UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811- 5079
John Hancock Tax-Exempt Series
(Exact name of registrant as specified in charter)
601 Congress Street, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip code)
Alfred P. Ouellette
Senior Counsel and Assistant Secretary
601 Congress Street
Boston, Massachusetts 02210
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4324
| Date of fiscal year end: | August 31 | |
| Date of reporting period: | February 28, 2007 | |
| ITEM 1. | REPORT TO SHAREHOLDERS. |
| TABLE OF CONTENTS |
| Your fund at a glance |
| page 1 |
| Managers’ report |
| page 2 |
| A look at performance |
| page 6 |
| Your expenses |
| page 8 |
| Fund’s investments |
| page 1 0 |
| Financial statements |
| page 1 4 |
| Notes to financial |
| statements |
| page 2 0 |
| For more information |
| page 2 8 |
CEO corner
To Our Shareholders,
The U.S. financial markets turned in strong results over the last six months, as earlier concerns of rising inflation, a housing slowdown and high energy prices gave way to news of slower, but still resilient, economic growth, stronger than expected corporate earnings and dampened inflation fears and energy costs. This environment also led the Federal Reserve Board to hold short-term interest rates steady. Even with a sharp decline in the last days of the period, the broad stock market returned 8.93% for the six months ended February 28, 2007, as measured by the S&P 500 Index. With interest rates remaining relatively steady, fixed-income securities also produced positive results.
But after a remarkably long period of calm, the financial markets were rocked at the end of the period by a dramatic sell-off in China’s stock market, which had ripple effects on financial markets worldwide. In the United States, for example, the Dow Jones Industrial Average had its steepest one-day percentage decline in nearly four years on February 27, 2007. The event served to jog investors out of their seemingly casual attitude toward risk and remind them of the simple fact that stock markets move in two directions — down as well as up.
It was also a good occasion to bring to mind several important investment principles that we believe are at the foundation of successful investing. First, keep a long-term approach to investing, avoiding emotional reactions to daily market moves. Second, maintain a well-diversified portfolio that is appropriate for your goals, risk profile and time horizons.
After the market’s moves of the last six months, we encourage investors to sit back, take stock and set some realistic expectations. While history bodes well for the market in 2007 (since 1939, the S&P 500 Index has always produced positive results in the third year of a presidential term), there are no guarantees, and opinions are divided on the future of this more-than-four-year-old bull market. The recent downturn bolsters this uncertainty, although we believe it was a healthy correction for which we were overdue.
The latest events could also be a wake-up call to contact your financial professional to determine whether changes are in order to your investment mix. Some asset groups have had long runs of outperformance. Others had truly outsized returns in 2006. These trends argue for a look to determine if these categories now represent a larger stake in your portfolios than prudent diversification would suggest they should. After all, we believe investors with a well-balanced portfolio and a marathon — not a sprint — approach to investing, stand a better chance of weathering the market’s short-term twists and turns and reaching their long-term goals.
Sincerely,
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEO’s views as of February 28, 2007. They are subject to change at any time.
Your fund at a glance
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. In pursuing this goal, the Fund normally invests at least 80% of its assets in securities of any maturity exempt from federal and New York personal income taxes.
Over the last six months
► Municipal bonds posted positive results, although they lagged the performance of the broad taxable bond market.
► The Fund’s return trailed both its peer group average and benchmark index.
► Industrial development and tobacco-related bonds were the best performers in the portfolio, while higher-quality bonds lagged.
| Top 10 holdings | |
| Puerto Rico Aqueduct & Sewer Auth, 7-1-11, 8.022% | 4.0% |
| New York Liberty Development Corp, 10-1-35, 5.250% | 4.0% |
| New York State Dormitory Auth, 5-15-19, 5.500% | 3.9% |
| Oneida County Industrial Development Agency, 7-1-29, Zero | 3.3% |
| Triborough Bridge & Tunnel Auth, 1-1-21, 6.125% | 3.1% |
| New York City Municipal Water Finance Auth, 6-15-33, 5.500% | 2.7% |
| New York, City of, 12-1-17, 5.250% | 2.7% |
| Virgin Islands Public Finance Auth, 10-1-18, 5.875% | 2.6% |
| Port Auth of New York & New Jersey, 10-1-19, 6.750% | 2.6% |
| New York Local Government Assistance Corp, 4-1-17, 5.500% | 2.4% |
As a percentage of net assets on February 28, 2007.
1
Managers’ report
John Hancock
New York Tax-Free Income Fund
Municipal bonds gained ground for the six months ended February 28, 2007, although they trailed the taxable bond market. The Lehman Brothers Municipal Bond Index returned 2.89%, while the Lehman Brothers Aggregate Bond Index — a broad measure of the taxable bond market — returned 3.66% .
The modest gains in the municipal bond market masked an increase in volatility during the six-month period as investors reacted to changing economic conditions. Since the beginning of 2006, the U.S. economy has gradually slowed, led by a noteworthy decline in the housing market. However, sporadic signs of economic resiliency created some uncertainty regarding the underlying strength of the economy. As a result, economic reports over the last few months of the period had a magnified effect, causing greater fluctuations in the municipal bond market.
Inflation remained generally under control during the period, thanks largely to a 10% decline in energy prices. The combination of slowing economic growth and benign inflation led the Federal Reserve to hold short-term interest rates steady throughout the six-month period, after raising rates 17 times between June 2004 and June 2006. Consequently, the municipal yield curve remained flat, with short- and long-term bond yields nearly equal.
Municipal bond issuance, which had been relatively low for much of 2006, rose sharply in late 2006 and early 2007. Nonetheless, the
SCORECARD
| INVESTMENT | PERIOD’S PERFORMANCE... AND WHAT’S BEHIND THE NUMBERS | |
| Tobacco bonds | ▲ | Demand for yield provided a lift |
| Industrial | ▲ | Relatively high yields and strong coupon income |
| development bonds | ||
| Shorter-term bonds | ▼ | Steady interest rate policy from the Fed led to underperformance |
| relative to longer-term bonds |
2
Portfolio Managers, MFC Global Investment Management (U.S.) LLC
Dianne Sales, CFA, and Frank A. Lucibella, CFA
increase in supply had little impact on municipal bond performance as strong investor demand helped absorb the new issues.
New York credit environment
Credit quality for New York’s state and local governments remained stable overall during the six-month period. Economic growth, though moderating, was robust enough to sustain solid tax revenues for the state and its largest city. In November 2006, former New York State Attorney General Eliot Spitzer was elected governor, replacing George Pataki, who declined to run for re-election after serving three terms as governor. We do not expect this change in leadership to have a meaningful impact on the state’s credit quality in the near term.
“The modest gains in the
municipal bond market
masked an increase in volatility
during the six-month period as
investors reacted to changing
economic conditions.”
Fund performance
For the six months ended February 28, 2007, John Hancock New York Tax-Free Income Fund’s Class A, Class B and Class C shares posted total returns of 2.48%, 2.12% and 2.12%, respectively, at net asset value. This performance lagged both the 2.71% average return of Morningstar’s Muni New York Long Fund category1 and the 2.89% return of the Lehman Brothers Municipal Bond Index. 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 or did not reinvest all distributions. See pages six and seven for historical performance information.
Yield sings
The best-performing segments of the portfolio were lower-quality bonds, reflecting the impact of coupon income on municipal bond performance
New York Tax-Free Income Fund
3
during the period. The bulk of the return in the municipal market came from interest income, allowing higher-yielding securities to produce the best returns. In addition, strong demand for yield in a relatively low interest rate environment contributed to the outperformance of higher-yielding bonds.
High-yielding segments of the Fund that outperformed during the six-month period included transportation bonds and tobacco-related bonds. The Fund’s transportation bonds finance projects ranging from airline terminals to transit systems to bridges and tunnels. The tobacco bonds are backed by the proceeds from a legal settlement between the major tobacco companies and the state of New York (as well as 45 other states).
The Fund’s industrial development bonds were also among the best performers in the portfolio. Not surprisingly, most of the Fund’s holdings in this segment were lower-quality bonds. However, the portfolio had less exposure to industrial development bonds than many of its peers, and this contributed to the Fund’s underperformance of the Morningstar peer group.
Positioning for a steeper yield curve
Another factor that weighed on relative performance during the six-month period was our yield curve positioning. We added to our holdings of intermediate-term bonds, particularly those maturing in five to ten years. In addition to reducing the portfolio’s interest rate sensitivity, this positioning tends to perform best when the yield curve grows increasingly steep; that is, when the gap between short- and long-term bond yields widens.
| SECTOR DISTRIBUTION2 | |
| General obligation | |
| bonds | 6% |
| Revenue bonds | |
| Water & sewer | 15% |
| Education | 15% |
| Health | 10% |
| Industrial development | 9% |
| Sales tax | 7% |
| Transportation | 6% |
| Public facility | 5% |
| Pollution | 4% |
| Economic development | 4% |
| Tobacco | 3% |
| Electric | 2% |
| All other | 14% |
As we mentioned before, the yield curve remained relatively flat instead of getting steeper during the period. In addition, longer-term bonds outperformed, especially late in the period, rewarding portfolios with greater interest rate sensitivity. However, we expect to see a steeper municipal yield curve and a return to a more typical relationship between short- and long-term municipal bond yields at some point in the future.
New York Tax-Free Income Fund
4
Outlook
The U.S. economy has held up better than expected, although further slowing is likely. In general, however, we expect municipal credit quality and state tax revenues to remain fairly stable over the next six months. New municipal bond issuance in 2007 is expected to be in line with last year’s issuance levels.
“High-yielding segments of the
Fund that outperformed during
the six-month period included
transportation bonds and
tobacco-related bonds.”
With regard to the portfolio, we intend to maintain our focus on producing an above-average level of tax-free income through a diversified portfolio of New York municipal bonds. We will also continue to position the Fund to benefit from a steeper yield curve.
This commentary reflects the views of the portfolio managers through the end of the Fund’s period discussed in this report. The managers’ statements reflect their own opinions. As such, they are in no way guarantees of future events and are not intended to be used as investment advice or a recommendation regarding any specific security. They are also subject to change at any time as market and other conditions warrant.
