N-30D 1 te.txt JOHN HANCOCK TAX-EXEMPT SERIES John Hancock New York Tax-Free Income Fund ANNUAL REPORT 8.31.02 Sign up for electronic delivery at www.jhancock.com/funds/edelivery [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."] [A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left next to first paragraph.] WELCOME Table of contents Your fund at a glance page 1 Managers' report page 2 A look at performance page 6 Growth of $10,000 page 7 Fund's investments page 8 Financial statements page 13 Trustees & officers page 27 For your information page 33 Dear Fellow Shareholders, The year 2002 has been an extremely difficult one for the stock market. A steady stream of accounting scandals and corporate misdeeds has shaken investors' faith in corporate America. Plus, questions about the strength of the economic rebound and prospects for corporate earnings have hung over the financial markets, along with increased fears about Middle East tensions and terrorism. With all these concerns, the major stock market indexes have fallen significantly. In the first eight months of 2002, the broad Standard & Poor's 500 Index is down 19%, the Dow Jones Industrial Average is off 12% and the technology-laden Nasdaq Composite Index has fallen 33%. Investors in equity mutual funds have been unable to escape the market's descent, as 99% of all U.S. domestic equity funds have produced negative results in the first eight months of 2002, according to Lipper, Inc., and the average equity fund has lost 20%. Bonds, on the other hand, outperformed stocks and gained some ground, as often happens when investors seek safer havens. At such trying times as these, the impulse to flee is understandable, especially after the negative stock market returns in 2000 and 2001. But we urge you to stay the course and keep a well-diversified portfolio and a longer-term investment perspective. Working with your investment professional on your long-term plan is especially critical in turbulent times. Financial markets have always moved in cycles, and even though the current down cycle is painful, it comes after five straight years of 20%-plus returns between 1995 and 1999. As discouraging as conditions may seem in the short term, history shows us that the bad times do pass. We believe that remains the case today. The economy is sound and the vast majority of U.S. corporations are honest institutions striving to do their best for their shareholders. And the efforts of both the private sector and the U.S. government should address the current issues of corporate governance, so that corporate credibility and therefore investor confidence are restored. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks a high level of current income, exempt from federal, New York State and New York City personal income taxes, consistent with preservation of capital. Over the last twelve months * The New York municipal market held its own during difficult conditions. * The Fund's airline-, airport- and corporate-backed bonds detracted from performance. * The Fund's holdings in pre-refunded and call-protected bonds helped. [Bar chart with heading "John Hancock New York Tax-Free Income Fund." Under the heading is a note that reads "Fund performance for the year ended August 31, 2002." The chart is scaled in increments of 1% with 0% at the bottom and 5% at the top. The first bar represents the 4.04% total return for Class A. The second bar represents the 3.31% total return for Class B. The third bar represents the 3.31% total return for Class C. A note below the chart reads "Total returns for Fund are at net asset value with all distributions reinvested."] Top 10 holdings 3.6% Puerto Rico Aqueduct and Sewer Auth., 7-1-11, 10.320% 3.5% New York City Muni. Water Finance Auth., 6-15-33, 5.500% 3.0% New York State Dormitory Auth., 5-15-19, 5.500% 2.8% Port Auth. of New York and New Jersey, 10-1-19, 6.750% 2.6% TSASC, Inc., 7-15-24, 5.500% 2.4% Islip Community Development Agency, 3-1-26, 7.500% 2.4% Triborough Bridge & Tunnel Auth., 1-1-21, 6.125% 2.1% Puerto Rico Public Finance Corp., 8-1-29, 5.500% 2.1% New York, City of, 12-1-17, 5.250% 2.0% New York State Dormitory Auth., 7-1-31, 5.250% As a percentage of net assets on August 31, 2002. MANAGERS' REPORT BY CYNTHIA M. BROWN, BARRY H. EVANS, CFA, AND DIANNE SALES, CFA, PORTFOLIO MANAGERS John Hancock New York Tax-Free Income Fund Considering all they had to cope with during the past 12 months, New York municipal bonds posted respectable returns during the past year. The global uncertainty caused by the terrorist attacks of September 11, 2001 prompted the Federal Reserve Board to dramatically lower interest rates in the last four months of 2001, and then hold them steady at 40-year lows through the end of the period. Low interest rates and waning fears of inflation in the wake of a weak economy buoyed nearly all types of bonds, including municipals. The bear market in stocks also helped, fueling a "flight to safety" toward high-quality fixed-income investments. More recently, however, the muni market has periodically faced more of an uphill battle as investors became more optimistic about the economy, raising concerns about rising interest rates. Another factor curtailing the progress of the municipal bond market of late was a wave of new bonds being issued, as municipal issuers sought to lock in prevailing low interest rates by issuing new, or refinancing old, debt. An abundance of new supply weighed a bit on muni prices, although continued strong demand helped lessen the pressure. "...New York municipal bonds posted respectable returns during the past year." Other developments clearly presented some difficult challenges unique to New York. The terrorist attacks forced New York City and state municipal bond issuers to grapple with the dual challenges of decreased revenues, as personal income tax receipts declined, and increased spending on items such as security and unemployment benefits. But investors seem to have approved of the steps New York issuers have implemented to deal with these problems. [Photos of Cynthia Brown, Barry Evans and Dianne Sales flush right next to first paragraph.] FUND PERFORMANCE For the 12 months ended August 31, 2002, John Hancock New York Tax-Free Income Fund's Class A, Class B and Class C shares posted total returns of 4.04%, 3.31% and 3.31%, respectively, at net asset value. By comparison, the average New York municipal bond fund returned 4.02%, 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 the entire period and did not reinvest all distributions. Please see pages six and seven for longer-term performance information. PRE-REFUNDEDS, NON-CALLABLES SHINE In a process known as pre-refunding, many New York City issuers replaced older, higher-interest-rate bonds with new ones financed at lower prevailing rates. The issuers then backed the old bonds with U.S. Treasury securities, which gave the municipal bonds the highest credit backing available in the bond market. The higher credit rating usually translated into higher prices for the pre-refunded bonds. "Our focus on non-callable bonds also aided our per- formance." Our focus on non-callable bonds also aided our performance. When rates decline, municipal issuers, like homeowners, often refinance to reduce debt costs. Bond investors typically dislike it when bonds are "called" in this refinancing process because it often forces them to reinvest the proceeds at lower prevailing rates. Given the dramatic decline in interest rates, bond calls happened quite frequently during the year. Fortunately, a good portion of the Fund was well-protected against being called, or was non-callable altogether, which allowed us to hang on to relatively high-yielding bonds that were in strong demand and whose prices were bid up as a result. [Table at top left-hand side of page entitled "Top five sectors." The first listing is Education 14%, the second is Health 12%, the third Industrial development 11%, the fourth Authority 8% and the fifth General obligations 6%.] BONDS TIED TO AIRLINES, CORPORATIONS SLUMP The main disappointment during the year was that we had positioned the portfolio to benefit from an improving economy. In our view, the economy, while certainly not headed for boom times, was poised to generate decent growth in the second half of 2001, primarily the function of rapidly declining interest rates in the first half of last year. But then a number of unforeseen occurrences quickly overwhelmed hopes for a recovery. The events of September 11, 2001 clearly had an impact on the economy's health. But so did questions about corporate accounting practices and ethics, which helped extend the bear market in stocks and left corporate America with less spending and borrowing power. In particular, our holdings in bonds used to finance the construction and operation of airline projects weakened, as travel slumped in the aftermath of September 11. Bonds issued by municipalities on behalf of projects deemed in the public interest and backed by corporations also came under pressure as corporate profits declined. We've pared back the most weakened of our holdings in these two areas, although we believe that those we've held onto are poised for improvement once the economy strengthens. [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on 8-31-02." The chart is divided into three sections (from top to left): Revenue bonds 93%, General obligation bonds 6% and Short-term assets and other 1%. ] [Table at top of page 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 Corporate-backed bonds followed by a down arrow with the phrase "Weak economy, ethics questions concerned investors." The second listing is Pre-refunded bonds followed by an up arrow with the phrase "Demand for these high-quality bonds increased." The third listing is Non-callable bonds followed by an up arrow with the phrase "Inability to retire these higher-yielding bonds helped prices."] OUTLOOK Many New York municipal issuers will continue to struggle with budget gaps resulting from declining revenues and rising expenses. So our credit research team will continue to closely monitor developments on that front. From a macroeconomic viewpoint, we believe the economy will continue to inch toward recovery over the next six months or so, with more robust growth in store for the second half of 2003. Inflation is nearly non-existent right now, so we don't think the Fed will raise interest rates anytime this year. Moderate, non-inflationary growth, coupled with steady interest rates, would likely be a positive for municipal bonds. The performance of the bond market will likely be the mirror image of stocks; if stocks remain weak, bonds should benefit. If stocks take off, bonds could suffer a bit as investors who seek out hot sectors gravitate toward the equity market. It's important to remember that with interest rates so low, it's unlikely that municipal bonds will produce the same magnitude of price appreciation that they have enjoyed over the past two years or so. That said, we believe municipals will continue to offer good value for investors with a multi-year investment horizon who seek to diversify their portfolios using tax-free bonds. "Moderate, non-inflationary growth, coupled with steady interest rates, would likely be a positive for municipal bonds." 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. A LOOK AT PERFORMANCE For the period ended August 31, 2002 The index used for comparison is the Lehman Brothers Municipal Bond Index, an unmanaged index that includes municipal bonds and is commonly used as a measure of bond performance. It is not possible to invest directly in an index. Class A Class B Class C Index Inception date 9-13-87 10-3-96 4-1-99 -- Average annual returns with maximum sales charge (POP) One year -0.63% -1.65% 1.27% 6.24% Five years 4.75% 4.66% -- 6.42% Ten years 5.77% -- -- 6.74% Since inception -- 5.24% 4.25% -- Cumulative total returns with maximum sales charge (POP) One year -0.63% -1.65% 1.27% 6.24% Five years 26.12% 25.55% -- 36.49% Ten years 75.28% -- -- 91.94% Since inception -- 35.24% 15.28% -- SEC 30-day yield as of August 31, 2002 4.27% 3.78% 3.73% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 4.50% and Class C shares of 1%, and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The Class B shares' CDSC declines annually between years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC. The return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than the original cost. Index figures do not reflect sales charges and would be lower if they did. The returns reflect past results and should not be considered indicative of future performance. The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment in Class A shares for the period indicated. For comparison, we've shown the same investment in the Lehman Brothers Municipal Bond Index. Line chart with the heading "GROWTH OF $10,000." Within the chart are three lines. The first line represents the Index and is equal to $19,194 as of August 31, 2002. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock New York Tax-Free Income Fund Class A, before sales charge, and is equal to $18,357 as of August 31, 2002. The third line represents the value of the same hypothetical investment made in the John Hancock New York Tax-Free Income Fund Class A, after sales charge, and is equal to $17,528 as of August 31, 2002. Class B Class C 1 Period beginning 10-3-96 4-1-99 Without sales charge $13,625 $11,652 With maximum sales charge $13,524 $11,528 Index $14,706 $12,225 Assuming all distributions were reinvested for the period indicated, the chart above shows the value of a $10,000 investment in the Fund's Class B and Class C shares, respectively, as of August 31, 2002. Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. 1 No contingent deferred sales charge applicable. FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on August 31, 2002 This schedule has one main category: tax-exempt long-term bonds. The tax-exempt long-term bonds are broken down by state or territory. Under each state or territory is a list of the securities owned by the Fund.
