22 AAA 305 327,942 6.98
Memorial Sloan-Kettering Cancer Ctr Rev.................... Zero 07-01-18 AAA 2,500 943,600 5.10
Nyack Hosp Rev Ser 1996.................................... 6.250 07-01-13 BAA 500 531,585 5.88
State Univ Athletic Facil Rev Ser 1998 .................... 5.250 07-01-18 AAA 1,000 1,026,620 5.11
State Univ Ed Facil Rev Ser 1990A ......................... 7.700 05-15-12 A- 300 321,849 7.18
State Univ Ed Facil Rev Ser 1993A ......................... 5.500 05-15-19 A- 2,000 2,126,140 5.17
State Univ Ed Facil Rev Ser 1993A ......................... 5.250 05-15-15 AAA 1,000 1,059,520 4.96
United Hlth Serv Inc FHA-Ins Mtg Rev Ser 1989.............. 7.350 08-01-29 AAA 200 211,600 6.95
Univ of Rochester Rev Ser 1987 Unref Bal................... 6.500 07-01-09 A+ 20 20,353 6.39
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Consol Edison Co of NY Inc Proj.. 7.500 07-01-25 A+ 260 266,183 7.33
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc Proj.. 7.500 01-01-26 A+ 420 437,413 7.20
Elec Facil Rev Ser 1994A Long Island Lighting Co** ........ 5.300 10-01-24 A- 1,250 1,239,550 5.34
New York State Environmental Facilities Corp,
State Wtr Poll Control Rev Rites Ser PA-174................ 12.998# 06-15-11 AAA 500 720,625 9.02
State Wtr Poll Control Revolving Fund Rev Ser 1990A ....... 7.500 06-15-12 AA 630 674,654 7.00
State Wtr Poll Control Revolving Fund Rev Ser 1991E
Unref Bal................................................. 6.875 06-15-11 AA+ 40 43,548 6.31
New York State Housing Finance Agency,
Ins Multi-Family Mtg Hsg 1992 Ser C........................ 6.450 08-15-14 AAA 500 530,260 6.08
Ins Multi-Family Mtg Hsg 1994 Ser B........................ 6.250 08-15-14 AAA 735 793,521 5.79
Ins Multi-Family Mtg Hsg 1994 Ser C........................ 6.450 08-15-14 Aa1 1,000 1,080,110 5.97
New York State Medical Care Facilities Finance Agency,
Hosp & Nursing Home Ins Mtg Rev 1992 Ser B Preref.......... 6.950 02-15-32 AA 170 188,525 6.27
Hosp & Nursing Home Ins Mtg Rev 1992 Ser B Unref Bal ...... 6.950 02-15-32 AA 830 920,445 6.27
Mental Hlth Serv Facil Imp Rev 1990 Ser B Preref........... 7.875 08-15-20 AAA 175 189,879 7.26
Mental Hlth Serv Facil Imp Rev 1990 Ser B Unref Bal........ 7.875 08-15-20 A- 65 70,023 7.31
Mental Hlth Serv Facil Imp Rev 1991 Ser A Preref........... 7.750 08-15-11 AAA 205 225,537 7.04
Mental Hlth Serv Facil Imp Rev 1991 Ser A Unref Bal........ 7.750 08-15-11 A3 20 21,838 7.10
Mental Hlth Serv Facil Imp Rev 1991 Ser B Preref........... 7.625 08-15-17 A- 80 88,204 6.92
Mental Hlth Serv Facil Imp Rev 1991 Ser B Unref Bal........ 7.625 08-15-17 A- 165 184,077 6.83
Mental Hlth Serv Facil Imp Rev 1991 Ser C Unref Bal ....... 7.300 02-15-21 A3 35 38,324 6.67
Rev Mental Hlth Serv 1994 Ser E Preref .................... 6.250 08-15-19 AAA 1,470 1,668,700 5.51
Rev Mental Hlth Serv 1994 Ser E Unref Bal.................. 6.250 08-15-19 AAA 30 33,424 5.61
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - New York Tax-Free Income Fund
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)
New York State Mortgage Agency,
Homeowner Mtg Rev Ser 27................................... 6.900% 04-01-15 Aa2 $1,175 $1,266,721 6.40%
Homeowner Mtg Rev Ser 28................................... 7.050 10-01-23 Aa2 500 531,830 6.63
Homeowner Mtg Rev Ser 57................................... 6.300 10-01-17 Aa2 500 544,860 5.78
Homeowner Mtg Rev Ser EE-4 ................................ 7.800 10-01-13 Aa2 300 314,484 7.44
Homeowner Mtg Rev Ser JJ .................................. 7.500 10-01-17 Aa2 330 341,081 7.26
Homeowner Mtg Rev Ser VV................................... 7.375 10-01-11 Aa2 195 207,110 6.94
New York State Power Auth,