1 Figures from Morningstar, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower.
2 As a percentage of net assets on February 28, 2007.
New York Tax-Free Income Fund
5
A look at performance
| For the periods ending February 28, 2007 | |||||||||||
| Average annual returns | Cumulative total returns | SEC 30- | |||||||||
| with maximum sales charge (POP) | with maximum sales charge (POP) | day yield | |||||||||
| Inception | Since | Since | as of | ||||||||
| Class | date | 1-year | 5-year | 10-year | inception | 6 months | 1-year | 5-year | 10-year | inception | 2-28-07 |
| A | 9-13-87 | –0.38% | 3.66% | 4.77% | — | –2.10% | –0.38% | 19.71% | 59.30% | — | 3.77% |
| B | 10-3-96 | –1.38 | 3.55 | 4.66 | — | –2.88 | –1.38 | 19.04 | 57.70 | — | 3.25 |
| C | 4-1-99 | 2.62 | 3.89 | — | 4.01% | 1.12 | 2.62 | 21.04 | — | 36.53% | 3.25 |
Performance figures assume all distributions are reinvested. POP (Public Offering Price) figures reflect maximum sales charge on Class A shares of 4.5% and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The returns for Class C shares have been adjusted to reflect the elimination of the front-end sales charge effective July 15, 2004. 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 returns reflect past results and should not be considered indicative of future performance. The return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Due to market volatility, the Fund’s current performance may be higher or lower than the performance shown. For performance data current to the most recent month-end, please call 1-800-225-5291 or visit the Fund’s Web site at www.jhfunds.com.
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.
New York Tax-Free Income Fund
6
Growth of $10,000
This chart shows what happened to a hypothetical $10,000 investment in New York Tax-Free Income Fund Class A shares for the period indicated. For comparison, we’ve shown the same investment in the Lehman Brothers Municipal Bond Index.
| With maximum | ||||
| Class | Period beginning | Without sales charge | sales charge | Index |
| B1 | 2-28-97 | $15,770 | $15,770 | $17,490 |
| C1 | 4-1-99 | 13,653 | 13,653 | 15,077 |
Assuming all distributions were reinvested for the period indicated, the table above shows the value of a $10,000 investment in the Fund’s Class B and Class C shares, respectively, as of February 28, 2007. The Class C shares investment with maximum sales charge has been adjusted to reflect the elimination of the front-end sales charge effective July 15, 2004. 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.
Lehman Brothers Municipal Bond Index is 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. Index figures do not reflect sales charges which would have resulted in lower values if they did.
1 No contingent deferred sales charge applicable.
New York Tax-Free Income Fund
7
Your expenses
These examples are intended to help you understand your ongoing operating expenses.
Understanding fund expenses
As a shareholder of the Fund, you incur two types of costs:
■ Transaction costs which include sales charges (loads) on purchases or redemptions (varies by share class), minimum account fee charge, etc.
■ Ongoing operating expenses including management fees, distribution and service fees (if applicable) and other fund expenses.
We are going to present only your ongoing operating expenses here.
Actual expenses/actual returns
This example is intended to provide information about your fund’s actual ongoing operating expenses, and is based on your fund’s actual return. It assumes an account value of $1,000.00 on September 1, 2006, with the same investment held until February 28, 2007.
| Account value | Ending value | Expenses paid during period | |
| on 9-1-06 | on 2-28-07 | ended 2-28-071 | |
| Class A | $1,000.00 | $1,024.80 | $5.26 |
| Class B | 1,000.00 | 1,021.20 | 8.69 |
| Class C | 1,000.00 | 1,021.20 | 8.69 |
Together with the value of your account, you may use this information to estimate the operating expenses that you paid over the period. Simply divide your account value at February 28, 2007 by $1,000.00, then multiply it by the “expenses paid” for your share class from the table above. For example, for an account value of $8,600.00, the operating expenses should be calculated as follows:
New York Tax-Free Income Fund
8
Hypothetical example for comparison purposes
This table allows you to compare your fund’s ongoing operating expenses with those of any other fund. It provides an example of the Fund’s hypothetical account values and hypothetical expenses based on each class’s actual expense ratio and an assumed 5% annual return before expenses (which is not your fund’s actual return). It assumes an account value of $1,000.00 on September 1, 2006, with the same investment held until February 28, 2007. Look in any other fund shareholder report to find its hypothetical example and you will be able to compare these expenses.
| Account value | Ending value | Expenses paid during period | |
| on 9-1-06 | on 2-28-07 | ended 2-28-071 | |
| Class A | $1,000.00 | $1,020.00 | $5.25 |
| Class B | 1,000.00 | 1,016.60 | 8.67 |
| Class C | 1,000.00 | 1,016.60 | 8.67 |
Remember, these examples do not include any transaction costs, such as sales charges; therefore, these examples will not help you to determine the relative total costs of owning different funds. If transaction costs were included, your expenses would have been higher. See the prospectus for details regarding transaction costs.
1 Expenses are equal to the Fund’s annualized expense ratio of 1.04%, 1.74% and 1.74% for Class A, Class B and Class C, respectively, multiplied by the average account value over the period, multiplied by number of days in most recent fiscal half-year/365 or 366 (to reflect the one-half year period).
New York Tax-Free Income Fund
9
F I N A N C I A L S T A T E M E N T S
Fund’s investments
Securities owned by the Fund on 2-28-07 (unaudited)
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 securities owned by the Fund. Short-term investments, which represent the Fund’s cash position, are listed last.
| Interest | Maturity | Credit | Par value | |||
| State, issuer, description | rate | date | rating (A) | (000) | Value | |
| Tax-exempt long-term bonds 102.87% | $60,231,771 | |||||
| (Cost $55,660,035) | ||||||
| New York 90.20% | 52,813,730 | |||||
| Albany Parking Auth, | ||||||
| Rev Ref Ser 2001A | 5.625% | 07-15-25 | BBB+ | $750 | 802,297 | |
| Chautauqua Tobacco Asset | ||||||
| Securitization Corp, | ||||||
| Rev Ref Asset Backed Bond | 6.750 | 07-01-40 | BBB | 1,000 | 1,077,210 | |
| Essex County Industrial | ||||||
| Development Agency, | ||||||
| Rev Ref Solid Waste Disp Intl | ||||||
| Paper Ser 2005A | 5.200 | 12-01-23 | BBB | 800 | 833,520 | |
| Herkimer County Industrial | ||||||
| Development Agency, | ||||||
| Rev Ref Folts Adult Home | ||||||
| Ser 2005A | 5.500 | 03-20-40 | Aaa | 1,000 | 1,128,170 | |
| Metropolitan Transportation Auth, | ||||||
| Rev Serv Contract Commuter Facil | ||||||
| Ser 3 | 7.375 | 07-01-08 | A1 | 375 | 385,530 | |
| Monroe Newpower Corp, | ||||||
| Rev Ref Pwr Facil | 5.100 | 01-01-16 | BBB | 1,000 | 1,039,480 | |
| Nassau County Industrial | ||||||
| Development Agency, | ||||||
| Rev Ref Civic Facil North Shore | ||||||
| Hlth Sys Projs Ser 2001A | 6.250 | 11-01-21 | A3 | 275 | 298,562 | |
| Rev Ref Civic Facil North Shore | ||||||
| Hlth Sys Projs Ser 2001B | 5.875 | 11-01-11 | A3 | 250 | 261,700 | |
| New York, City of, | ||||||
| Gen Oblig Unltd Preref Ser 1990B | 8.250 | 06-01-07 | AA– | 180 | 182,086 | |
| Gen Oblig Unltd Ser 1993E2 (P) | 3.620 | 08-01-20 | AAA | 100 | 100,000 | |
| Gen Oblig Unltd Ser 2001B | 5.250 | 12-01-17 | AA– | 1,500 | 1,589,085 | |
| Gen Oblig Unltd Ser 2004J | 5.000 | 05-15-23 | AA– | 1,000 | 1,060,140 | |
| Gen Oblig Unltd Unref Bal | ||||||
| Ser 1990B | 8.250 | 06-01-07 | AA– | 20 | 20,223 | |
| New York City Industrial | ||||||
| Development Agency, | ||||||
| Rev Civic Facil Lycee Francais de | ||||||
| NY Proj Ser 2002A | 5.375 | 06-01-23 | A | 1,000 | 1,059,480 | |
See notes to financial statements
New York Tax-Free Income Fund
10
F I N A N C I A L S T A T E M E N T S
| Interest | Maturity | Credit | Par value | |||
| State, issuer, description | rate | date | rating (A) | (000) | Value | |
| New York (continued) | ||||||
| New York City Industrial | ||||||
| Development Agency, (continued) | ||||||
| Rev Civic Facil Polytechnic | ||||||
| Univ Proj | 6.125% | 11-01-30 | BB+ | $1,000 | $1,044,230 | |
| Rev Liberty 7 World Trade Ctr | ||||||
| Ser 2005A (G) | 6.250 | 03-01-15 | BB– | 1,000 | 1,063,770 | |
| Rev Ref Brooklyn Navy Yard | ||||||
| Cogen Partners | 5.650 | 10-01-28 | BBB– | 1,000 | 1,012,100 | |
| Rev Spec Airport Facil Airis JFK | ||||||