STATE, ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE TAX-EXEMPT LONG-TERM BONDS 98.71% $74,007,197 (Cost $68,733,767) Florida 0.67% $502,975 Capital Trust Agency, Rev Seminole Tribe of Florida Convention & Resort Hotel Facil Ser 2002A, 10-01-33 10.000% BB $500 502,975 New York 86.32% 64,718,225 Albany Parking Auth, Rev Ref Ser 2001A, 07-15-25 5.625 BBB+ 750 774,322 Chautauqua TOB Asset Securitization Corp., TOB Settlement Rev Asset Backed Bond, 07-01-40 6.750 A+ 1,000 1,075,890 Glen Cove Housing Auth, Rev Sr Living Facil The Mayfair Proj, 10-01-26 8.250 BB+ 1,000 1,076,320 Islip Community Development Agency, Community Dev Rev Ref NY Institute of Technology Proj, 03-01-26 7.500 AAA 1,500 1,787,070 Long Island Power Auth, Elec Sys Rev Cap Apprec, 06-01-27 Zero AAA 1,000 285,420 Metropolitan Transportation Auth, Commuter Facil Rev 1987 Serv Contract Ser 3, 07-01-08 7.375 A3 1,000 1,157,490 Rev Ref Serv Contract Ser 2002A, 01-01-29 5.125 AA- 1,000 1,004,920 Rev Ser 2002A, 11-15-31 5.125 A 1,150 1,153,991 Monroe TOB Asset Securitization Corp., TOB Settlement Rev Asset Backed Bonds, 06-01-35 6.375 A 1,000 1,055,770 Nassau County Industrial Development Agency, Civic Facil Rev Ser 2001A North Shore Hlth Sys Proj, 11-01-21 6.250 BB+ 300 298,806 Civic Facil Rev Ser 2001B North Shore Hlth Sys Proj, 11-01-11 5.875 BB+ 500 502,130 New York City Health & Hospital Corp., Hlth Sys Rev Ser 2002A, 02-15-26 5.375 BBB 500 501,090 New York City Housing Development Corp., Multi-Family Mtg Rev FHA Ins Mtg Ln 1993 Ser A, 10-01-15 6.550 AAA 1,000 1,029,390 New York City Industrial Development Agency, Civic Facil Rev Polytechnic Univ Proj, 11-01-30 6.125 BBB- 1,000 1,033,140 Civic Facil Rev Ser 2002C Staten Island Univ Hosp Proj, 07-01-32 6.450 BBB- 500 503,400 Ind'l Dev Rev Ref LaGuardia Assoc LP Proj, 11-01-28 6.000 BB+ 750 586,942 Rev Brooklyn Navy Yard Cogeneration Partners, 10-01-28 5.650 BBB- 1,000 982,540 Rev Airis JFK I Llc Ser 2001A Proj, 07-01-28 5.500 BBB- 1,000 932,810 Spec Facil Rev American Airlines, Inc. Proj, 08-01-24 6.900 BB- 1,000 693,410 Spec Facil Rev British Airways Plc Proj, 12-01-32 7.625 BBB- 1,000 888,510 New York City Municipal Water Finance Auth, Wtr & Swr Sys Rev Ref, 06-15-33 5.500 AA 2,500 2,627,775 Wtr & Swr Sys Rev Ref Cap Apprec Ser 2001D, 06-15-20 Zero AA 2,000 849,660 Wtr & Swr Sys Rev Ref Ser 2000 B, 06-15-33 6.000 AA 460 534,479 Wtr & Swr Sys Rev Ref Ser 2000 B Preref, 06-15-33 6.000 AA 740 876,375 Wtr & Swr Sys Rev Ser 1996A, 06-15-26 5.375 AAA 1,000 1,023,850 New York City Transitional Finance Auth, Rev Future Tax Sec Bond Ser B, 11-15-29 6.000 AA+ 1,000 1,182,660 Rev Future Tax Sec Bond Ser B Unref, 02-01-17 5.500 AA+ 760 831,394 Rev Future Tax Sec Bond Ser B Preref, 02-01-17 5.500 AA+ 240 275,959 Rev Future Tax Sec Bond Ser C, 02-01-17 5.375 AA+ 1,000 1,082,220 New York Local Government Assistance Corp., Rev Ref Cap Apprec 1993 Ser C, 04-01-14 Zero AAA 1,100 681,901 Rev Ref 1993 Ser C, 04-01-17 5.500 AA- 1,225 1,383,013 New York Mortgage Agency, Homeowner Mtg Rev Ref Ser 57, 10-01-17 6.300 Aa1 500 537,685 Homeowner Mtg Rev Ref Ser 94, 10-01-30 5.900 Aa1 500 526,805 New York State Dormitory Auth, Catholic Hlth Servs Rev Ser 2000A, 07-01-30 6.000 BBB+ 1,000 1,064,760 City Univ Rev Iss Ser U Unref Bal, 07-01-08 6.375 BBB 210 214,920 Concord Nursing Home Inc Rev, 07-01-29 6.500 A1 500 550,120 KMH Homes Inc FHA-Ins Mtg Rev Ser 1991, 08-01-31 6.950 AA 1,140 1,155,846 Lease Rev State Univ Dorm Facil Ser A, 07-01-30 6.000 AA- 1,000 1,110,010 Miriam Osborn Mem Home Rev Ser B, 07-01-25 6.875 A 750 848,280 Rev City Univ Sys Cons 4th Gen Ser 2001A, 07-01-31 5.250 AA- 1,500 1,527,495 Rev Ref Lenox Hill Hosp Oblig Group, 07-01-30 5.500 A3 1,000 1,025,890 St. Luke's-Roosevelt Hospital Center Rev Ser 2000B, 08-15-40 Zero AAA 3,000 297,120 New York State Dormitory Auth (cont.), State Univ Ed Facil Rev Ser 1993A, 05-15-19 5.500 AA- 2,000 2,240,520 State Univ Ed Facil Rev Ser 1993A, 05-15-15 5.250 AAA 1,000 1,118,230 State Univ Ed Facil Rev Ser 2000B, 05-15-23 5.375 AA- 1,000 1,038,620 Univ of Rochester Rev Ser 1987 Unref Bal, 07-01-09 6.500 A+ 20 20,077 Univ of Rochester Ser 2000A, Step Coupon (6.05%, 07-01-10), 07-01-25 Zero AAA 1,000 687,990 New York State Environmental Facil Corp., State Wtr Poll Control Rev Rites-PA 174, 06-15-11 14.295# AAA 500 762,500 State Wtr Poll Control Revolving Fund Rev Ser 1991E Unref Bal, 06-15-10 6.875 AAA 40 42,684 New York State Housing Finance Agency, Ins Multi-Family Mtg Hsg 1992 Ser C, 08-15-14 6.450 AAA 500 510,625 Ins Multi-Family Mtg Hsg 1994 Ser C, 08-15-14 6.450 Aa1 1,000 1,042,040 New York State Medical Care Facilities Finance Agency, Hosp & Nursing Home Ins Mtg Rev 1992 Ser B Unref Bal, 02-15-32 6.950 AA 830 849,845 Rev Mental Hlth 1994 Ser E Unref Bal, 08-15-19 6.250 AAA 30 32,741 New York State Power Auth, Gen Purpose Ser W, 01-01-08 6.500 AAA 250 289,100 New York State Urban Development Corp., Rev Personal Income Tax St Facil Ser 2002A, 03-15-27 5.125 AA 1,000 1,010,130 New York, City of, GO Fiscal 1991 Ser B, 06-01-07 8.250 A 200 242,860 GO Fiscal 1991 Ser D Unref Bal, 08-01-04 8.000 A 5 5,170 GO Fiscal 1991 Ser F Unref Bal, 11-15-03 8.200 A 20 20,421 GO Fiscal 1992 Ser B Preref, 10-01-13 7.000 A 10 10,199 GO Ser 2001B, 12-01-17 5.250 A 1,500 1,565,790 New York, State of, GO Environmental Quality Fiscal 1994, 12-01-14 6.500 AA 1,000 1,129,060 Onondaga County Industrial Development Agency, Rev Sr Air Cargo, 01-01-32 6.125 Baa3 1,000 986,630 Orange County Industrial Development Agency, Civic Facil Rev Ser 2001C Arden Hill Care Ctr, Newburgh, 08-01-31 7.000 BB+ 500 501,095 Port Auth of New York and New Jersey, Spec Proj KIAC Partners Proj Ser 4, 10-01-19 6.750 BBB 2,000 2,062,580 Suffolk County Industrial Development Agency, Civic Facil Rev Ser 2002B Huntington Hosp Proj, 11-01-22 6.000 BBB 1,000 1,030,600 Continuing Care Retirement Rev Peconic Landing Ser 2000A, 10-01-30 8.000 BB+ 500 507,710 Triborough Bridge & Tunnel Auth, Gen Purpose Rev Ser 1992Y, 01-01-21 6.125 AA- 1,500 1,774,980 Gen Purpose Rev Ser 1993, 01-01-21 Zero AAA 1,500 624,105 Trust for Cultural Resources of the City of New York, Museum of American Folk Art Rev, 07-01-30 6.125 A 500 549,450 TSASC, Inc., TOB Settlement Asset Backed Bond Ser 1, 07-15-24 5.500 A 2,000 1,982,280 Ulster TOB Asset Securitization Corp., TOB Settlement Rev Asset Backed Bond, 06-01-40 Zero A1 1,000 654,500 Upper Mohawk Valley Regional Water Finance Auth, Wtr Sys Rev Cap Apprec, 04-01-22 Zero Aaa 2,230 846,062 Westchester County Healthcare Corp., Rev Ref Sr Lien Ser 2000A, 11-01-30 6.000% A 1,150 1,202,716 Yonkers Industrial Development Agency, Civic Facil Rev Ser 2001A Community Development Properties, 02-01-26 6.625 BBB- 1,000 1,057,490 Civic Facil Rev Ser 2001B St John's Riverside Hosp, 07-01-31 7.125 BB 780 787,847 Puerto Rico 8.93% 6,694,031 Puerto Rico Aqueduct and Sewer Auth, Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of Puerto Rico, 07-01-11 10.320# AAA 2,000 2,684,520 Puerto Rico Highway & Transportation Auth, Trans Rev Ser B, 07-01-26 6.000 A 1,000 1,084,990 Puerto Rico Public Building Auth, Rev Gtd Govt Facil Ser A, 07-01-12 6.250 AAA 1,110 1,349,716 Puerto Rico Public Finance Corp., Commonwealth Approp Ser 2002E, 08-01-29 5.500 BBB+ 1,500 1,574,805 Virgin Islands 2.79% 2,091,966 Virgin Islands Public Finance Auth, Rev Receipts Tax Ln Ser A, 10-01-24 6.500 BBB- 535 596,691 Rev Sub Lien Fund Ln Notes Ser 1998E, 10-01-18 5.875 BB+ 1,500 1,495,275 TOTAL INVESTMENTS 98.71% $74,007,197 OTHER ASSETS AND LIABILITIES, NET 1.29% $970,890 TOTAL NET ASSETS 100.00% $74,978,087
* Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investors Service, Fitch or John Hancock Advisers, LLC, where Standard & Poor's ratings are not available. # Represents rate in effect on August 31, 2002. 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. PORTFOLIO CONCENTRATION August 31, 2002 (unaudited) This table shows the percentages of the Fund's investments aggregated by various industries. VALUE AS A PERCENTAGE INDUSTRY DISTRIBUTION OF NET ASSETS General Obligation 5.77% Revenue Bonds -- Authority 8.45 Revenue Bonds -- Anticipation Note 2.10 Revenue Bonds -- Bridge & Toll Road 2.37 Revenue Bonds -- Building 0.73 Revenue Bonds -- Combined 9.42 Revenue Bonds -- Education 14.37 Revenue Bonds -- Electric 3.52 Revenue Bonds -- Environment 1.02 Revenue Bonds -- General Purpose 0.91 Revenue Bonds -- Health 11.71 Revenue Bonds -- Highway 1.45 Revenue Bonds -- Housing 5.60 Revenue Bonds -- Improvement 2.02 Revenue Bonds -- Industrial Development 11.28 Revenue Bonds -- Industrial Revenue 0.73 Revenue Bonds -- Other 4.15 Revenue Bonds -- Parking Garage/Authority 1.03 Revenue Bonds -- Single Family 0.70 Revenue Bonds -- Transportation 5.26 Revenue Bonds -- Various Purpose 1.41 Revenue Bonds -- Water & Sewer 4.71 Total tax-exempt long-term bonds 98.71% See notes to financial statements. ASSETS AND LIABILITIES August 31, 2002 This Statement of Assets and Liabilities is the Fund's balance sheet. It shows the value of what the Fund owns, is due and owes. You'll also find the net asset value and the maximum offering price per share. ASSETS Investments at value (cost $68,733,767) $74,007,197 Cash 296,149 Receivable for shares sold 11,200 Interest receivable 941,167 Other assets 4,348 Total assets 75,260,061 LIABILITIES Payable for shares repurchased 170,321 Dividends payable 22,580 Payable to affiliates 41,658 Other payables and accrued expenses 47,415 Total liabilities 281,974 NET ASSETS Capital paid-in 70,677,847 Accumulated net realized loss on investments (992,534) Net unrealized appreciation of investments 5,273,430 Accumulated net investment income 19,344 Net assets $74,978,087 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($48,911,516 [DIV] 3,918,464 shares) $12.48 Class B ($22,823,103 [DIV] 1,828,437 shares) $12.48 Class C ($3,243,468 [DIV] 259,856 shares) $12.48 MAXIMUM OFFERING PRICE PER SHARE Class A 1 ($12.48 [DIV] 95.5%) $13.07 Class C ($12.48 [DIV] 99%) $12.61 1 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. See notes to financial statements. OPERATIONS For the year ended August 31, 2002 This Statement of Operations summarizes the Fund's investment income earned and expenses incurred in operat- ing the Fund. It also shows net gains (losses) for the period stated. INVESTMENT INCOME Interest $4,028,020 Total investment income 4,028,020 EXPENSES Investment management fee 349,929 Class A distribution and service fee 144,114 Class B distribution and service fee 206,061 Class C distribution and service fee 13,415 Transfer agent fee 84,157 Custodian fee 31,229 Auditing fee 21,609 Accounting and legal services fee 14,794 Registration and filing fee 12,776 Printing 7,556 Miscellaneous 4,651 Trustees' fee 4,451 Interest expense 1,642 Legal fee 1,151 Total expenses 897,535 Less expense reductions (9,040) Net expenses 888,495 Net investment income 3,139,525 REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on investments (523,196) Change in unrealized appreciation (depreciation) of investments 172,705 Net realized and unrealized loss (350,491) Increase in net assets from operations $2,789,034 See notes to financial statements. CHANGES IN NET ASSETS This Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous period. The dif- ference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and any increase or decrease in money share- holders invested in the Fund. YEAR YEAR ENDED ENDED 8-31-01 8-31-02 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $2,606,540 $3,139,525 Net realized gain (loss) 492,334 (523,196) Change in net unrealized appreciation (depreciation) 3,069,578 172,705 Increase in net assets from operations 6,168,452 2,789,034 Distributions to shareholders From net investment income Class A (2,132,587) (2,262,789) Class B (463,535) (808,139) Class C (10,418) (54,850) (2,606,540) (3,125,778) From fund share transactions 10,283,721 9,629,303 NET ASSETS Beginning of period 51,839,895 65,685,528 End of period 1 $65,685,528 $74,978,087 1 Includes accumulated net investment income of $19,344 and $19,344, respectively. See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS A SHARES The Financial Highlights show how the Fund's net asset value for a share has changed since the end of the previous period. PERIOD ENDED 8-31-98 8-31-99 8-31-00 8-31-01 8-31-02 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $12.25 $12.62 $11.76 $11.82 $12.57 Net investment income 2 0.66 0.63 0.61 0.58 0.58 Net realized and unrealized gain (loss) on investments 0.37 (0.75) 0.06 0.75 (0.09) Total from investment operations 1.03 (0.12) 0.67 1.33 0.49 Less distributions From net investment income (0.66) (0.63) (0.61) (0.58) (0.58) From realized gain -- (0.11) -- -- -- In excess of realized gain -- -- 3 -- -- -- (0.66) (0.74) (0.61) (0.58) (0.58) Net asset value, end of period $12.62 $11.76 $11.82 $12.57 $12.48 Total return 4,5 (%) 8.64 (1.08) 5.95 11.54 4.04 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $52 $48 $43 $48 $49 Ratio of expenses to average net assets (%) 0.70 0.70 0.77 0.97 1.05 Ratio of adjusted expenses to average net assets 6 (%) 1.10 1.08 1.13 1.12 1.06 Ratio of net investment income to average net assets (%) 5.26 5.06 5.28 4.77 4.71 Portfolio turnover (%) 46 58 63 54 36 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 8-31-98 8-31-99 8-31-00 8-31-01 8-31-02 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $12.25 $12.62 $11.76 $11.82 $12.57 Net investment income 2 0.57 0.54 0.53 0.49 0.49 Net realized and unrealized gain (loss) on investments 0.37 (0.75) 0.06 0.75 (0.09) Total from investment operations 0.94 (0.21) 0.59 1.24 0.40 Less distributions From net investment income (0.57) (0.54) (0.53) (0.49) (0.49) From realized gain -- (0.11) -- -- -- In excess of realized gain -- -- 3 -- -- -- (0.57) (0.65) (0.53) (0.49) (0.49) Net asset value, end of period $12.62 $11.76 $11.82 $12.57 $12.48 Total return 4,5 (%) 7.88 (1.77) 5.21 10.76 3.31 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $6 $8 $8 $17 $23 Ratio of expenses to average net assets (%) 1.40 1.40 1.47 1.67 1.75 Ratio of adjusted expenses to average net assets 6 (%) 1.80 1.78 1.83 1.82 1.76 Ratio of net investment income to average net assets (%) 4.56 4.36 4.58 4.07 4.01 Portfolio turnover (%) 46 58 63 54 36 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 8-31-99 7 8-31-00 8-31-01 8-31-02 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $12.39 $11.76 $11.82 $12.57 Net investment income 2 0.22 0.53 0.50 0.49 Net realized and unrealized gain (loss) on investments (0.63) 0.06 0.75 (0.09) Total from investment operations (0.41) 0.59 1.25 0.40 Less distributions From net investment income (0.22) (0.53) (0.50) (0.49) Net asset value, end of period $11.76 $11.82 $12.57 $12.48 Total return 4,5 (%) (3.24) 8 5.21 10.77 3.31 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) -- 9 -- 9 $1 $3 Ratio of expenses to average net assets (%) 1.40 10 1.47 1.67 1.75 Ratio of adjusted expenses to average net assets 6 (%) 1.78 10 1.83 1.82 1.76 Ratio of net investment income to average net assets (%) 4.23 10 4.58 4.07 4.01 Portfolio turnover (%) 58 63 54 36
1 As required, effective September 1, 2001 the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The change had no effect on per share amounts for the year ended August 31, 2002 and, had the Fund not made these changes to amortization and accretion, the ratio of net investment income to average net assets would have been 4.69%, 3.99% and 3.99% for Class A, Class B and Class C, respectively. Per share ratios and supplemental data for periods prior to September 1, 2001 have not been restated to reflect this change in presentation. 2 Based on the average of the shares outstanding at the end of each month. 3 Less than $0.01 per share. 4 Assumes dividend reinvestment and does not reflect the effect of sales charges. 5 Total returns would have been lower had certain expenses not been reduced during the periods shown. 6 Does not take into consideration expense reductions during the periods shown. 7 Class C shares began operations on 4-1-99. 8 Not annualized. 9 Less than $500,000. 10 Annualized. See notes to financial statements. NOTES TO STATEMENTS NOTE A Accounting policies John Hancock New York Tax-Free Income Fund (the "Fund") is a non-diversified series of John Hancock Tax-Exempt Series Fund, an open-end investment management company registered under the Investment Company Act of 1940. The Fund seeks a high level of current income consistent with preservation of capital that is exempt from federal, New York State and New York City personal income taxes. 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 shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights as 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 that 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, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large 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. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. Class allocations Income, common expenses and realized and unrealized gains (losses) are determined at the fund level and allocated daily to each class of shares based on the appropriate net assets of the respective classes. Distribution 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 are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings of up to $475 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The average daily loan balance during the period for which loans were outstanding amounted to $1,217,000 and the weighted average interest rate was 2.325%. Interest expense includes $381 paid under the line of credit. There was no outstanding borrowing under the line of credit on August 31, 2002. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $596,051 of a capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent that such carryforward is used by the Fund, no capital gain distributions will be made. The carryforward expires as follows: August 31, 2008 -- $414,005, August 31, 2010 -- $182,046. Additionally, net capital losses of $332,301 attributable to security transactions incurred after October 31, 2001 are treated as arising on September 1, 2002, the first day of the Fund's next taxable year. Interest and distributions Interest income on investment securities is recorded on the accrual basis. The Fund records distributions to shareholders from net investment income and realized gains on the ex- dividend date. The Fund's net investment income is declared daily as dividends to shareholders of record as of the close of business on the preceding day, and distributed monthly. During the year ended August 31, 2002, the tax character of distributions paid was as follows: ordinary income $1,450 and exempt income $3,124,328. Distributions paid by the Fund with respect to each class of shares will be calculated in the same manner, at the same time and will be in the same amount, except for the effect of expenses that may be applied differently to each class. As of August 31, 2002, the components of distributable earnings on a tax basis included $45,336 of undistributed exempt income. Such distributions and distributable earnings on a tax basis are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.50% of the first $250,000,000 of the Fund's average daily net asset value, (b) 0.45% of the next $250,000,000, (c) 0.425% of the next $500,000,000, (d) 0.40% of the next $250,000,000 and (e) 0.30% of the Fund's average daily net asset value in excess of $1,250,000,000. The Fund has an agreement with its custodian bank under which custodian fees are reduced by balance credits applied during the period. Accordingly, the custody expense reduction amounted to $9,040, or 0.01% of the Fund's average net assets, for the year ended August 31, 2002. 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 Distribution Plans with John Hancock Funds, LLC ("JH Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted Distribution Plans with respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the Investment Company Act of 1940 to reimburse JH Funds for the services it provides as distributor of shares of the Fund. Accordingly, the Fund makes monthly payments to JH Funds at an annual rate not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B and Class C average daily net assets. A maximum of 0.25% of such payments may be service fees as defined by the Conduct Rules of the National Association of Securities Dealers. Under the Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could occur under certain circumstances. Class A and Class C shares are assessed up-front sales charges. During the year ended August 31, 2002, JH Funds received net up-front sales charges of $216,417 with regard to sales of Class A shares. Of this amount, $26,342 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $158,488 was paid as sales commissions to unrelated broker-dealers and $31,587 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect sole shareholder of Signator Investors. During the year ended August 31, 2002, JH Funds received net up-front sales charges of $25,785 with regard to sales of Class C shares. Of this amount, $24,235 was paid as sales commissions to unrelated broker-dealers and $1,550 was paid as sales commissions to sales personnel of Signator Investors. Class B shares that are redeemed within six years of purchase are 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. Class C shares that are redeemed within one year of purchase are subject to a CDSC at a rate of 1.00% 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 CDSCs 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 and Class C shares. During the year ended August 31, 2002, CDSCs received by JH Funds amounted to $35,134 for Class B shares and $42 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc., an indirect subsidiary of JHLICo. The Fund pays a monthly transfer agent fee based on the number of shareholder accounts, plus certain out-of-pocket expenses. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio 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. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 8-31-01 YEAR ENDED 8-31-02 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 853,340 $10,382,507 646,298 $7,928,002 Distributions reinvested 121,953 1,480,504 122,714 1,506,073 Repurchased (817,340) (9,903,599) (687,901) (8,457,808) Net increase 157,953 $1,959,412 81,111 $976,267 CLASS B SHARES Sold 729,680 $8,898,030 659,359 $8,142,380 Distributions reinvested 16,836 205,225 37,786 463,804 Repurchased (99,284) (1,202,875) (211,181) (2,595,172) Net increase 647,232 $7,900,380 485,964 $6,011,012 CLASS C SHARES Sold 39,988 $487,811 225,846 $2,776,084 Distributions reinvested 322 3,938 1,961 24,185 Repurchased (5,651) (67,820) (12,975) (158,245) Net increase 34,659 $423,929 214,832 $2,642,024 NET INCREASE 839,844 $10,283,721 781,907 $9,629,303
NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended August 31, 2002, aggregated $34,493,828 and $25,025,767, respectively. The cost of investments owned on August 31, 2002, including short-term investments, for federal income tax purposes was $68,712,980. Gross unrealized appreciation and depreciation of investments aggregated $5,598,668 and $304,451, respectively, resulting in net unrealized appreciation of $5,294,217. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to accretion of discounts on debt securities. NOTE E Reclassification of accounts During the year ended August 31, 2002, the Fund reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $8,849, a decrease in accumulated net investment income of $29,636 and an increase in capital paid-in of $20,787. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of August 31, 2002. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income per share in the financial highlights excludes these adjustments. NOTE F Change in accounting principle Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $15,889 increase in the cost of investments and a corresponding decrease in net unrealized appreciation of investments, based on securities held as of August 31, 2001. The effect of this change for the year ended August 31, 2002 was to increase net investment income by $13,747, decrease unrealized appreciation of investments by $4,898 and increase net realized loss on investments by $8,849. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in presentation. AUDITORS' REPORT Report of Pricewaterhouse- Coopers LLP, Independent Auditors To the Shareholders and Board of Trustees of John Hancock New York Tax-Free Income Fund In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments (except for Moody's and Standard & Poor's ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the John Hancock New York Tax-Free Income Fund (the "Fund") at August 31, 2002, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities owned at August 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, New York October 11, 2002 TAX INFORMATION Unaudited For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund paid during its taxable year ended August 31, 2002. None of the 2002 income dividends qualify for the corporate dividends-received deduction. Shareholders who are not subject to the alternative minimum tax received income dividends which are 99.99% tax-exempt. The percentage of income dividends from the Fund subject to the alternative minimum tax is 4.62%. None of the income dividends were derived from the U.S. Treasury Bills. For specific information on exception provisions in your state, consult your local state tax officer or your tax adviser. Shareholders will receive a 2002 U.S. Treasury Department Form 1099-DIV in January 2003. This will reflect the total of all distributions that are taxable for calendar year 2002. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock Fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees.