Gen Purpose Ser W ......................................... 6.500 01-01-08 AAA 250 285,722 5.69
New York State Urban Development Corp,
Rev Ser 1990 Onondaga County Convention Center Proj ....... 7.875 01-01-20 BBB+ 250 274,548 7.17
Rev Ser 7 Correctional Cap Facil Proj...................... 5.700 01-01-16 BBB+ 500 529,315 5.38
New York, City of,
GO Fiscal 1991 Ser B ...................................... 8.250 06-01-07 A- 200 254,086 6.49
GO Fiscal 1991 Ser D Preref................................ 8.000 08-01-04 A- 240 268,853 7.14
GO Fiscal 1991 Ser D Unref Bal............................. 8.000 08-01-04 A- 10 11,113 7.20
GO Fiscal 1991 Ser F Preref ............................... 8.200 11-15-03 AAA 220 250,188 7.21
GO Fiscal 1991 Ser F Unref Bal ............................ 8.200 11-15-03 A- 30 33,817 7.27
GO Fiscal 1992 Ser A Preref................................ 7.750 08-15-12 A- 245 273,418 6.94
GO Fiscal 1992 Ser A Unref Bal............................. 7.750 08-15-12 A- 5 5,538 7.00
GO Fiscal 1992 Ser B Unref Bal............................. 7.000 10-01-13 A- 10 11,136 6.29
GO Fiscal 1992 Ser C Preref................................ 7.500 08-01-21 A- 10 11,370 6.60
GO Fiscal 1992 Ser C Unref Bal............................. 7.500 08-01-21 A- 10 11,228 6.68
GO Fiscal 1992 Ser H Unref Bal............................. 7.000 02-01-22 A- 25 27,358 6.40
GO Fiscal 1996 Ser C ...................................... 5.875 02-01-16 A- 1,000 1,076,380 5.46
GO Fiscal 1996 Ser G....................................... 5.750 02-01-17 A- 1,000 1,061,950 5.41
New York, State of,
GO Environmental Quality Fiscal 1994 ...................... 6.500 12-01-14 A 1,000 1,153,480 5.64
Onondaga County Industrial Development Agency,
Civic Facil Rev 1993 Ser B Community Gen Hosp
of Greater Syracuse Proj.................................. 6.625 01-01-18 BBB 895 951,627 6.23
Port Auth of New York and New Jersey,
Spec Proj KIAC Partners Proj Ser 4......................... 6.750 10-01-19 BBB 2,500 2,768,675 6.09
Suffolk County Industrial Development Agency,
Rev Ref Nissequogue Cogen Partners Facil................... 5.500 01-01-23 BBB- 500 501,560 5.48
Triborough Bridge & Tunnel Auth,
Gen Purpose Rev Ref Ser 1997A.............................. 5.250 01-01-28 A+ 1,000 1,011,430 5.19
Gen Purpose Rev Ser 1993................................... Zero 01-01-21 AAA 1,500 493,905 5.15
Spec Oblig Ref Ser 1991B................................... 6.875 01-01-15 A- 500 537,360 6.40
----------
54,063,752
----------
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - New York Tax-Free Income Fund
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>
Puerto Rico (8.10%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the
Commonwealth of Puerto Rico .............................. 8.220%# 07-01-11 AAA $2,000 $2,610,000 6.30%
Puerto Rico Public Building Auth,
Rev Gtd Govt Facil Ser A .................................. 6.250 07-01-12 AAA 1,110 1,308,157 5.30
Puerto Rico, Commonwealth of,
GO Cap Apprec Ref Pub Imp Ser 1998......................... Zero 07-01-14 A 2,000 952,840 4.89
----------
4,870,997
----------
Virgin Islands (1.71%)
Virgin Islands Public Finance Auth,
Rev Sub Lien Fund Ln Notes Ser 1998E ....................... 5.875 10-01-18 BB+ 1,000 1,030,910 5.70
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $55,699,891) (99.70%) 59,965,659
----------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.30%) 179,271
----------- -----------
TOTAL NET ASSETS (100.00%) $60,144,930
=========== ===========
</TABLE>
* Credit ratings are unaudited and rated by Standard & Poor's where available,
or Moody's Investors Service, Fitch or John Hancock Advisers, Inc. where
Standard & Poor's ratings are not available.