| I LLC Proj Ser 2001A | 5.500 | 07-01-28 | BBB– | 1,000 | 1,038,460 | |
| Rev Terminal One Group Assn Proj | 5.500 | 01-01-21 | BBB+ | 1,000 | 1,096,680 | |
| New York City Municipal Water | ||||||
| Finance Auth, | ||||||
| Rev Preref Wtr & Swr Sys | ||||||
| Ser 2000B | 6.000 | 06-15-33 | AA+ | 740 | 801,768 | |
| Rev Ref Wtr & Swr Sys | 5.500 | 06-15-33 | AAA | 1,500 | 1,602,075 | |
| Rev Ref Wtr & Swr Sys Cap Apprec | ||||||
| Ser 2001D | Zero | 06-15-20 | AA+ | 2,000 | 1,182,720 | |
| Rev Unref Bal Wtr & Swr Sys | ||||||
| Ser 2000B | 6.000 | 06-15-33 | AA+ | 460 | 495,862 | |
| Rev Wtr & Swr Sys Ser 2000C (P) | 3.620 | 06-15-33 | AA+ | 800 | 800,000 | |
| New York City Transitional | ||||||
| Finance Auth, | ||||||
| Rev Future Tax Sec Ser 2000B | 6.000 | 11-15-29 | AAA | 1,000 | 1,081,710 | |
| Rev Ref Future Tax Sec Ser 2002A | ||||||
| (Zero to 11-01-11 then | ||||||
| 14.000%) (O) | Zero | 11-01-29 | AAA | 1,000 | 834,410 | |
| New York City Trust For Cultural | ||||||
| Resources, | ||||||
| Rev Ref American Museum of | ||||||
| Natural History Ser 2004A | 5.000 | 07-01-36 | AAA | 1,000 | 1,063,020 | |
| New York Liberty | ||||||
| Development Corp, | ||||||
| Rev Goldman Sachs Headquarters | 5.250 | 10-01-35 | AA– | 2,000 | 2,347,560 | |
| Rev National Sports Museum Proj | ||||||
| Ser 2006A (G) | 6.125 | 02-15-19 | BB– | 1,000 | 1,056,120 | |
| New York Local Government | ||||||
| Assistance Corp, | ||||||
| Rev Ref Ser 1993C | 5.500 | 04-01-17 | AAA | 1,225 | 1,385,046 | |
| New York State Dormitory Auth, | ||||||
| Rev Cap Apprec FHA Insd Mtg | ||||||
| Ser 2000B (G) | Zero | 08-15-40 | AA | 3,000 | 393,840 | |
| Rev Lease State Univ Dorm Facil | ||||||
| Ser 2000A | 6.000 | 07-01-30 | AA– | 1,000 | 1,084,740 | |
| Rev Miriam Osborn Mem Home | ||||||
| Ser 2000B | 6.875 | 07-01-25 | A | 750 | 831,653 | |
| Rev North Shore L I Jewish Grp | 5.375 | 05-01-23 | A3 | 1,000 | 1,071,130 | |
| Rev Personal Income Tax Ser 2005F | 5.000 | 03-15-30 | AAA | 1,000 | 1,068,210 | |
| Rev Ref Ser 2002B | 5.250 | 11-15-23 | AA– | 1,000 | 1,067,940 | |
See notes to financial statements
New York Tax-Free Income Fund
11
F I N A N C I A L S T A T E M E N T S
| Interest | Maturity | Credit | Par value | |||
| State, issuer, description | rate | date | rating (A) | (000) | Value | |
| New York (continued) | ||||||
| New York State Dormitory Auth, (continued) | ||||||
| Rev Ref State Univ Edl Facil | ||||||
| Ser 1993A | 5.500% | 05-15-19 | AA– | $2,000 | $2,269,320 | |
| Rev Ref State Univ Edl Facil | ||||||
| Ser 1993A | 5.250 | 05-15-15 | AAA | 1,000 | 1,093,230 | |
| Rev Ref Univ of Rochester Defd | ||||||
| Income Ser 2000A (Zero to | ||||||
| 07-01-10 then 6.05%) (O) | Zero | 07-01-25 | AAA | 1,000 | 892,080 | |
| Rev State Univ Edl Facil | ||||||
| Ser 2000B | 5.375 | 05-15-23 | AA– | 1,000 | 1,063,220 | |
| Rev Unref City Univ 4th Ser 2001A | 5.250 | 07-01-31 | AA– | 130 | 138,598 | |
| New York State Environmental | ||||||
| Facilities Corp, | ||||||
| Rev Ref Poll Control (P) | 11.894 | 06-15-11 | AAA | 500 | 638,300 | |
| Rev Unref Bal Poll Control | ||||||
| Ser 1991E | 6.875 | 06-15-10 | AAA | 25 | 25,219 | |
| New York State Power Auth, | ||||||
| Rev Ref Gen Purpose Ser 1990W | 6.500 | 01-01-08 | AAA | 25 | 25,164 | |
| Oneida County Industrial | ||||||
| Development Agency, | ||||||
| Rev Civic Facilities Hamilton | ||||||
| College Proj Ser 2007A | Zero | 07-01-29 | AAA | 5,330 | 1,962,559 | |
| Onondaga County Industrial | ||||||
| Development Agency, | ||||||
| Rev Sr Air Cargo | 6.125 | 01-01-32 | Baa3 | 1,000 | 1,062,730 | |
| Orange County Industrial | ||||||
| Development Agency, | ||||||
| Rev Civic Facil Arden Hill Care | ||||||
| Ctr Newburgh Ser 2001C (G) | 7.000 | 08-01-31 | BB– | 500 | 533,890 | |
| Port Auth of New York & | ||||||
| New Jersey, | ||||||
| Rev Ref Spec Proj KIAC Partners | ||||||
| Ser 4 (G) | 6.750 | 10-01-19 | BBB– | 1,500 | 1,523,895 | |
| Suffolk County Industrial | ||||||
| Development Agency, | ||||||
| Rev Civic Facil Huntington Hosp | ||||||
| Proj Ser 2002B | 6.000 | 11-01-22 | BBB | 1,000 | 1,081,070 | |
| Rev Ref Jeffersons Ferry Proj | 5.000 | 11-01-28 | BBB– | 1,000 | 1,030,890 | |
| Triborough Bridge & Tunnel Auth, | ||||||
| Rev Ref Gen Purpose Ser 1992Y | 6.125 | 01-01-21 | AAA | 1,500 | 1,839,645 | |
| TSASC, Inc., | ||||||
| Rev Tobacco Settlement Asset | ||||||
| Backed Bond Ser 1 | 5.500 | 07-15-24 | AAA | 800 | 861,144 | |
| Upper Mohawk Valley Regional | ||||||
| Water Finance Auth, | ||||||
| Rev Wtr Sys Cap Apprec | Zero | 04-01-22 | Aaa | 2,230 | 1,214,012 | |
| Westchester County | ||||||
| Healthcare Corp, | ||||||
| Rev Ref Sr Lien Ser 2000A | 6.000 | 11-01-30 | BB | 1,150 | 1,188,077 | |
See notes to financial statements
New York Tax-Free Income Fund
12
F I N A N C I A L S T A T E M E N T S
| Interest | Maturity | Credit | Par value | |||
| State, issuer, description | rate | date | rating (A) | (000) | Value | |
| New York (continued) | ||||||
| Yonkers Industrial Development Agency, | ||||||
| Rev Cmty Dev Pptys Yonkers Inc | ||||||
| Ser 2001A | 6.625% | 02-01-26 | BBB– | $1,000 | $1,110,160 | |
| Puerto Rico 9.00% | 5,269,803 | |||||
| Puerto Rico Aqueduct & | ||||||
| Sewer Auth, | ||||||
| Rev Inverse Floater (Gtd) (P) | 8.022 | 07-01-11 | AAA | 2,000 | 2,353,920 | |
| Puerto Rico, Commonwealth of, | ||||||
| Gen Oblig Unltd Ser 975 (P) | 6.130 | 07-01-18 | Aaa | 500 | 578,950 | |
| Puerto Rico Public Building Auth, | ||||||
| Rev Govt Facil Ser 1995A (Gtd) | 6.250 | 07-01-12 | AAA | 1,110 | 1,248,850 | |
| Puerto Rico Public Finance Corp, | ||||||
| Rev Preref Commonwealth Approp | ||||||
| Ser 2002E | 5.500 | 08-01-29 | BBB– | 1,005 | 1,088,083 | |
| Virgin Islands 3.67% | 2,148,238 | |||||
| Virgin Islands Public | ||||||
| Finance Auth, | ||||||
| Rev Ref Gross Receipts Tax Ln | ||||||
| Note Ser 1999A | 6.500 | 10-01-24 | BBB+ | 535 | 589,618 | |
| Rev Sub Lien Fund Ln Notes | ||||||
| Ser 1998E (G) | 5.875 | 10-01-18 | BBB– | 1,500 | 1,558,620 | |
| Interest | Par value | |||||
| Issuer, description, maturity date | rate | (000) | Value | |||
| Short-term investments 0.02% | $15,000 | |||||
| (Cost $15,000) | ||||||
| Joint Repurchase Agreement 0.02% | 15,000 | |||||
| Investment in a joint repurchase agreement transaction | ||||||
| with Cantor Fitzgerald LP — Dated 2-28-07, due | ||||||
| 3-1-07 (Secured by U.S. Treasury Inflation Indexed | ||||||
| Notes 1.875% due 7-15-13 and 2.000% due 7-15-14). | ||||||
| Maturity value: $15,002 | 5.270% | $15 | 15,000 | |||
| Total investments (Cost $55,675,035) 102.89% | $60,246,771 | |||||
| Other assets and liabilities, net (2.89%) | ($1,694,167) | |||||
| Total net assets 100.00% | $58,552,604 | |||||
(A) Credit ratings are unaudited and are rated by Moody’s Investors Service or Fitch where Standard & Poor’s ratings are not available unless indicated otherwise.
(G) Security rated internally by John Hancock Advisers, LLC.
(O) Cash interest will be paid on this obligation at the stated rate beginning on the stated date.
(P) Represents rate in effect on February 28, 2007.
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
New York Tax-Free Income Fund
13
F I N A N C I A L S T A T E M E N T S
Financial statements
Statement of assets and liabilities 2-28-07 (unaudited)
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 $55,675,035) | $60,246,771 |
| Cash | 989 |
| Receivable for shares sold | 8,436 |
| Interest receivable | 739,319 |
| Other assets | 5,162 |
| Total assets | 61,000,677 |
| Liabilities | |
| Payable for investments purchased | 1,956,057 |
| Payable for shares repurchased | 400,367 |
| Dividends payable | 6,222 |
| Payable to affiliates | |
| Management fees | 22,503 |
| Distribution and service fees | 3,958 |
| Other | 6,730 |
| Other payables and accrued expenses | 52,236 |
| Total liabilities | 2,448,073 |
| Net assets | |
| Capital paid-in | 54,569,247 |
| Accumulated net realized loss on investments | (611,287) |
| Net unrealized appreciation of investments | 4,571,736 |
| Accumulated net investment income | 22,908 |
| Net assets | $58,552,604 |
| Net asset value per share | |
| Based on net asset values and shares outstanding — the Fund has an | |
| unlimited number of shares authorized with no par value | |
| Class A ($42,636,430 ÷ 3,423,458 shares) | $12.45 |
| Class B ($12,085,051 ÷ 970,355 shares) | $12.45 |
| Class C ($3,831,123 ÷ 307,617 shares) | $12.45 |
| Maximum offering price per share | |
| Class A1 ($12.45 ÷ 95.5%) | $13.04 |
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
New York Tax-Free Income Fund
14
F I N A N C I A L S T A T E M E N T S
Statement of operations For the period ended 2-28-07 (unaudited)1
This Statement of Operations summarizes the Fund’s investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated.