INDEPENDENT TRUSTEES NUMBER OF NAME, AGE TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 1 BY TRUSTEE Dennis S. Aronowitz, Born: 1931 1987 31 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1987 31 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove, Born: 1933 1991 31 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 2, Born: 1932 1996 31 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); Trustee, Marblehead Savings Bank (since 1994); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler 2, Born: 1947 1994 31 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1996 31 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. Patti McGill Peterson, Born: 1943 1996 38 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John A. Moore 2, Born: 1939 1996 38 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). John W. Pratt, Born: 1931 1996 31 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 1 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 60 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 60 Trustee, Chairman, President and Chief Executive Officer Executive Vice President, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Adviser and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND OFFICER PRINCIPAL OCCUPATION(S) AND OF FUND DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Baring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1992 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1988 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1987 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts 02199. The Statement of Additional Information of the Fund includes additional information about members of the Board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-225-5291. 1 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 2 Member of Audit Committee. 3 Interested Trustees hold positions with the Fund's investment adviser, underwriter and certain other affiliates. 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Attn: Mutual Fund Image Operations 529 Main Street Charlestown, MA 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 TDD line 1-800-554-6713 [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner. A tag line below reads "JOHN HANCOCK FUNDS."] 1-800-225-5291 1-800-554-6713 (TDD) 1-800-338-8080 EASI-Line www.jhfunds.com Now available: electronic delivery www.jhancock.com/funds/edelivery This report is for the information of the shareholders of the John Hancock New York Tax-Free Income Fund. 7600A 8/02 10/02 John Hancock Massachusetts Tax-Free Income Fund ANNUAL REPORT 8.31.02 Sign up for electronic delivery at www.jhancock.com/funds/edelivery [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."] [A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left next to first paragraph.] WELCOME Table of contents Your fund at a glance page 1 Managers' report page 2 A look at performance page 6 Growth of $10,000 page 7 Fund's investments page 8 Financial statements page 13 Trustees & officers page 27 For your information page 33 Dear Fellow Shareholders, The year 2002 has been an extremely difficult one for the stock market. A steady stream of accounting scandals and corporate misdeeds has shaken investors' faith in corporate America. Plus, questions about the strength of the economic rebound and prospects for corporate earnings have hung over the financial markets, along with increased fears about Middle East tensions and terrorism. With all these concerns, the major stock market indexes have fallen significantly. In the first eight months of 2002, the broad Standard & Poor's 500 Index is down 19%, the Dow Jones Industrial Average is off 12% and the technology-laden Nasdaq Composite Index has fallen 33%. Investors in equity mutual funds have been unable to escape the market's descent, as 99% of all U.S. domestic equity funds have produced negative results in the first eight months of 2002, according to Lipper, Inc., and the average equity fund has lost 20%. Bonds, on the other hand, outperformed stocks and gained some ground, as often happens when investors seek safer havens. At such trying times as these, the impulse to flee is understandable, especially after the negative stock market returns in 2000 and 2001. But we urge you to stay the course and keep a well-diversified portfolio and a longer-term investment perspective. Working with your investment professional on your long-term plan is especially critical in turbulent times. Financial markets have always moved in cycles, and even though the current down cycle is painful, it comes after five straight years of 20%-plus returns between 1995 and 1999. As discouraging as conditions may seem in the short term, history shows us that the bad times do pass. We believe that remains the case today. The economy is sound and the vast majority of U.S. corporations are honest institutions striving to do their best for their shareholders. And the efforts of both the private sector and the U.S. government should address the current issues of corporate governance, so that corporate credibility and therefore investor confidence are restored. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks a high level of current income, consistent with preservation of capital, that is exempt from federal and Massachusetts personal income taxes. Over the last twelve months * Municipal bonds performed well as demand jumped strongly, despite a sharp increase in issuance. * The Fund's essential service revenue bonds performed well. * On the economic front, the Massachusetts economy has weathered the recession relatively well. [Bar chart with heading "John Hancock Massachusetts Tax-Free Income Fund." Under the heading is a note that reads "Fund performance for the year ended August 31, 2002." The chart is scaled in increments of 2% with 0% at the bottom and 6% at the top. The first bar represents the 5.54% total return for Class A. The second bar represents the 4.80% total return for Class B. The third bar represents the 4.80% total return for Class C. A note below the chart reads "Total returns for Fund are at net asset value with all distributions reinvested."] Top 10 holdings 4.7% Massachusetts Turnpike Auth., 1-1-23, 5.125% 3.8% Route 3 North Transit Improvement Assoc., 6-15-29, 5.375% 3.7% Holyoke Gas and Electric Department, 12-1-31, 5.000% 3.4% Massachusetts Industrial Finance Agency, 12-1-20, 6.750% 2.9% Puerto Rico Aqueduct and Sewer Auth., 7-1-11, 10.320% 2.6% Mass. Water Pollution Abatement Trust, 2-1-31, 5.125% 2.3% Brockton, City of, 6-15-18, 6.125% 2.2% Mass. Health and Ed. Facilities Auth., 12-15-31, 9.200% 2.2% Mass. Health and Ed. Facilities Auth., 7-15-37, 5.125% 2.1% Mass. Development Finance Agency, 11-1-28, 5.450% As a percentage of net assets on August 31, 2002. MANAGERS' REPORT BY DIANNE SALES, CFA, BARRY H. EVANS, CFA, AND CYNTHIA M. BROWN, PORTFOLIO MANAGERS John Hancock Massachusetts Tax-Free Income Fund Over the past year, a weakened economy, global uncertainty after September 11 and turmoil in the equity markets resulted in a good environment for bonds. It also led the Federal Reserve to cut interest rates four times after the terrorist attacks in an attempt to keep the U.S. economy from sliding deeper into recession. With economic numbers indicating a very slow recovery, the Federal Reserve has held rates steady in 2002, buoying fixed-income performance. Most market experts expect stronger growth to return in the latter part of 2003, and therefore don't anticipate any rate hikes until at least the first quarter of 2003. There's even some speculation that the Fed might lower rates even further this year. Against this backdrop of low interest rates, tame inflation and slow economic growth, bonds have posted solid returns. "...a good environment for bonds." Municipal bonds, in particular, have performed well. Although issuance increased dramatically as governments took advantage of lower interest rates to finance and/or refinance their capital budgets, demand for tax-exempt fixed-income securities has outpaced supply. The result has been strong performance in the municipal market, especially on an after-tax basis. With all of the uncertainty about the economic recovery, we've seen higher-grade issues outperform as investors have exhibited classic "flight to quality" behavior, shying away from lower-grade names. PERFORMANCE REVIEW For the year ended August 31, 2002, John Hancock Massachusetts Tax-Free Income Fund's Class A, Class B and Class C shares returned 5.54%, 4.80% and 4.80%, respectively, at net asset value. For the same period, the average Massachusetts municipal bond fund returned 5.08%, 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. [Photos of Dianne Sales, Barry Evans and Cynthia Brown flush right next to first paragraph.] REVENUE BONDS TURN IN SOLID PERFORMANCE Our essential service revenue bonds -- such as water, sewer and electric utilities -- turned in solid performances. Given their stable revenue streams, these bonds were well insulated from the weakening economy. Refinancings by the Massachusetts Bay Transportation Authority (MBTA) also contributed positively to the Fund's performance. In particular, the refinancing of the Route 128 parking garage boosted the credit rating on the project to AAA from BBB. Finally, our avoidance of unenhanced airline debt also helped our relative performance. "Our essential service revenue bonds -- such as water, sewer and electric utilities -- turned in solid performances." Not all of our holdings have performed well, however. With interest rates declining and bond prices rising, our higher coupon bonds lost some steam as they traded through their coupons. Because these bonds are trading at a premium and have limited upside potential, they had trouble keeping up in this market environment. We also suffered from our holdings in the Ogden Haverhill waste project, as problems at the parent, Covanta, cast a shadow over the bonds. However, the project is independent of the parent and remains profitable, so we anticipate improved relative performance over the next year. MASSACHUSETTS MARKET On the economic front, the Massachusetts economy has weathered the recession relatively well. However, the state's fiscal situation has suffered more than expected, as lower tax revenues, on top of the state's tax rollback, combined to deplete state reserve funds. The fiscal year 2003 budget was signed two months late and relied on numerous tax increases, further depletion of reserve funds and one-time revenue enhancements to achieve balance. The state also eliminated the income-tax rate decrease that was to have occurred in January 2003. The net result is that the state's safety net has been reduced to a very thin margin, diminishing fiscal flexibility if tax revenues drop further. Since we are approaching a gubernatorial election, additional fiscal adjustments will be more difficult, due to heavy political pressures. In this environment, credit ratings could be vulnerable to a downgrade. Of course, we will be monitoring the situation closely and keeping a close eye on secondary effects of the state's budget cuts on all of our holdings going forward. [Table at top left-hand side of page entitled "Top five sectors." The first listing is Education 20%, the second is Health 11%, the third Highway 9%, the fourth General obligation 8% and the fifth Water & sewer 8%.] [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on 8-31-02." The chart is divided into three sections (from top to left): Revenue bonds 89%, General obligation bonds 8% and Short-term investments and other 3%.] PORTFOLIO ADJUSTMENTS In this volatile market environment, we have stayed the course with our long-term investment strategy, making only minor adjustments to the portfolio. We've selectively looked for opportunities to add new names to the portfolio. With little new issuance in the state, the opportunities have been limited. Our emphasis has been on bonds with good call protection -- that is, bonds that are protected from being redeemed early by the issuers. We've also looked for bonds with strong liquidity, as they tend to perform better in difficult markets. [Table at top of page 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 Revenue bonds followed by an up arrow with the phrase "Essential services equal strong revenue streams." The second listing is MBTA followed by an up arrow with the phrase "Refinancing boosts credit quality." The third listing is Premium coupon bonds followed by a down arrow with the phrase "Limited upside potential."] OUTLOOK Looking ahead, we believe the outlook for municipal bonds remains positive. Indicators suggest that we're in the midst of an extended period of slow economic growth, which is a good environment for bonds. As we mentioned earlier, the Federal Reserve isn't likely to raise interest rates anytime soon, given the economic outlook. Against that backdrop, bonds are likely to trade in a relatively narrow range. As a result, fixed-income investors will see much of the returns coming from coupon income as opposed to price performance. With interest rates at such low levels, price appreciation on the same scale as the past two years is not likely to be repeated. We believe the Fund is well positioned to benefit from this scenario. "Looking ahead, we believe the outlook for municipal bonds remains positive." In this slow-growth environment, we anticipate maintaining our strong focus on revenue bonds, particularly those in essential services, such as water, sewer or electric utilities, and stable sectors such as higher education. These bonds tend to be better insulated from a weakening economy due to the essential nature of their services. Since project revenues are more closely aligned with current economic conditions, they are more likely to see their income streams pick up as the economy improves. 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. A LOOK AT PERFORMANCE For the period ended August 31, 2002 The index used for comparison is the Lehman Brothers Municipal Bond Index, an unmanaged index that includes municipal bonds and is commonly used as a measure of bond performance. It is not possible to invest directly in an index. Class A Class B Class C Index Inception date 9-3-87 10-3-96 4-1-99 -- Average annual returns with maximum sales charge (POP) One year 0.83% -0.20% 2.73% 6.24% Five years 4.93% 4.83% -- 6.42% Ten years 5.87% -- -- 6.74% Since inception -- 5.43% 4.19% -- Cumulative total returns with maximum sales charge (POP) One year 0.83% -0.20% 2.73% 6.24% Five years 27.21% 26.61% -- 36.49% Ten years 76.93% -- -- 91.94% Since inception -- 36.72% 15.06% -- SEC 30-day yield as of August 31, 2002 4.32% 3.82% 3.79% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 4.50% and Class C shares of 1%, and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The Class B shares' CDSC declines annually between years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC. The return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than the original cost. Index figures do not reflect sales charges and would be lower if they did. The returns reflect past results and should not be considered indicative of future performance. The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment of Class A shares for the period indicated. For comparison, we've shown the same investment in the Lehman Brothers Municipal Bond Index. Line chart with the heading "GROWTH OF $10,000." Within the chart are three lines. The first line represents the Index and is equal to $19,194 as of August 31, 2002. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Massachusetts Tax-Free Income Fund Class A, before sales charge, and is equal to $18,526 as of August 31, 2002. The third line represents the value of the same hypothetical investment made in the John Hancock Massachusetts Tax-Free Income Fund Class A, after sales charge, and is equal to $17,693 as of August 31, 2002. Class B Class C 1 Period beginning 10-3-96 4-1-99 Without sales charge $13,776 $11,629 With maximum sales charge $13,672 $11,506 Index $14,706 $12,225 Assuming all distributions were reinvested for the period indicated, the chart above shows the value of a $10,000 investment in the Fund's Class B and Class C shares, respectively, as of August 31, 2002. Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. 1 No contingent deferred sales charge applicable. FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on August 31, 2002 This schedule is divided into two main categories: tax-exempt long-term bonds and short-term investments. Tax-exempt long-term bonds are broken down by state or territory. Under each state or territory is a list of the securities owned by the Fund. Short-term investments, which represent the Fund's cash position, are listed last.