** These securities having an aggregate value of $2,268,660 or 3.77% of the
Fund's net assets, have been purchased as forward commitments -- that is, the
Fund has agreed on trade date to take delivery of and make payment for such
securities on a delayed basis subsequent to the date of this schedule. The
purchase price and interest rate of such securities are fixed at trade date,
although the Fund does not earn any interest on such securities until
settlement date. The Fund has instructed its Custodian Bank to segregate
assets with a current value at least equal to the amount of the forward
commitments. Accordingly, the market value of $2,394,022 of Puerto Rico
Aqueduct and Sewer Auth, 8.220%, 07-01-11, has been segregated to cover the
forward commitments.
+ 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 February 28, 1999.
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
15
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - New York Tax-Free Income Fund
Portfolio Concentration
February 28, 1999 (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 February 28, 1999 assigned to
the various sector categories.
MARKET VALUE
AS A PERCENTAGE
OF THE FUND'S
SECTOR DISTRIBUTION NET ASSETS
- ------------------- ---------------
General Obligation............................................ 11.16%
Revenue Bonds - Authority..................................... 1.71
Revenue Bonds - Combined ..................................... 3.90
Revenue Bonds - Education..................................... 13.77
Revenue Bonds - Electric Power ............................... 10.52
Revenue Bonds - Environment................................... 1.20
Revenue Bonds - Facility ..................................... 0.85
Revenue Bonds - General Purpose............................... 1.68
Revenue Bonds - Health........................................ 11.44
Revenue Bonds - Hospital...................................... 1.57
Revenue Bonds - Housing ...................................... 12.99
Revenue Bonds - Industrial Development........................ 5.00
Revenue Bonds - Industrial Rev................................ 1.17
Revenue Bonds - Other ........................................ 7.70
Revenue Bonds - Solid Waste Disposal ......................... 2.15
Revenue Bonds - Transportation................................ 5.52
Revenue Bonds - Water & Sewer................................. 7.37
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS 99.70%
==========
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - New York Tax-Free Income Fund
(UNAUDITED)
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, Class B and Class C shares. The Fund issued
Class C shares for the first time on April 1, 1999. 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.
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,
Inc., 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.
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 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
17
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - New York Tax-Free Income Fund
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 which 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
size 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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund based on its borrowings. In
addition, a commitment fee is charged based on the average daily unused portion
of the line of credit and is allocated among the participating funds. The Fund
had no borrowing activity for the period ended February 28, 1999.
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's gains and/or losses can be affected as a result of futures contracts.
At February 28, 1999, there were no open positions in financial futures
contracts.
OPTIONS The Fund may purchase options contracts. Listed options will be valued
at the last quoted sales price on the exchange on which they are primarily
traded. Over-the-counter options are valued at the mean between the last bid and
asked prices. 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 options 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 exposure will be limited to the
change in value of the contract over the period the contract remains open.
18
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - New York Tax-Free Income Fund
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 options 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 February
28, 1999.
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 February 28, 1999, 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 $97,410. This limitation may not be
discontinued until after January 1, 2000.
The Fund has an agreement with its custodian bank under which $15,039
of custodian fees have been reduced by balance credits applied during the period
ended February 28, 1999. 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
February 28, 1999, net sales charges received with regard to sales of Class A
shares amounted to $69,117. Out of this amount, $7,986 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $43,413
was paid as sales commissions to unrelated broker-dealers and $17,718 was paid
as sales commissions to sales personnel of Signator Investors, Inc. ("Signator
Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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 February 28,
1999 the contingent deferred sales charges received by JH Funds amounted to
$94,387.
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 shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses, at an annual rate not to exceed
0.30% of Class A average daily net assets and 1.00% of Class B average daily net
assets, to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.25% of 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.
19
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - New York Tax-Free Income Fund
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 Fund. 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., Mr. Stephen L. Brown, 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 February 28, 1999 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 February 28, 1999, aggregated $18,526,449 and $17,115,374, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended February 28, 1999.
The cost of investments owned at February 28, 1999 for federal income
tax purposes was $55,699,891. Gross unrealized appreciation and depreciation of
investments aggregated $4,328,458 and $62,690 respectively, resulting in net
unrealized appreciation of $4,265,768.
20
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=====================================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>
================================================================================
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This report is for the information of shareholders of the John Hancock
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objectives and operating policies.
[LOGO] Printed on Recycled Paper 760SA 2/99
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