| Investment income | |
| Interest | $1,533,922 |
| Total investment income | 1,533,922 |
| Expenses | |
| Investment management fees (Note 2) | 147,926 |
| Distribution and service fees (Note 2) | 147,153 |
| Transfer agent fees (Note 2) | 21,877 |
| Accounting and legal services fees (Note 2) | 4,201 |
| Compliance fees | 803 |
| Custodian fees | 18,406 |
| Printing | 8,088 |
| Professional fees | 10,646 |
| Blue sky fees | 2,010 |
| Trustees’ fees | 1,198 |
| Miscellaneous | 3,915 |
| Total expenses | 366,223 |
| Less expense reductions (Note 2) | (43) |
| Net expenses | 366,180 |
| Net investment income | 1,167,742 |
| Realized and unrealized gain | |
| Net realized gain on investments | 56,062 |
| Change in net unrealized appreciation (depreciation) of investments | 201,339 |
| Net realized and unrealized gain | 257,401 |
| Increase in net assets from operations | $1,425,143 |
1 Semiannual period from 9-1-06 through 2-28-07.
See notes to financial statements
New York Tax-Free Income Fund
15
F I N A N C I A L S T A T E M E N T S
Statement of changes in net assets
These Statements of Changes in Net Assets show how the value of the Fund’s net assets has changed during the last two periods. The difference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and the net of Fund share transactions.
| Year | Period | |
| ended | ended | |
| 8-31-06 | 2-28-071 | |
| Increase (decrease) in net assets | ||
| From operations | ||
| Net investment income | $2,473,104 | $1,167,742 |
| Net realized gain | 99,789 | 56,062 |
| Change in net unrealized appreciation (depreciation) | (1,231,981) | 201,339 |
| Increase in net assets resulting from operations | 1,340,912 | 1,425,143 |
| Distributions to shareholders | ||
| From net investment income | ||
| Class A | (1,786,319) | (877,762) |
| Class B | (541,611) | (220,735) |
| Class C | (137,990) | (65,409) |
| (2,465,920) | (1,163,906) | |
| From Fund share transactions | (4,118,407) | (1,888,925) |
| Net assets | ||
| Beginning of period | 65,423,707 | 60,180,292 |
| End of period2 | $60,180,292 | $58,552,604 |
1 Semiannual period from 9-1-06 through 2-28-07. Unaudited.
2 Includes accumulated net investment income of $19,072 and $22,908, respectively.
See notes to financial statements
New York Tax-Free Income Fund
16
F I N A N C I A L S T A T E M E N T S
Financial highlights
The Financial Highlights show how the Fund’s net asset value for a share has changed since the end of the previous period.
| CLASS A SHARES | ||||||
| Period ended | 8-31-021 | 8-31-03 | 8-31-04 | 8-31-05 | 8-31-06 | 2-28-072 |
| Per share operating performance | ||||||
| Net asset value, | ||||||
| beginning of period | $12.57 | $12.48 | $12.10 | $12.46 | $12.61 | $12.40 |
| Net investment income3 | 0.58 | 0.56 | 0.54 | 0.52 | 0.52 | 0.25 |
| Net realized and unrealized | ||||||
| gain (loss) on investments | (0.09) | (0.38) | 0.36 | 0.15 | (0.21) | 0.05 |
| Total from investment operations | 0.49 | 0.18 | 0.90 | 0.67 | 0.31 | 0.30 |
| Less distributions | ||||||
| From net investment income | (0.58) | (0.56) | (0.54) | (0.52) | (0.52) | (0.25) |
| Net asset value, end of period | $12.48 | $12.10 | $12.46 | $12.61 | $12.40 | $12.45 |
| Total return4 (%) | 4.045 | 1.435 | 7.545 | 5.50 | 2.545 | 2.485,6 |
| Ratios and supplemental data | ||||||
| Net assets, end of period | ||||||
| (in millions) | $49 | $46 | $44 | $44 | $43 | $43 |
| Ratio of net expenses to average | ||||||
| net assets (%) | 1.05 | 1.00 | 1.01 | 1.06 | 1.03 | 1.047 |
| Ratio of gross expenses to average | ||||||
| net assets (%) | 1.068 | 1.028 | 1.028 | 1.06 | 1.038 | 1.048 |
| Ratio of net investment income | ||||||
| to average net assets (%) | 4.71 | 4.55 | 4.35 | 4.18 | 4.20 | 4.147 |
| Portfolio turnover (%) | 36 | 17 | 43 | 25 | 32 | 86 |
See notes to financial statements
New York Tax-Free Income Fund
17
F I N A N C I A L S T A T E M E N T S
Financial highlights
| CLASS B SHARES | ||||||
| Period ended | 8-31-021 | 8-31-03 | 8-31-04 | 8-31-05 | 8-31-06 | 2-28-072 |
| Per share operating performance | ||||||
| Net asset value, | ||||||
| beginning of period | $12.57 | $12.48 | $12.10 | $12.46 | $12.61 | $12.40 |
| Net investment income3 | 0.49 | 0.47 | 0.45 | 0.43 | 0.43 | 0.21 |
| Net realized and unrealized | ||||||
| gain (loss) on investments | (0.09) | (0.38) | 0.36 | 0.15 | (0.21) | 0.05 |
| Total from investment operations | 0.40 | 0.09 | 0.81 | 0.58 | 0.22 | 0.26 |
| Less distributions | ||||||
| From net investment income | (0.49) | (0.47) | (0.45) | (0.43) | (0.43) | (0.21) |
| Net asset value, end of period | $12.48 | $12.10 | $12.46 | $12.61 | $12.40 | $12.45 |
| Total return4 (%) | 3.315 | 0.725 | 6.805 | 4.77 | 1.835 | 2.125,6 |
| Ratios and supplemental data | ||||||
| Net assets, end of period | ||||||
| (in millions) | $23 | $22 | $20 | $17 | $14 | $12 |
| Ratio of net expenses to average | ||||||
| net assets (%) | 1.75 | 1.70 | 1.71 | 1.76 | 1.73 | 1.747 |
| Ratio of gross expenses to average | ||||||
| net assets (%) | 1.768 | 1.728 | 1.728 | 1.76 | 1.738 | 1.748 |
| Ratio of net investment income | ||||||
| to average net assets (%) | 4.01 | 3.85 | 3.65 | 3.48 | 3.50 | 3.447 |
| Portfolio turnover (%) | 36 | 17 | 43 | 25 | 32 | 86 |
See notes to financial statements
New York Tax-Free Income Fund
18
F I N A N C I A L S T A T E M E N T S
Financial highlights
| CLASS C SHARES | ||||||
| Period ended | 8-31-021 | 8-31-03 | 8-31-04 | 8-31-05 | 8-31-06 | 2-28-072 |
| Per share operating performance | ||||||
| Net asset value, | ||||||
| beginning of period | $12.57 | $12.48 | $12.10 | $12.46 | $12.61 | $12.40 |
| Net investment income3 | 0.49 | 0.47 | 0.45 | 0.43 | 0.43 | 0.21 |
| Net realized and unrealized | ||||||
| gain (loss) on investments | (0.09) | (0.38) | 0.36 | 0.15 | (0.21) | 0.05 |
| Total from investment operations | 0.40 | 0.09 | 0.81 | 0.58 | 0.22 | 0.26 |
| Less distributions | ||||||
| From net investment income | (0.49) | (0.47) | (0.45) | (0.43) | (0.43) | (0.21) |
| Net asset value, end of period | $12.48 | $12.10 | $12.46 | $12.61 | $12.40 | $12.45 |
| Total return4 (%) | 3.315 | 0.725 | 6.805 | 4.77 | 1.835 | 2.125,6 |
| Ratios and supplemental data | ||||||
| Net assets, end of period | ||||||
| (in millions) | $3 | $5 | $5 | $5 | $3 | $4 |
| Ratio of net expenses to average | ||||||
| net assets (%) | 1.75 | 1.70 | 1.71 | 1.76 | 1.73 | 1.747 |
| Ratio of gross expenses to average | ||||||
| net assets (%) | 1.768 | 1.728 | 1.728 | 1.76 | 1.738 | 1.748 |
| Ratio of net investment income | ||||||
| to average net assets (%) | 4.01 | 3.81 | 3.65 | 3.48 | 3.50 | 3.437 |
| Portfolio turnover (%) | 36 | 17 | 43 | 25 | 32 | 86 |
1 As required, effective 9-1-01 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. This change had no effect on per share amounts for the year ended 8-31-02 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 shares, respectively. Per share ratios and supplemental data for periods prior to 9-1-01, have not been restated to reflect this change in presentation.
2 Semiannual period from 9-1-06 through 2-28-07. Unaudited.
3 Based on the average of the shares outstanding.
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 Not annualized.
7 Annualized.
8 Does not take into consideration expense reductions during the periods shown.
See notes to financial statements
New York Tax-Free Income Fund
19
Notes to financial statements (unaudited)
Note 1
Accounting policies
John Hancock New York Tax-Free Income Fund (the “Fund”) is a non-diversified series of John Hancock Tax-Exempt Series Fund (the “Trust”), an open-end management investment company registered under the Investment Company Act of 1940 (the “1940 Act”), as amended. The Fund seeks a high level of current income, consistent with the preservation of capital, that is exempt from federal, New York State and New York City personal income taxes. Since the Fund invests primarily in New York state issuers, the Fund may be affected by political, economic or regulatory developments in the state of New York.
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 (the “SEC”) and the Internal Revenue Service. Shareholders of a class that bears distribution and service expenses under the terms of a distribution plan have exclusive voting rights to that distribution plan. Class B shares will convert to Class A shares eight years after purchase.
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 which have a remaining maturity of 60 days or less may be valued at amortized cost, which approximates market value.
Joint repurchase agreement
Pursuant to an exemptive order issued by the SEC, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the “Adviser”), a wholly owned subsidiary of John Hancock Financial Services, Inc., a subsidiary of Manulife Financial Corporation (“MFC”), 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 accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. 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 asset value of the respective classes. Distribution and service fees, if any, are calculated daily at the class level based on the appropriate net asset
New York Tax-Free Income Fund
20
value of each class and the specific expense rate(s) applicable to each class.
Expenses
The majority of expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund are allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative size 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 permits borrowings of up to $150 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 period ended February 28, 2007.
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 $623,645 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 gains distributions will be made. The loss carryforward expires as follows: August 31, 2008 — $25,762, August 31, 2010 — $181,898, August 31, 2011 — $414,533 and August 31, 2012 — $1,452.
New accounting pronouncements
In June 2006, Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”) was issued, and is effective for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. This Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return, and requires certain expanded disclosures. Management is currently evaluating the application of the Interpretation to the Fund and has not at this time quantified the impact, if any, resulting from the adoption of this Interpretation on the Fund’s financial statements. The Fund will implement this pronouncement no later than February 28, 2008.