STATE, ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE TAX-EXEMPT LONG-TERM BONDS 96.57% $88,676,999 (Cost $83,121,743) Florida 0.55% $502,975 Capital Trust Agency, Rev Seminole Tribe of Florida Convention & Resort Hotel Facil Ser 2002A, 10-01-33 10.000% BB $500 502,975 Massachusetts 89.21% 81,921,704 Boston City Industrial Development Financing Auth, Sewage Facil Rev 1991 Harbor Elec Energy Co Proj, 05-15-15 7.375 BBB 250 253,550 Boston Water and Sewer Commission, Gen Rev 1992 Sr Ser A, 11-01-13 5.750 AA- 500 571,340 Brockton, City of, State Qualified Municipal Purpose Ln of 1993, 06-15-18 6.125 A+ 2,000 2,114,500 Holyoke Gas and Electric Department, Rev Ser A, 12-01-31 5.000 Aaa 3,410 3,431,517 Massachusetts Bay Transportation Auth, Gen Trans Sys Rev Ref Ser 1994A, 03-01-14 7.000 AA 1,000 1,269,440 Gen Trans Sys Rev Ser 1997D MBIA IBC, 03-01-27 5.000 AAA 1,000 1,001,040 Rev Assessment Ser 2000A, 07-01-30 5.250 AAA 1,000 1,021,830 Massachusetts, Commonwealth of, GO Consol Ln Ser 2001C, 12-01-19 5.375 AA- 1,000 1,141,960 Massachusetts Development Finance Agency, Concord-Assabet Family Servs Rev Ref, 11-01-28 6.000 Caa3 850 609,144 Resource Recovery Rev Southeastern MA Sys Ser 2001A, 01-01-16 5.625 AAA 500 555,465 Rev Belmont Hill School, 09-01-31 5.000 A 1,000 989,420 Rev GNMA Coll VOA Concord Ser 2000A, 10-20-41 6.900 AAA 1,000 1,157,220 Rev Lasell Village Proj Ser 1998A, 12-01-25 6.375 BBB- 1,000 922,170 Rev YMCA Greater Boston Iss, 11-01-19 5.350 BBB+ 1,000 1,003,070 Rev YMCA Greater Boston Iss, 11-01-28 5.450 BBB+ 2,000 1,956,200 Massachusetts Educational Financing Auth, Ed Ln Rev Iss D Ser 1991A, 01-01-09 7.250 AAA 200 202,350 Massachusetts Health and Educational Facilities Auth, Rev Boston College Iss Ser J Unref Bal, 07-01-21 6.625 AAA 35 35,479 Rev Boston College Iss Ser L, 06-01-26 5.000 AA- 1,500 1,499,880 Rev Civic Investments Ser 2002B, 12-15-31 9.200 BB 2,000 2,064,960 Rev Dana-Farber Cancer Institute Ser G-1, 12-01-22 6.250 A 500 520,090 Rev Harvard Univ Iss Ser FF, 07-15-37 5.125 AAA 2,000 2,010,660 Rev Harvard Univ Iss Ser W, 07-01-35 6.000 AAA 1,000 1,182,140 Rev Melrose-Wakefield Hosp Iss Ser B, 07-01-06 6.350 AAA 500 511,900 Rev Milford-Whitinsville Hosp Ser D, 07-15-32 6.350 BBB- 1,500 1,529,115 Rev Northeastern Univ Iss Ser E, 10-01-22 6.550 AAA 1,000 1,024,260 Rev Partners Healthcare Sys Ser 2001C, 07-01-32 5.750 AA- 1,000 1,040,290 Rev Ref Boston College Iss Ser L, 06-01-31 4.750 AA- 1,000 962,010 Rev Ref Brandeis Univ Iss Ser J, 10-01-26 5.000 Aaa 1,750 1,757,542 Rev Ref Harvard Pilgrim Health Ser A, 07-01-18 5.000 AAA 1,000 1,014,170 Rev Ref Harvard Univ Ser 2001DD, 07-15-35 5.000 AAA 1,000 1,001,930 Rev Ref Tufts Univ Ser 2002J, 08-15-17 5.500 AA- 500 569,250 Rev Ref Univ of Mass Worcester Campus Ser 2001B, 10-01-31 5.250 AAA 1,500 1,541,385 Rev Simmons College Ser 2000D, 10-01-29 6.150 AAA 1,000 1,112,130 Rev South Shore Hosp Ser F, 07-01-29 5.750 A 1,000 1,010,260 Rev St Luke's Hosp , 08-15-23 9.900# AAA 500 531,950 Rev Wheelock College Ser 2000B, 10-01-30 5.625 Aaa 1,000 1,056,080 Massachusetts Housing Finance Agency, Hsg Rev Rental Mtg Ser 2001A, 07-01-30 5.800 AAA 1,000 1,040,780 Rev Insured Rental Hsg 1994 Ser A, 07-01-14 6.600 AAA 960 1,003,738 Massachusetts Industrial Finance Agency, Assisted Living Facil Rev Newton Group Properties LLC Proj, 09-01-27 8.000 BB 1,000 1,080,960 Assisted Living Facil Rev TNG Marina Bay LLC Proj, 12-01-27 7.500 BB 1,000 1,041,900 Resource Recovery Rev Ref Ogden Haverhill Proj Ser 1998A, 12-01-19 5.600 BBB 1,000 815,990 Resource Recovery Rev Ref Ser 1993A Refusetech Inc Proj, 07-01-05 6.300 BBB+ 1,825 1,909,498 Rev Assumption College Iss 1996, 07-01-26 6.000 AAA 1,000 1,113,470 Rev Dana Hall School Iss, 07-01-17 5.800 BBB 1,090 1,111,440 Rev Glenmeadow Retirement Community Ser C, 02-15-18 8.375 AA 1,000 1,201,390 Rev St John's High School, 06-01-28 5.350 BBB+ 1,000 942,280 Rev Wtr Treatment American Hingham Proj, 12-01-20 6.750 BBB 3,000 3,108,600 Rev Wtr Treatment American Hingham Proj, 12-01-29 6.900 BBB 1,310 1,364,378 Massachusetts Municipal Wholesale Electric Co, Pwr Supply Sys Rev 1993 Reg Inverse Floater, 07-01-18 9.130# AAA 1,300 1,372,306 Massachusetts Port Auth, Rev Ref Ser 1992A, 07-01-23 6.000 A+ 1,370 1,404,250 Rev Ser C FSA-CR, 07-01-29 5.750 AAA 1,250 1,337,800 Rev Special Facil Ser A USAir Proj, 09-01-16 5.750 AAA 1,000 1,062,440 Massachusetts Turnpike Auth, Metro Highway Sys Rev Sr Lien Cap Apprec Ser 1997C, 01-01-20 Zero AAA 1,000 424,800 Metro Highway Sys Rev Sr Ser 1997A, 01-01-23 5.125 AAA 4,300 4,347,644 Massachusetts Water Pollution Abatement Trust, Rev Ref Pool Prog Ser 7, 02-01-31 5.125 AAA 2,320 2,349,394 Wtr Poll Abatement Rev Ref Sub New Bedford Prog Ser A, 02-01-26 4.750 Aaa 1,000 969,720 Massachusetts Water Resource Auth, Gen Rev Ref 1993 Ser B, 03-01-22 5.000 AA 360 360,299 Gen Rev Ref 1993 Ser B, 03-01-17 5.500 AA 400 413,020 Gen Rev Ref 1993 Ser C, 12-01-23 4.750 AA 1,000 971,260 Gen Rev Ref 2002 Ser B, 08-01-27 5.125 AAA 1,000 1,015,090 Nantucket, Town of, GO Municipal Purpose Ln of 1991, 12-01-11 6.800 Aaa 25 25,607 Narragansett Regional School District, GO Unltd, 06-01-18 5.375 Aaa 1,000 1,081,480 Pittsfield, City of, GO Ltd, 04-15-19 5.000 AAA 1,000 1,042,980 Plymouth, County of, Cert of Part Correctional Facil Proj, 04-01-22 5.000 AAA 1,000 1,013,900 Rail Connections, Inc., Rev Cap Apprec Rte 128 Pkg Ser 1999B, 07-01-18 Zero Aaa 1,750 784,368 Rev Cap Apprec Rte 128 Pkg Ser 1999B, 07-01-19 Zero Aaa 2,415 1,013,382 Route 3 North Transit Improvement Associates, Lease Rev, 06-15-29 5.375 AAA 3,100 3,499,993 Springfield, City of, GO School Proj Ln Act of 1992 Ser B, 09-01-11 7.100 Baa3 500 510,080 University of Massachusetts, Bldg Auth Facil Rev Gtd Ser 2000A, 11-01-25 5.125 AAA 1,000 1,011,770 Puerto Rico 6.81% 6,252,320 Puerto Rico Aqueduct and Sewer Auth, Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of Puerto Rico, 07-01-11 10.320# AAA 2,000 2,684,520 Puerto Rico, Commonwealth of, GO Pub Imp Inverse Rate Securities Ser 1996, 07-01-11 10.220# AAA 1,000 1,350,500 Puerto Rico Highway and Transportation Auth, Highway Rev Cap Rites Ser Y, 07-01-14 6.250 A 1,000 1,207,280 Puerto Rico Public Buildings Auth, Rev Gov't Facils Ser 1997B, 07-01-27 5.000 AAA 1,000 1,010,020 ISSUER, DESCRIPTION, INTEREST PAR VALUE MATURITY DATE RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 2.14% $1,961,000 (Cost $1,961,000) Joint Repurchase Agreement 2.14% Investment in a joint repurchase agreement transaction with State Street Corp. -- Dated 08-30-02, due 09-03-02 (Secured by U.S. Treasury Bond, 5.500% due 08-15-28 and U.S. Treasury Inflation Indexed Bonds, 3.625% thru 3.875% due 04-15-28 thru 04-15-29 and U.S. Treasury Inflation Indexed Notes, 3.375% thru 3.500% due 01-15-07 thru 01-15-11 and U.S. Treasury Note, 3.250% due 08-15-07) 1.820% 1,961 1,961,000 TOTAL INVESTMENTS 98.71% $90,637,999 OTHER ASSETS AND LIABILITIES, NET 1.29% $1,189,222 TOTAL NET ASSETS 100.00% $91,827,221
* Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investors Service, Fitch or John Hancock Advisers, LLC, where Standard & Poor's ratings are not available. # Represents rate in effect on August 31, 2002. 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. PORTFOLIO CONCENTRATION August 31, 2002 (unaudited) This table shows the percentages of the Fund's investments aggregated by various industries. VALUE AS A PERCENTAGE INDUSTRY DISTRIBUTION OF NET ASSETS General Obligation 7.89% Revenue Bonds -- Building 1.10 Revenue Bonds -- Combined 4.83 Revenue Bonds -- Correctional Facility 1.10 Revenue Bonds -- Education 19.75 Revenue Bonds -- Electric 1.49 Revenue Bonds -- Financial 1.26 Revenue Bonds -- Health 11.27 Revenue Bonds -- Highway 9.01 Revenue Bonds -- Hospital 1.13 Revenue Bonds -- Improvement 0.54 Revenue Bonds -- Industrial Development 4.11 Revenue Bonds -- Industrial Revenue 7.23 Revenue Bonds -- Mass Transit 1.11 Revenue Bonds -- Multi-Family 2.23 Revenue Bonds -- Other 1.87 Revenue Bonds -- Pollution Control 2.56 Revenue Bonds -- Port Authority 1.53 Revenue Bonds -- Resource Recovery 0.60 Revenue Bonds -- School 1.08 Revenue Bonds -- Transportation 5.81 Revenue Bonds -- Various Purpose 1.46 Revenue Bonds -- Water & Sewer 7.61 Total tax-exempt long-term bonds 96.57% See notes to financial statements. ASSETS AND LIABILITIES August 31, 2002 This Statement of Assets and Liabilities is the Fund's balance sheet. It shows the value of what the Fund owns, is due and owes. You'll also find the net asset value and the maximum offering price per share. ASSETS Investments at value (cost $85,082,743) $90,637,999 Cash 638 Receivable for shares sold 118,701 Interest receivable 1,218,978 Other assets 4,700 Total assets 91,981,016 LIABILITIES Payable for shares repurchased 31,787 Dividends payable 29,218 Payable to affiliates 48,128 Other payables and accrued expenses 44,662 Total liabilities 153,795 NET ASSETS Capital paid-in 86,524,912 Accumulated net realized loss on investments (259,671) Net unrealized appreciation of investments 5,555,256 Accumulated net investment income 6,724 Net assets $91,827,221 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($64,664,085 [DIV] 5,172,945 shares) $12.50 Class B ($23,127,424 [DIV] 1,850,117 shares) $12.50 Class C ($4,035,712 [DIV] 322,846 shares) $12.50 MAXIMUM OFFERING PRICE PER SHARE Class A 1 ($12.50 [DIV] 95.5%) $13.09 Class C ($12.50 [DIV] 99%) $12.63 1 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. See notes to financial statements. OPERATIONS For the year ended August 31, 2002 This Statement of Operations summarizes the Fund's investment income earned and expenses incurred in operat- ing the Fund. It also shows net gains (losses) for the period stated. INVESTMENT INCOME Interest $5,002,264 Total investment income 5,002,264 EXPENSES Investment management fee 434,582 Class A distribution and service fee 190,243 Class B distribution and service fee 207,450 Class C distribution and service fee 27,571 Transfer agent fee 81,911 Custodian fee 35,221 Auditing fee 21,609 Accounting and legal services fee 18,374 Registration and filing fee 15,840 Printing 10,356 Miscellaneous 6,032 Trustees' fee 