In September 2006, FASB Standard No. 157, Fair Value Measurements (“FAS 157”), was issued and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishing a framework for measuring fair value and expands disclosure about fair value measurements. Management is currently evaluating the application of FAS 157 to the Fund and its impact, if any, resulting from the adoption of FAS 157 on the Fund’s financial statements.
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 net realized gains, if any, 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, 2006, the tax character of distributions paid was as follows: ordinary income $3,200 and exempt income $2,462,720. Distributions paid by the Fund with respect to each class of shares are calculated in the same manner, at the same time and are in the same amount, except for the effect of expenses that may be applied differently to each class.
New York Tax-Free Income Fund
21
Such distributions, 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 2
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.
Effective December 31, 2005, the investment management teams of the Adviser were reorganized into Sovereign Asset Management LLC (“Sovereign”), a wholly owned indirect subsidiary of John Hancock Life Insurance Company (“JHLICO”), a subsidiary of MFC. The Adviser remains the principal advisor on the Fund and Sovereign acts as subadviser under the supervision of the Adviser. The restructuring did not have an impact on the Fund, which continues to be managed using the same investment philosophy and process. The Fund is not responsible for payment of the subadvisory fees.
Effective October 1, 2006, Sovereign changed its name to MFC Global Investment Management (U.S.), LLC.
The Fund has an agreement with its custodian bank, under which custody fees are reduced by balance credits applied during the period. Accordingly, the expense reductions related to custody fee offsets amounted to $43, which had no impact on the Fund’s ratio of expenses to average net assets, for the period ended February 28, 2007. If the Fund had not entered into this agreement, the assets not invested, on which these balance credits were earned, could have produced taxable income.
The Fund has a Distribution Agreement with John Hancock Funds, 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 1940 Act, as amended, 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 asset value and 1.00% of Class B and Class C average daily net asset value. 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.
Expenses under the agreements described above for the period ended February 28, 2007, were as follows:
| Distribution and | |
| Share class | service fees |
| Class A | $63,728 |
| Class B | 64,315 |
| Class C | 19,110 |
| Total | $147,153 |
Class A shares are assessed up-front sales charges. During the period ended February 28, 2007, JH Funds received net up-front sales charges of $26,505 with regard to sales of Class A shares. Of this amount, $3,518 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $19,601 was paid as sales commissions to unrelated broker-dealers and $3,386 was paid as sales commissions to sales personnel of
New York Tax-Free Income Fund
22
Signator Investors, Inc. (“Signator Investors”), a related broker-dealer. The Adviser’s indirect parent, JHLICO, is the indirect sole shareholder 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 period ended February 28, 2007, CDSCs received by JH Funds amounted to $11,452 for Class B shares.
The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. (“Signature Services”), an indirect subsidiary of JHLICO. The Fund pays a monthly transfer agent fee at an annual rate of 0.01% of each class’s average daily net asset value, plus a fee based on the number of shareholder accounts and reimbursement for certain out-of-pocket expenses, aggregated and allocated to each class on the basis of its relative net asset value.
The Fund has an agreement with the Adviser and affiliates to perform necessary tax, accounting and legal services for the Fund. The compensation for the period amounted to $4,201. The Fund reimbursed JHLICO for certain compliance costs, included in the Fund’s Statement of Operations.
Mr. James R. Boyle is Chairman of the Adviser, as well as affiliated Trustee of the Fund, and is compensated by the Adviser and/or its affiliates. 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 investments, as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund.
New York Tax-Free Income Fund
23
Note 3
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.
| Year ended 8-31-06 | Period ended 2-28-071 | |||
| Shares | Amount | Shares | Amount | |
| Class A shares | ||||
| Sold | 313,148 | $3,860,804 | 152,846 | $1,898,777 |
| Distributions reinvested | 99,641 | 1,227,725 | 49,523 | 616,030 |
| Repurchased | (394,010) | (4,851,704) | (261,266) | (3,248,738) |
| Net increase (decrease) | 18,779 | $236,825 | (58,897) | ($733,931) |
| Class B shares | ||||
| Sold | 33,049 | $409,088 | 9,630 | $120,032 |
| Distributions reinvested | 27,838 | 343,042 | 11,902 | 148,050 |
| Repurchased | (334,834) | (4,123,694) | (143,820) | (1,787,461) |
| Net decrease | (273,947) | ($3,371,564) | (122,288) | ($1,519,379) |
| Class C shares | ||||
| Sold | 11,285 | $137,862 | 55,374 | $689,681 |
| Distributions reinvested | 7,691 | 94,775 | 1,974 | 24,554 |
| Repurchased | (98,780) | (1,216,305) | (28,083) | (349,850) |
| Net increase (decrease) | (79,804) | ($983,668) | 29,265 | $364,385 |
| Net decrease | (334,972) | ($4,118,407) | (151,920) | ($1,888,925) |
1 Semiannual period from 9-1-06 through 2-28-07. Unaudited.
Note 4
Investment transactions
Purchases and proceeds from sales or maturities of securities, other than short-term securities and obligations of the U.S. government, during the period ended February 28, 2007, aggregated $5,156,057 and $4,838,560, respectively.
The cost of investments owned on February 28, 2007, including short-term investments, for federal income tax purposes, was $55,636,167. Gross unrealized appreciation and depreciation of investments aggregated $4,613,861 and $3,257, respectively, resulting in net unrealized appreciation of $4,610,604. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the amortization of premiums and accretion of discount on debt securities.
New York Tax-Free Income Fund
24
Board Consideration of and
Continuation of Investment Advisory
Agreement and Subadvisory
Agreement: John Hancock New York
Tax-Free Income Fund
The Investment Company Act of 1940 (the “1940 Act”) requires the Board of Trustees (the “Board”) of John Hancock Tax-Exempt Series Fund (the “Trust”), including a majority of the Trustees who have no direct or indirect interest in the investment advisory agreement and are not “interested persons” of the Trust, as defined in the 1940 Act (the “Independent Trustees”), annually to review and consider the continuation of: (i) the investment advisory agreement (the “Advisory Agreement”) with John Hancock Advisers, LLC (the “Adviser”) and (ii) the investment subadvisory agreement (the “Subadvisory Agreement”) with Sovereign Asset Management LLC (the “Subadviser”) for the John Hancock New York Tax-Free Income Fund (the “Fund”). The Advisory Agreement and the Subadvisory Agreement are collectively referred to as the “Advisory Agreements.”
At meetings held on May 1–2 and June 5–6, 2006,1 the Board considered the factors and reached the conclusions described below relating to the selection of the Adviser and Subadviser and the continuation of the Advisory Agreements. During such meetings, the Board’s Contracts/Operations Committee and the Independent Trustees also met in executive sessions with their independent legal counsel.
In evaluating the Advisory Agreements, the Board, including the Contracts/Operations Committee and the Independent Trustees, reviewed a broad range of information requested for this purpose by the Independent Trustees, including: (i) the investment performance of the Fund relative to a category of relevant funds (the “Category”) and a peer group of comparable funds (the “Peer Group”) each selected by Morningstar Inc. (“Morningstar”), an independent provider of investment company data, for a range of periods ended December 31, 2005; (ii) advisory and other fees incurred by, and the expense ratios of, the Fund relative to a Category and a Peer Group; (iii) the advisory fees of comparable portfolios of other clients of the Adviser and the Subadviser; (iv) the Adviser’s financial results and condition including its and certain of its affiliates’ profitability from services performed for the Fund; (v) brea kpoints in the Fund’s and the Peer Group’s fees, and information about economies of scale; (vi) the Adviser’s and Subadviser’s record of compliance with applicable laws and regulations with the Fund’s investment policies and restrictions and with the applicable Code of Ethics, and the structure and responsibilities of the Adviser’s and Subadviser’s compliance department; (vii) the background and experience of senior management and investment professionals and (viii) the nature, cost and character of advisory and non-investment management services provided by the Adviser and its affiliates and by the Subadviser.
The Board’s review and conclusions were based on a comprehensive consideration of all information presented to the Board and not the result of any single controlling factor. It was based on performance and other information as of December 31, 2005; facts may have changed between that date and the date of this shareholders report. The key factors considered by the Board and the conclusions reached are described below.
Nature, extent and quality of services
The Board considered the ability of the Adviser and the Subadviser, based on their resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory and supervisory personnel. The Board further considered the compliance programs and compliance records of the Adviser and Subadviser. In addition, the Board took into account the administrative services provided to the Fund by the Adviser and its affiliates.
Based on the above factors, together with those referenced below, the Board concluded that, within the context of its full deliberations, the nature, extent and quality of the investment advisory services provided to the Fund by the Adviser and Subadviser were sufficient to support renewal of the Advisory Agreements.
Fund performance
The Board considered the performance results for the Fund over various time periods ended December 31, 2005. The Board also
25
considered these results in comparison to the performance of the Category, as well as the Fund’s benchmark index. Morningstar determined the Category and Peer Group for the Fund. The Board reviewed with a representative of Morningstar the methodology used by Morningstar to select the funds in the Category and the Peer Group.
The Board noted that the Fund’s performance during the periods under review was generally competitive with the performance of the Peer Group and Category medians, and its benchmark index, the Lehman Brothers Municipal NY Index. The Board noted that, for the 3- and 5-year periods under review, the Fund’s performance was higher than the performance of the Peer Group median, and was lower than the performance of the Category median and benchmark index. The Board also noted that, for the 1- and 10-year periods under review, the Fund’s performance was higher than the performance of the Peer Group and Category medians, and was lower than the performance of the benchmark index.
Investment advisory fee and subadvisory fee rates and expenses
The Board reviewed and considered the contractual investment advisory fee rate payable by the Fund to the Adviser for investment advisory services (the “Advisory Agreement Rate”). The Board received and considered information comparing the Advisory Agreement Rate with the advisory fees for the Peer Group and Category. The Board noted that the Advisory Agreement Rate was equal to the median rate of the Peer Group and Category.
The Board received and considered expense information regarding the Fund’s various components, including advisory fees, distribution fees and fees other than advisory and distribution fees, including transfer agent fees, custodian fees and other miscellaneous fees (e.g., fees for accounting and legal services). The Board considered comparisons of these expenses to the Peer Group median. The Board also received and considered expense information regarding the Fund’s total operating expense ratio (“Expense Ratio”). The Board received and considered information comparing the Expense Ratio of the Fund to that of the Category and Peer Group medians. The Board noted that the Fund’s Expense Ratio was higher than the Category and Peer Group medians.