5,448 Interest expense 2,194 Legal fee 1,350 Total expenses 1,058,181 Less expense reductions (726) Net expenses 1,057,455 Net investment income 3,944,809 REALIZED AND UNREALIZED GAIN Net realized gain on investments 64,052 Change in unrealized appreciation (depreciation) of investments 628,585 Net realized and unrealized gain 692,637 Increase in net assets from operations $4,637,446 See notes to financial statements. CHANGES IN NET ASSETS This Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous period. The difference reflects earnings less expenses, any investment gains and losses, distributions paid to share holders, if any, and any increase or decrease in money share- holders invested in the Fund. YEAR YEAR ENDED ENDED 8-31-01 8-31-02 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $3,768,582 $3,944,809 Net realized gain 76,705 64,052 Change in net unrealized appreciation (depreciation) 3,973,440 628,585 Increase in net assets from operations 7,818,727 4,637,446 Distributions to shareholders From net investment income Class A (3,032,173) (2,969,335) Class B (682,472) (826,564) Class C (53,937) (109,897) (3,768,582) (3,905,796) From fund share transactions 4,520,091 7,198,405 NET ASSETS Beginning of period 75,326,930 83,897,166 End of period 1 $83,897,166 $91,827,221 1 Includes accumulated net investment income of $6,724 and $6,724, respectively. See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS A SHARES The Financial Highlights show how the Fund's net asset value for a share has changed since the end of the previous period. PERIOD ENDED 8-31-98 8-31-99 8-31-00 8-31-01 8-31-02 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $12.12 $12.60 $11.85 $11.80 $12.41 Net investment income 2 0.66 0.64 0.64 0.59 0.58 Net realized and unrealized gain (loss) on investments 0.48 (0.75) (0.05) 0.61 0.08 Total from investment operations 1.14 (0.11) 0.59 1.20 0.66 Less distributions From net investment income (0.66) (0.64) (0.64) (0.59) (0.57) Net asset value, end of period $12.60 $11.85 $11.80 $12.41 $12.50 Total return 3,4 (%) 9.66 (0.96) 5.16 10.44 5.54 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $58 $58 $60 $63 $65 Ratio of expenses to average net assets (%) 0.70 0.70 0.77 0.97 1.03 Ratio of adjusted expenses to average net assets 5 (%) 1.10 1.05 1.09 1.05 1.03 Ratio of net investment income to average net assets (%) 5.28 5.16 5.54 4.90 4.72 Portfolio turnover (%) 6 6 19 17 15 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 8-31-98 8-31-99 8-31-00 8-31-01 8-31-02 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $12.12 $12.60 $11.85 $11.80 $12.41 Net investment income 2 0.57 0.55 0.56 0.51 0.50 Net realized and unrealized gain (loss) on investments 0.48 (0.75) (0.05) 0.61 0.08 Total from investment operations 1.05 (0.20) 0.51 1.12 0.58 Less distributions From net investment income (0.57) (0.55) (0.56) (0.51) (0.49) Net asset value, end of period $12.60 $11.85 $11.80 $12.41 $12.50 Total return 3,4 (%) 8.89 (1.66) 4.43 9.67 4.80 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $6 $13 $14 $19 $23 Ratio of expenses to average net assets (%) 1.40 1.40 1.47 1.67 1.73 Ratio of adjusted expenses to average net assets 5 (%) 1.80 1.75 1.79 1.75 1.73 Ratio of net investment income to average net assets (%) 4.58 4.46 4.84 4.20 4.02 Portfolio turnover (%) 6 6 19 17 15 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 8-31-99 6 8-31-00 8-31-01 8-31-02 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $12.46 $11.85 $11.80 $12.41 Net investment income 2 0.21 0.56 0.51 0.50 Net realized and unrealized gain (loss) on investments (0.61) (0.05) 0.61 0.08 Total from investment operations (0.40) 0.51 1.12 0.58 Less distributions From net investment income (0.21) (0.56) (0.51) (0.49) Net asset value, end of period $11.85 $11.80 $12.41 $12.50 Total return 3,4 (%) (3.23) 7 4.43 9.67 4.80 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) -- 8 $1 $2 $4 Ratio of expenses to average net assets (%) 1.40 9 1.47 1.67 1.73 Ratio of adjusted expenses to average net assets 5 (%) 1.75 9 1.79 1.75 1.73 Ratio of net investment income to average net assets (%) 4.30 9 4.84 4.20 4.02 Portfolio turnover (%) 6 19 17 15
1 As required, effective September 1, 2001 the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The effect of this change on per share amounts for the year ended August 31, 2002 was to increase net investment income per share by $0.01, decrease net realized and unrealized gains per share by $0.01, and, had the Fund not made these changes to amortization and accretion, the ratio of net investment income to average net assets would have been 4.68%, 3.98% and 3.98% for Class A, Class B and Class C shares, respectively. Per share ratios and supplemental data for periods prior to September 1, 2001 have not been restated to reflect this change in presentation. 2 Based on the average of the shares outstanding at the end of each month. 3 Assumes dividend reinvestment and does not reflect the effect of sales charges. 4 Total returns would have been lower had certain expenses not been reduced during the periods shown. 5 Does not take into consideration expense reductions during the periods shown. 6 Class C shares began operations on 4-1-99. 7 Not annualized. 8 Less than $500,000. 9 Annualized. See notes to financial statements. NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Massachusetts Tax-Free Income Fund (the "Fund") is a non-diversified series of John Hancock Tax-Exempt Series Fund, an open-end investment management company registered under the Investment Company Act of 1940. The Fund seeks a high level of current income, consistent with preservation of capital, that is exempt from federal and Massachusetts personal income taxes. 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 shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights as 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 that 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, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large 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. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. Class allocations Income, common expenses and realized and unrealized gains (losses) are determined at the fund level and allocated daily to each class of shares based on the appropriate net assets of the respective classes. Distribution 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 are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings of up to $475 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund 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 under the line of credit during the year ended August 31, 2002. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $232,080 of a capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent that such carryforward is used by the Fund, no capital gain distributions will be made. The loss carryforward expires as follows: August 31, 2004 -- $37,675, August 31, 2005 -- $6,645 and August 31, 2008 -- $187,760. Interest and distributions Interest income on investment securities is recorded on the accrual basis. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. The Fund's net investment income is declared daily as dividends to shareholders of record as of the close of business on the preceding day, and distributed monthly. During the year ended August 31, 2002, the tax character of distributions paid was as follows: ordinary income $27,360 and exempt income $3,878,436. Distributions paid by the Fund with respect to each class of shares will be calculated in the same manner, at the same time and will be in the same amount, except for the effect of expenses that may be applied differently to each class. As of August 31, 2002, the components of distributable earnings on a tax basis included $39,467 of undistributed exempt income. Such distributions and distributable earnings on a tax basis are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.50% of the first $250,000,000 of the Fund's average daily net asset value, (b) 0.45% of the next $250,000,000, (c) 0.425% of the next $500,000,000, (d) 0.40% of the next $250,000,000 and (e) 0.30% of the Fund's average daily net asset value in excess of $1,250,000,000. The Fund has an agreement with its custodian bank under which custodian fees are reduced by balance credits applied during the period. Accordingly, the custody expense reduction amounted to $726, or less than 0.01% of the Fund's average net asset, for the year ended August 31, 2002. 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 Distribution Plans with John Hancock Funds, LLC ("JH Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted Distribution Plans with respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the Investment Company Act of 1940 to reimburse JH Funds for the services it provides as distributor of shares of the Fund. Accordingly, the Fund makes monthly payments to JH Funds at an annual rate not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B and Class C average daily net assets. A maximum of 0.25% of such payments may be service fees as defined by the Conduct Rules of the National Association of Securities Dealers. Under the Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could occur under certain circumstances. Class A and Class C shares are assessed up-front sales charges. During the year ended August 31, 2002, JH Funds received net up-front sales charges of $203,436 with regard to sales of Class A shares. Of this amount, $24,883 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $136,588 was paid as sales commissions to unrelated broker-dealers and $41,965 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect sole shareholder of Signator Investors. During the year ended August 31, 2002, JH Funds received net up-front sales charges of $21,793 with regard to sales of Class C shares. Of this amount, $20,710 was paid as sales commissions to unrelated broker-dealers and $1,083 was paid as sales commissions to sales personnel of Signator Investors. Class B shares that are redeemed within six years of purchase are 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. Class C shares that are redeemed within one year of purchase are subject to a CDSC at a rate of 1.00% 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 CDSCs 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 and Class C shares. During the year ended August 31, 2002, CDSCs received by JH Funds amounted to $40,329 for Class B shares and $21 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc., an indirect subsidiary of JHLICo. The Fund pays a monthly transfer agent fee based on the number of shareholder accounts, plus certain out-of-pocket expenses. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio 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. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 8-31-01 YEAR ENDED 8-31-02 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 830,284 $9,980,780 875,311 $10,706,940 Distributions reinvested 166,253 1,998,557 156,228 1,910,203 Repurchased (993,080) (11,927,526) (963,517) (11,756,324) Net increase 3,457 $51,811 68,022 $860,819 CLASS B SHARES Sold 443,801 $5,326,941 494,835 $6,057,542 Distributions reinvested 32,633 392,784 39,383 481,477 Repurchased (173,172) (2,077,606) (192,406) (2,352,267) Net increase 303,262 $3,642,119 341,812 $4,186,752 CLASS C SHARES Sold 69,788 $843,041 180,842 $2,215,245 Distributions reinvested 1,460 17,625 4,584 56,098 Repurchased (2,852) (34,505) (9,991) (120,509) Net increase 68,396 $826,161 175,435 $2,150,834 NET INCREASE 375,115 $4,520,091 585,269 $7,198,405
NOTE D Investment transactions Purchases and proceeds from sales of securities other than short-term securities and obligations of the U.S. government, during the year ended August 31, 2002, aggregated $19,498,787 and $12,714,333, respectively. The cost of investments owned on August 31, 2002, including short-term investments, for federal income tax purposes was $85,008,820. Gross unrealized appreciation and depreciation of investments aggregated $6,154,049 and $524,870, respectively, resulting in net unrealized appreciation of $5,629,179. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax adjustment for the accretion of discounts on debt securities. NOTE E Reclassification of accounts During the year ended August 31, 2002, the Fund reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $5, a decrease in accumulated net investment income of $73,928 and an increase in capital paid-in of $73,923. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of August 31, 2002. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income per share in the financial highlights excludes these adjustments. NOTE F Change in accounting principle Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $34,915 increase in the cost of investments and a corresponding decrease in net unrealized appreciation of investments, based on securities held as of August 31, 2001. The effect of this change for the year ended August 31, 2002 was to increase net investment income by $39,013, decrease unrealized appreciation of investments by $39,008 and decrease net realized gain on investments by $5. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in presentation. AUDITORS' REPORT Report of Pricewaterhouse- Coopers LLP, Independent Auditors To the Shareholders and Board of Trustees of John Hancock Massachusetts Tax-Free Income Fund, In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments (except for Moody's and Standard & Poor's ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the John Hancock Massachusetts Tax-Free Income Fund (the "Fund") at August 31, 2002, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities owned at August 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts October 11, 2002 TAX INFORMATION Unaudited For Federal income tax purposes, the following information is furnished with respect to the distributions of the Fund paid during its taxable year ended August 31, 2002. None of the 2002 income dividends qualify for the corporate dividends-received deduction. Shareholders who are not subject to the alternative minimum tax received income dividends which are 99.30% tax-exempt. The percentage of income dividends from the fund subject to the alternative minimum tax is 15.90%. None of the income dividends were derived from U.S. Treasury Bills. For specific information on exception provisions in your state, consult your local state tax officer or your tax adviser. Shareholders will receive a 2002 U.S. Treasury Department Form 1099-DIV in January 2003. This will reflect the total of all distributions that are taxable for calendar year 2002. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock Fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees.
INDEPENDENT TRUSTEES NUMBER OF NAME, AGE TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 1 BY TRUSTEE Dennis S. Aronowitz, Born: 1931 1987 31 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1987 31 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove, Born: 1933 1991 31 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 2, Born: 1932 1996 31 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); Trustee, Marblehead Savings Bank (since 1994); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler 2, Born: 1947 1994 31 Senior Vice President and Chief Economist, The Conference Board (nonprofit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1996 31 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. Patti McGill Peterson, Born: 1943 1996 38 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John A. Moore 2, Born: 1939 1996 38 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). John W. Pratt, Born: 1931 1996 31 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 1 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 60 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 60 Trustee, Chairman, President and Chief Executive Officer Executive Vice President, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Adviser and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND OFFICER PRINCIPAL OCCUPATION(S) AND OF FUND DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Baring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1992 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1988 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1987 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts 02199. The Statement of Additional Information of the Fund includes additional information about members of the Board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-225-5291. 1 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 2 Member of Audit Committee. 3 Interested Trustees hold positions with the Fund's investment adviser, underwriter and certain other affiliates. OUR FAMILY OF FUNDS ------------------------------------------------------- Equity Balanced Fund Core Equity Fund Focused Equity Fund Growth Trends Fund Large Cap Equity Fund Large Cap Growth Fund Large Cap Spectrum Fund Mid Cap Growth Fund Multi Cap Growth Fund Small Cap Equity Fund Small Cap Growth Fund Sovereign Investors Fund U.S. Global Leaders Growth Fund ------------------------------------------------------- Sector Biotechnology Fund Financial Industries Fund Health Sciences Fund Real Estate Fund Regional Bank Fund Technology Fund ------------------------------------------------------- Income Bond Fund Government Income Fund High Income Fund High Yield Bond Fund Investment Grade Bond Fund Strategic Income Fund ------------------------------------------------------- International European Equity Fund Global Fund International Fund Pacific Basin Equities Fund ------------------------------------------------------- Tax-Free Income California Tax-Free Income Fund High Yield Municipal Bond Fund Massachusetts Tax-Free Income Fund New York Tax-Free Income Fund Tax-Free Bond Fund ------------------------------------------------------- Money Market Money Market Fund U.S. Government Cash Reserve ELECTRONIC DELIVERY Now available from John Hancock Funds Instead of receiving annual and semiannual reports and prospectuses through the U.S. mail, we'll notify you by e-mail when these documents are available for online viewing. How does electronic delivery benefit you? * No more waiting for the mail to arrive; you'll receive an e-mail notification as soon as the document is ready for online viewing. * Reduces the amount of paper mail you receive from John Hancock Funds. * Reduces costs associated with printing and mailing. Sign up for electronic delivery today at www.jhancock.com/funds/edelivery OUR WEB SITE Available just a few clicks away -- www.jhfunds.com Instant access to ---------------------------------- Portfolio/Account Information ---------------------------------- Proxy Voting ---------------------------------- Daily Mutual Fund Prices ---------------------------------- Mutual Fund Overviews ---------------------------------- Prospectuses ---------------------------------- 4 & 5 Star Funds ---------------------------------- IRA Information/Calculators ---------------------------------- Annual & Semiannual Reports ---------------------------------- Investment Professionals ---------------------------------- Mutual Fund FAQs FOR YOUR INFORMATION INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 PRINCIPAL DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, Massachusetts 02217-1001 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS PricewaterhouseCoopers LLP 160 Federal Street Boston, Massachusetts 02110 HOW TO CONTACT US On the Internet www.jhfunds.com By regular mail John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 By express mail John Hancock Signature Services, Inc. Attn: Mutual Fund Image Operations 529 Main Street Charlestown, MA 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 TDD line 1-800-554-6713 [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner. A tag line below reads "JOHN HANCOCK FUNDS."] 1-800-225-5291 1-800-554-6713 (TDD) 1-800-338-8080 EASI-Line www.jhfunds.com Now available: electronic delivery www.jhancock.com/funds/edelivery This report is for the information of the shareholders of the John Hancock Massachusetts Tax-Free Income Fund. 7700A 8/02 10/02