The Adviser also discussed the Morningstar data and rankings, and other relevant information, for the Fund. Based on the above-referenced considerations and other factors, the Board concluded that the Fund’s overall expense results and performance supported the re-approval of the Advisory Agreements.
The Board also received information about the investment subadvisory fee rate (the “Subadvisory Agreement Rate”) payable by the Adviser to the Subadviser for investment sub-advisory services. The Board concluded that the Subadvisory Agreement Rate was fair and equitable, based on its consideration of the factors described here.
Profitability
The Board received and considered a detailed profitability analysis of the Adviser based on the Advisory Agreements, as well as on other relationships between the Fund and the Adviser and its affiliates, including the Subadviser. The Board concluded that, in light of the costs of providing investment management and other services to the Fund, the profits and other ancillary benefits reported by the Adviser were not unreasonable.
Economies of scale
The Board received and considered general information regarding economies of scale with respect to the management of the Fund, including the Fund’s ability to appropriately benefit from economies of scale under the Fund’s fee structure. The Board recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Board’s understanding that most of the Adviser’s costs are not specific to individual Funds, but rather are incurred across a variety of products and services.
To the extent the Board and the Adviser were able to identify actual or potential economies of scale from Fund-specific or allocated expenses, in order to ensure that any such economies continue to be reasonably shared with the Fund as its assets increase, the Adviser
26
and the Board agreed to continue the existing breakpoints to the Advisory Agreement Rate.
Information about services to other clients
The Board also received information about the nature, extent and quality of services and fee rates offered by the Adviser and Subadviser to their other clients, including other registered investment companies, institutional investors and separate accounts. The Board concluded that the Advisory Agreement Rate and the Subadvisory Agreement Rate were not unreasonable, taking into account fee rates offered to others by the Adviser and Subadviser, respectively, after giving effect to differences in services.
Other benefits to the Adviser
The Board received information regarding potential “fall-out” or ancillary benefits received by the Adviser and its affiliates as a result of the Adviser’s relationship with the Fund. Such benefits could include, among others, benefits directly attributable to the relationship of the Adviser with the Fund and benefits potentially derived from an increase in the business of the Adviser as a result of its relationship with the Fund (such as the ability to market to shareholders other financial products offered by the Adviser and its affiliates).
The Board also considered the effectiveness of the Adviser’s, Subadviser’s and Fund’s policies and procedures for complying with the requirements of the federal securities laws, including those relating to best execution of portfolio transactions and brokerage allocation.
Other factors and broader review
As discussed above, the Board reviewed detailed materials received from the Adviser and Subadviser as part of the annual re-approval process. The Board also regularly reviews and assesses the quality of the services that the Fund receives throughout the year. In this regard, the Board reviews reports of the Adviser at least quarterly, which include, among other things, a detailed portfolio review, detailed fund performance reports and compliance reports. In addition, the Board meets with portfolio managers and senior investment officers at various times throughout the year. After considering the above-described factors and based on its deliberations and its evaluation of the information described above, the Board concluded that approval of the continuation of the Advisory Agreements for the Fund was in the best interest of the Fund and its shareholders. Accordingly, the Board unanimously approved the continuation of the Advisory Agreements.
1 The Board previously considered information about the Subadvisory Agreement at the September and December 2005 Board meetings in connection with the Adviser’s reorganization.
27
For more information
The Fund’s proxy voting policies, procedures and records are available without charge, upon request:
| By phone | On the Fund’s Web site | On the SEC’s Web site |
| 1-800-225-5291 | www.jhfunds.com/proxy | www.sec.gov |
| Trustees | Francis V. Knox, Jr. | Custodian |
| Ronald R. Dion, Chairman | Chief Compliance Officer | The Bank of New York |
| James R. Boyle† | One Wall Street | |
| James F. Carlin | Gordon M. Shone | New York, NY 10286 |
| Richard P. Chapman, Jr.* | Treasurer | |
| William H. Cunningham | Transfer agent | |
| Charles L. Ladner* | John G. Vrysen | John Hancock Signature |
| Dr. John A. Moore* | Chief Financial Officer | Services, Inc. |
| Patti McGill Peterson* | 1 John Hancock Way, | |
| Steven R. Pruchansky | Investment adviser | Suite 1000 |
| *Members of the Audit Committee | John Hancock Advisers, LLC | Boston, MA 02217-1000 |
| †Non-Independent Trustee | 601 Congress Street | Legal counsel |
| Boston, MA 02210-2805 | ||
| Kirkpatrick & Lockhart | ||
| Officers | Subadviser | Preston Gates Ellis LLP |
| Keith F. Hartstein | MFC Global Investment | 1 Lincoln Street |
| President and | Management (U.S.), LLC | Boston, MA 02110-2950 |
| Chief Executive Officer | 101 Huntington Avenue | |
| Boston, MA 02199 | ||
| Thomas M. Kinzler | Principal distributor | |
| Secretary and | John Hancock Funds, LLC | |
| Chief Legal Officer | 601 Congress Street | |
| Boston, MA 02210-2805 | ||
The Fund’s investment objective, risks, charges and expenses are included in the prospectus and should be considered carefully before investing. For a prospectus, call your financial professional, call John Hancock Funds at 1-800-225-5291 or visit the Fund’s Web site at www.jhfunds.com. Please read the prospectus
carefully before investing or sending money.
| How to contact us | ||
| Internet | www.jhfunds.com | |
| Regular mail: | Express mail: | |
| John Hancock | John Hancock | |
| Signature Services, Inc. | Signature Services, Inc. | |
| 1 John Hancock Way, Suite 1000 | Mutual Fund Image Operations | |
| Boston, MA 02217-1000 | 380 Stuart Street | |
| Boston, MA 02116 | ||
| Phone | Customer service representatives | 1-800-225-5291 |
| EASI-Line | 1-800-338-8080 | |
| TDD line | 1-800-554-6713 | |
A listing of month-end portfolio holdings is available on our Web site, www.jhfunds.com. A more detailed portfolio holdings summary is available on a quarterly basis 60 days after the fiscal quarter on our Web site or upon request by calling 1-800-225-5291, or on the Securities and Exchange Commission’s Web site, www.sec.gov.
28
J O H N H A N C O C K F A M I L Y O F F U N D S
EQUITY
Balanced Fund
Classic Value Fund
Classic Value Fund II
Classic Value Mega Cap Fund
Core Equity Fund
Focused Equity Fund
Global Shareholder Yield Fund
Growth Fund
Growth Opportunities Fund
Growth Trends Fund
Intrinsic Value Fund
Large Cap Equity Fund
Large Cap Select Fund
Mid Cap Equity Fund
Mid Cap Growth Fund
Multi Cap Growth Fund
Small Cap Equity Fund
Small Cap Fund
Small Cap Intrinsic Value Fund
Sovereign Investors Fund
U.S. Core Fund
U.S. Global Leaders Growth Fund
Value Opportunities Fund
ASSET ALLOCATION
Allocation Core Portfolio
Allocation Growth + Value Portfolio
Lifecycle 2010 Portfolio
Lifecycle 2015 Portfolio
Lifecycle 2020 Portfolio
Lifecycle 2025 Portfolio
Lifecycle 2030 Portfolio
Lifecycle 2035 Portfolio
Lifecycle 2040 Portfolio
Lifecycle 2045 Portfolio
Lifecycle Retirement Portfolio
Lifestyle Aggressive Portfolio
Lifestyle Balanced Portfolio
Lifestyle Conservative Portfolio
Lifestyle Growth Portfolio
Lifestyle Moderate Portfolio
SECTOR
Financial Industries Fund
Health Sciences Fund
Real Estate Fund
Regional Bank Fund
Technology Fund
Technology Leaders Fund
INTERNATIONAL
Greater China Opportunities Fund
International Allocation Portfolio
International Classic Value Fund
International Core Fund
International Fund
International Growth Fund
INCOME
Bond Fund
Government Income Fund
High Yield Fund
Investment Grade Bond Fund
Strategic Income 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
CLOSED-END
Bank and Thrift Opportunity Fund
Financial Trends Fund, Inc.
Income Securities Trust
Investors Trust
Patriot Global Dividend Fund
Patriot Preferred Dividend Fund
Patriot Premium Dividend Fund I
Patriot Premium Dividend Fund II
Patriot Select Dividend Trust
Preferred Income Fund
Preferred Income II Fund
Preferred Income III Fund
Tax-Advantaged Dividend Income Fund
For more complete information on any John Hancock Fund and an Open-End fund prospectus, which includes charges and expenses, call your financial professional, or John Hancock Funds at 1-800-225-5291 for Open-End fund information and 1-800-852-0218 for Closed-End fund information. Please read the Open-End fund prospectus carefully before investing or sending money.
1-800-225-5291
1-800-554-6713 TDD
1-800-338-8080 EASI-Line
www.jhfunds. com
Now available: electronic delivery
www.jhfunds. com/edelivery
This report is for the information of the shareholders of John Hancock New York Tax-Free Income Fund. 760SA 2/07
&nb sp; 4/07
| TABLE OF CONTENTS |
| Your fund at a glance |
| page 1 |
| Managers’ report |
| page 2 |
| A look at performance |
| page 6 |
| Your expenses |
| page 8 |
| Fund’s investments |
| page 1 0 |
| Financial statements |
| page 1 4 |
| Notes to financial |
| statements |
| page 2 0 |
| For more information |
| page 2 8 |
CEO corner
To Our Shareholders,
The U.S. financial markets turned in strong results over the last six months, as earlier concerns of rising inflation, a housing slowdown and high energy prices gave way to news of slower, but still resilient, economic growth, stronger than expected corporate earnings and dampened inflation fears and energy costs. This environment also led the Federal Reserve Board to hold short-term interest rates steady. Even with a sharp decline in the last days of the period, the broad stock market returned 8.93% for the six months ended February 28, 2007, as measured by the S&P 500 Index. With interest rates remaining relatively steady, fixed-income securities also produced positive results.
But after a remarkably long period of calm, the financial markets were rocked at the end of the period by a dramatic sell-off in China’s stock market, which had ripple effects on financial markets worldwide. In the United States, for example, the Dow Jones Industrial Average had its steepest one-day percentage decline in nearly four years on February 27, 2007. The event served to jog investors out of their seemingly casual attitude toward risk and remind them of the simple fact that stock markets move in two directions — down as well as up.
It was also a good occasion to bring to mind several important investment principles that we believe are at the foundation of successful investing. First, keep a long-term approach to investing, avoiding emotional reactions to daily market moves. Second, maintain a well-diversified portfolio that is appropriate for your goals, risk profile and time horizons.
After the market’s moves of the last six months, we encourage investors to sit back, take stock and set some realistic expectations. While history bodes well for the market in 2007 (since 1939, the S&P 500 Index has always produced positive results in the third year of a presidential term), there are no guarantees, and opinions are divided on the future of this more-than-four-year-old bull market. The recent downturn bolsters this uncertainty, although we believe it was a healthy correction for which we were overdue.
The latest events could also be a wake-up call to contact your financial professional to determine whether changes are in order to your investment mix. Some asset groups have had long runs of outperformance. Others had truly outsized returns in 2006. These trends argue for a look to determine if these categories now represent a larger stake in your portfolios than prudent diversification would suggest they should. After all, we believe investors with a well-balanced portfolio and a marathon — not a sprint — approach to investing, stand a better chance of weathering the market’s short-term twists and turns and reaching their long-term goals.
Sincerely,
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEO’s views as of February 28, 2007. They are subject to change at any time.
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. In pursuing this goal, the Fund normally invests at least 80% of its assets in securities of any maturity exempt from federal and Massachusetts personal income taxes.
Over the last six months
► Municipal bonds posted positive results, although they lagged the performance of the broad taxable bond market.
► The Fund’s return was in line with its peer group average but trailed its benchmark index.
► Lower-grade bonds were the best performers in the portfolio, while higher-quality bonds lagged.
| Top 10 holdings | |
| Massachusetts Turnpike Auth, 1-1-23, 5.125% | 4.2% |
| Holyoke Gas & Electric Department, 12-1-31, 5.000% | 3.4% |
| Route 3 North Transit Improvement Associates, 6-15-29, 5.375% | 3.1% |
| Massachusetts Development Finance Agency, 12-15-24, 5.000% | 3.0% |
| Massachusetts Industrial Finance Agency, 12-1-20, 6.750% | 2.7% |
| Massachusetts Water Pollution Abatement Trust, 8-1-18, 5.250% | 2.6% |
| Massachusetts Health & Educational Facilities Auth, 12-15-31, 9.200% | 2.3% |
| Massachusetts, Commonwealth of, 12-1-24, 5.500% | 2.3% |
| Puerto Rico Aqueduct & Sewer Auth, 7-1-11, 8.022% | 2.2% |
| Massachusetts Development Finance Agency, 2-1-22, 5.250% | 2.2% |
As a percentage of net assets on February 28, 2007.
1
Managers’ report
John Hancock
Massachusetts Tax-Free Income Fund
Municipal bonds gained ground for the six months ended February 28, 2007, although they trailed the taxable bond market. The Lehman Brothers Municipal Bond Index returned 2.89%, while the Lehman Brothers Aggregate Bond Index — a broad measure of the taxable bond market — returned 3.66% .
The modest gains in the municipal bond market masked an increase in volatility during the six-month period as investors reacted to changing economic conditions. Since the beginning of 2006, the U.S. economy has gradually slowed, led by a noteworthy decline in the housing market. However, sporadic signs of economic resiliency created some uncertainty regarding the underlying strength of the economy. As a result, economic reports over the last few months of the period had a magnified effect, causing greater fluctuations in the municipal bond market.
Inflation remained generally under control during the period, thanks largely to a 10% decline in energy prices. The combination of slowing economic growth and benign inflation led the Federal Reserve to hold short-term interest rates steady throughout the six-month period, after raising rates 17 times between June 2004 and June 2006. Consequently, the municipal yield curve remained flat, with short- and long-term bond yields nearly equal.
Municipal bond issuance, which had been relatively low for much of 2006, rose sharply in late 2006 and early 2007. Nonetheless, the
SCORECARD
| INVESTMENT | PERIOD’S PERFORMANCE. . . AND WHAT’S BEHIND THE NUMBERS | |
| Tobacco bonds | ▲ | Demand for yield provided a lift |
| Health care bonds | ▲ | Also benefited from their relatively high yields |
| Shorter-term bonds | ▼ | Steady interest rate policy from the Fed led to underperformance |
| relative to longer-term bonds |
2
Portfolio Managers, MFC Global Investment Management (U.S.), LLC
Dianne Sales, CFA and Frank A. Lucibella, CFA
increase in supply had little impact on municipal bond performance as strong investor demand helped absorb the new issues.
Massachusetts credit environment
Credit quality for Massachusetts’ state and local governments remained stable overall during the six-month period. Economic growth, though moderating, was robust enough to sustain solid tax revenues for the state. In November 2006, Deval Patrick was elected governor of Massachusetts, replacing Mitt Romney, who declined to run for re-election after his single term as governor. We do not expect this change in leadership to have an impact on the state’s credit quality in the near term.
“The modest gains in the
municipal bond market masked
an increase in volatility during
the six-month period as investors
reacted to changing economic
conditions.”
Fund performance
For the year ended February 28, 2007, John Hancock Massachusetts Tax-Free Income Fund’s Class A, Class B and Class C shares posted total returns of 2.42%, 2.07% and 2.07%, respectively, at net asset value. By comparison, the average return of Morningstar’s Muni Massachusetts Fund category was 2.37% 1 and the Lehman Brothers Municipal Bond Index returned 2.89% . 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 or did not reinvest all distributions. See pages six and seven for historical performance information.
Massachusetts Tax-Free Income Fund
3
Yield sings
The best-performing segments of the portfolio were lower-quality bonds, reflecting the impact of coupon income on municipal bond performance during the period. The bulk of the return in the municipal market came from interest income, allowing higher-yielding securities to produce the best returns. In addition, strong demand for yield in a relatively low interest rate environment contributed to the outperformance of higher-yielding bonds.
In Massachusetts, the lower-quality segment of the municipal market consists largely of health care bonds, and they were among the best performers in the portfolio. Health care bonds comprised about 12% of the portfolio, making it one of the larger sector weightings. Our health care holdings emphasized hospitals and medical clinics, but also included assisted living facilities and retirement communities.
Another higher-yielding segment of the portfolio that outperformed during the six-month period was tobacco bonds, which are backed by the proceeds from a legal settlement between the major tobacco companies and the state of Massachusetts (as well as 45 other states).
Essential services bonds performed well
Some of the Fund’s essential services bonds — which finance projects related to electric, water and sewer services — also produced solid returns during the period. In particular, the portfolio’s holdings of power supply bonds provided a lift to performance.
In addition, the portfolio owned a number of lower-rated industrial development bonds that financed essential services projects, such as a privatized water treatment plant. These bonds also fared well during the period, benefiting from their relatively high yields.
| SECTOR DISTRIBUTION2 | |
| General obligation | |
| bonds | 14% |
| Revenue bonds | |
| Transportation | 18% |
| Education | 12% |
| Health | 12% |
| Electric | 4% |
| Industrial development | 4% |
| Water & sewer | 3% |
| Pollution | 2% |
| Sales tax | 1% |
| Resource recovery | 1% |
| Economic development | 1% |
| Correctional facilities | 1% |
| Housing | 1% |
| Public facility | 1% |
| All other | 24% |
Outlook
The U.S. economy has held up better than expected, although further slowing is likely. In general, however, we expect municipal credit quality and state tax revenues to remain fairly
Massachusetts Tax-Free Income Fund
4
stable over the next six months. New municipal bond issuance in 2007 is expected to be in line with last year’s issuance levels.
With regard to the Fund, we intend to maintain our focus on producing an above-average level of tax-free income through a diversified portfolio of Massachusetts municipal bonds. We will also look to lengthen duration slightly on dips.
“In Massachusetts, the lower-
quality segment of the municipal
market consists largely of health
care bonds, and they were among
the best performers in
the portfolio.”
This commentary reflects the views of the portfolio managers through the end of the Fund’s period discussed in this report. The managers’ statements reflect their own opinions. As such, they are in no way guarantees of future events and are not intended to be used as investment advice or a recommendation regarding any specific security. They are also subject to change at any time as market and other conditions warrant.
1 Figures from Morningstar, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower.
2 As a percentage of net assets on February 28, 2007.
Massachusetts Tax-Free Income Fund
5
A look at performance
For the periods ending February 28, 2007
| Average annual returns | Cumulative total returns | SEC 30- | |||||||||
| with maximum sales charge (POP) | with maximum sales charge (POP) | day yield | |||||||||
| Inception | Since | Since | as of | ||||||||
| Class | date | 1-year | 5-year | 10-year | inception | 6 months | 1-year | 5-year | 10-year | inception | 2-28-07 |
| A | 9-3-87 | –0.70% | 4.16% | 4.98% | — | –2.22% | –0.70% | 22.62% | 62.58% | — | 3.81% |
| B | 10-3-96 | –1.72 | 4.06 | 4.87 | — | –2.93 | –1.72 | 22.02 | 60.90 | — | 3.29 |
| C | 4-1-99 | 2.27 | 4.40 | — | 4.20% | 1.07 | 2.27 | 24.02 | — | 38.44% | 3.29 |
Performance figures assume all distributions are reinvested. POP (Public Offering Price) figures reflect maximum sales charge on Class A shares of 4.5% and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The returns for Class C shares have been adjusted to reflect the elimination of the front-end sales charge effective July 15, 2004. 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 returns reflect past results and should not be considered indicative of future performance. The return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Due to market volatility, the Fund’s current performance may be higher or lower than the performance shown. For performance data current to the most recent month-end, please call 1-800-225-5291 or visit the Fund’s Web site at www.jhfunds.com.
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.
Massachusetts Tax-Free Income Fund
6
Growth of $10,000
This chart shows what happened to a hypothetical $10,000 investment in Massachusetts
Tax-Free Income Fund Class A shares for the period indicated. For comparison, we’ve
shown the same investment in the Lehman Brothers Municipal Bond Index.
| With maximum | ||||
| Class | Period beginning | Without sales charge | sales charge | Index |
| B1 | 2-28-97 | $16,090 | $16,090 | $17,490 |
| C1 | 4-1-99 | 13,844 | 13,844 | 15,077 |
Assuming all distributions were reinvested for the period indicated, the table above shows the value of a $10,000 investment in the Fund’s Class B and Class C shares, respectively, as of February 28, 2007. The Class C shares investment with maximum sales charge has been adjusted to reflect the elimination of the front-end sales charge effective July 15, 2004. 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.
Lehman Brothers Municipal Bond Index is 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. Index figures do not reflect sales charges which would have resulted in lower values if they did.
1 No contingent deferred sales charge applicable.
Massachusetts Tax-Free Income Fund
7
Your expenses
These examples are intended to help you understand your ongoing operating expenses.
Understanding fund expenses
As a shareholder of the Fund, you incur two types of costs:
▪ Transaction costs which include sales charges (loads) on purchases or redemptions (varies by share class), minimum account fee charge, etc.
▪ Ongoing operating expenses including management fees, distribution and service fees (if applicable) and other fund expenses.
We are going to present only your ongoing operating expenses here.
Actual expenses/actual returns
This example is intended to provide information about your fund’s actual ongoing operating expenses, and is based on your fund’s actual return. It assumes an account value of $1,000.00 on September 1, 2006, with the same investment held until February 28, 2007.
| Account value | Ending value | Expenses paid during period | |
| on 9-1-06 | on 2-28-07 | ended 2-28-071 | |
| Class A | $1,000.00 | $1,024.20 | $4.96 |
| Class B | 1,000.00 | 1,020.70 | 8.49 |
| Class C | 1,000.00 | 1,020.70 | 8.49 |
Together with the value of your account, you may use this information to estimate the operating expenses that you paid over the period. Simply divide your account value at February 28, 2007 by $1,000.00, then multiply it by the “expenses paid” for your share class from the table above. For example, for an account value of $8,600.00, the operating expenses should be calculated as follows:
Massachusetts Tax-Free Income Fund
8
Hypothetical example for comparison purposes
This table allows you to compare your fund’s ongoing operating expenses with those of any other fund. It provides an example of the Fund’s hypothetical account values and hypothetical expenses based on each class’s actual expense ratio and an assumed 5% annual return before expenses (which is not your fund’s actual return). It assumes an account value of $1,000.00 on September 1, 2006, with the same investment held until February 28, 2007. Look in any other fund shareholder report to find its hypothetical example and you will be able to compare these expenses.
| Account value | Ending value | Expenses paid during period | |
| on 9-1-06 | on 2-28-07 | ended 2-28-071 | |
| Class A | $1,000.00 | $1,019.90 | $4.95 |
| Class B | 1,000.00 | 1,016.40 | 8.47 |
| Class C | 1,000.00 | 1,016.40 | 8.47 |
Remember, these examples do not include any transaction costs, such as sales charges; therefore, these examples will not help you to determine the relative total costs of owning different funds. If transaction costs were included, your expenses would have been higher. See the prospectus for details regarding transaction costs.
1 Expenses are equal to the Fund’s annualized expense ratio of 0.99%, 1.69% and 1.69% for Class A, Class B and Class C, respectively, multiplied by the average account value over the period, multiplied by number of days in most recent fiscal half-year/365 or 366 (to reflect the one-half year period).
Massachusetts Tax-Free Income Fund
9
Fund’s investments
F I N A N C I A L S T A T E M E N T S
Securities owned by the Fund on 2-28-07 (unaudited)
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 securities owned by the Fund. Short-term
investments, which represent the Fund’s cash position, are listed last.
| Interest | Maturity | Credit | Par value | ||||
| State, issuer, description | rate | date | rating (A) | (000) | Value | ||
| Tax-exempt long-term bonds 98.72% | $103,614,804 | ||||||
| (Cost $97,208,294) | |||||||
| Massachusetts 89.40% | 93,831,975 | ||||||
| Boston City Industrial | |||||||
| Development Financing Auth, | |||||||
| Rev Ref Swr Facil Harbor Electric | |||||||
| Energy Co Proj | 7.375% | 05-15-15 | BBB | $205 | 206,716 | ||
| Boston Water & Sewer Commission, | |||||||
| Rev Ref Sr Ser 1992A | 5.750 | 11-01-13 | AA | 500 | 537,600 | ||
| Freetown Lakeville Regional | |||||||
| School District, | |||||||
| Gen Oblig Unltd | 5.000 | 07-01-23 | AAA | 1,000 | 1,070,310 | ||
| Holyoke Gas & Electric | |||||||
| Department, | |||||||
| Rev Ser 2001A | 5.000 | 12-01-31 | Aaa | 3,410 | 3,583,637 | ||
| Massachusetts Bay | |||||||
| Transportation Auth, | |||||||
| Rev Assessment Ser A | 5.250 | 07-01-31 | AAA | 1,000 | 1,182,860 | ||
| Rev Preref Spec Assessment | |||||||
| Ser 2000A | 5.250 | 07-01-30 | AAA | 780 | 819,390 | ||
| Rev Ref Sales Tax Ser 2005B | 5.500 | 07-01-28 | AAA | 1,000 | 1,212,270 | ||
| Rev Ref Ser 1994A | 7.000 | 03-01-14 | AA | 1,000 | 1,170,030 | ||
| Rev Ser 1997D | 5.000 | 03-01-27 | AAA | 1,000 | 1,010,110 | ||
| Rev Spec Assessment Ser 2004A | 5.000 | 07-01-34 | AAA | 1,000 | 1,084,870 | ||
| Rev Unref Bal Spec Assessment | |||||||
| Ser 2000A | 5.250 | 07-01-30 | AAA | 220 | 229,420 | ||
| Massachusetts College | |||||||
| Building Auth, | |||||||
| Rev Ref Cap Apprec Ser 2003B | Zero | 05-01-19 | AAA | 1,000 | 606,470 | ||
| Massachusetts, Commonwealth of, | |||||||
| Gen Oblig Ltd Ref | 5.500 | 11-01-17 | AAA | 1,000 | 1,148,270 | ||
| Gen Oblig Ltd Ref Ser 2001C | 5.375 | 12-01-19 | AA | 1,000 | 1,071,510 | ||
| Gen Oblig Ltd Ref Ser 2002C | 5.500 | 11-01-15 | AA | 1,000 | 1,127,180 | ||
| Gen Oblig Ltd Ref Ser 2004B | 5.250 | 08-01-20 | AA | 1,000 | 1,137,780 | ||
| Gen Oblig Ltd Ser 2005C | 5.000 | 09-01-24 | AAA | 1,000 | 1,093,150 | ||
| Gen Oblig Unltd Ref Ser 2004C | 5.500 | 12-01-24 | AAA | 2,000 | 2,390,000 | ||
| Massachusetts Development | |||||||
| Finance Agency, | |||||||
| Rev Belmont Hill School | 5.000 | 09-01-31 | A | 1,000 | 1,040,000 | ||
| Rev Boston Univ Ser 2002R-4 (P) | 3.620 | 10-01-42 | AAA | 400 | 400,000 | ||
See notes to financial statements
Massachusetts Tax-Free Income Fund
10
F I N A N C I A L S T A T E M E N T S
| Interest | Maturity | Credit | Par value | ||||
| State, issuer, description | rate | date | rating (A) | (000) | Value | ||
| Massachusetts (continued) | �� | ||||||
| Massachusetts Development | |||||||
| Finance Agency, (continued) | |||||||
| Rev Curry College Ser 2005A | 4.500% | 03-01-25 | A | $1,000 | $1,007,360 | ||
| Rev Curry College Ser 2006A | 5.250 | 03-01-26 | A | 1,000 | 1,076,520 | ||
| Rev Dominion Energy Brayton Point | 5.000 | 02-01-36 | BBB | 1,000 | 1,036,470 | ||
| Rev Plantation Apts Hsg Prog | |||||||
| Ser 2004A | 5.000 | 12-15-24 | AAA | 2,320 | 2,346,703 | ||
| Rev Ref Combined Jewish | |||||||
| Philanthropies Ser 2002A | 5.250 | 02-01-22 | Aa3 | 1,875 | 2,008,106 | ||
| Rev Ref Resource Recovery | |||||||
| Southeastern Ser 2001A | 5.625 | 01-01-16 | AAA | 500 | 542,530 | ||
| Rev Resource Recovery Ogden | |||||||
| Haverhill Proj Ser 1998B | 5.500 | 12-01-19 | BBB | 1,500 | 1,556,700 | ||
| Rev Volunteers of America Concord | |||||||
| Ser 2000A | 6.900 | 10-20-41 | AAA | 1,000 | 1,126,530 | ||
| Rev YMCA Greater Boston Iss (G) | 5.450 | 11-01-28 | AA | 3,000 | 3,137,250 | ||
| Rev YMCA Greater Boston Iss (G) | 5.350 | 11-01-19 | AA | 1,000 | 1,044,150 | ||
| Massachusetts Health & | |||||||
| Educational Facilities Auth, | |||||||
| Rev Civic Investments Inc, | |||||||
| Ser 2002B (G) | 9.200 | 12-15-31 | BB | 2,000 | 2,460,560 | ||
| Rev Harvard Univ Iss Ser 2000W | 6.000 | 07-01-35 | Aaa | 1,000 | 1,082,760 | ||
| Rev Jordan Hosp Ser 2003E | 6.750 | 10-01-33 | BBB– | 1,500 | 1,662,630 | ||
| Rev Ref Boston College Iss | |||||||
| Ser 1998L | 5.000 | 06-01-26 | AA– | 1,000 | 1,019,590 | ||
| Rev Ref Boston College Iss | |||||||
| Ser 1998L | 4.750 | 06-01-31 | AA– | 1,000 | 1,009,310 | ||
| Rev Ref Emerson Hosp Ser 2005E | 5.000 | 08-15-35 | AA | 1,000 | 1,042,720 | ||
| Rev Ref Harvard Pilgrim Health | |||||||
| Ser 1998A | 5.000 | 07-01-18 | AAA | 1,000 | 1,021,640 | ||
| Rev Ref Lahey Clinic Med Ctr | |||||||
| Ser 2005C | 5.000 | 08-15-23 | AAA | 1,000 | 1,071,930 | ||
| Rev Ref New England Med Ctr Hosp | |||||||
| Ser 2002H | 5.000 | 05-15-25 | AAA | 1,000 | 1,046,100 | ||
| Rev Ref Partners Healthcare Sys | |||||||
| Ser 2001C | 5.750 | 07-01-32 | AA | 1,000 | 1,079,550 | ||
| Rev Ref South Shore Hosp | |||||||
| Ser 1999F | 5.750 | 07-01-29 | A | 1,000 | 1,047,690 | ||
| Rev Ref Williams College | |||||||
| Ser 2003H | 5.000 | 07-01-33 | AA+ | 1,500 | 1,580,625 | ||
| Rev Simmons College Ser 2000D | 6.150 | 10-01-29 | AAA | 1,000 | 1,092,890 | ||
| Rev Sterling & Francine Clark | |||||||
| Ser 2006A | 5.000 | 07-01-36 | AA | 1,000 | 1,066,010 | ||
| Rev Univ of Mass Worcester Campus | |||||||
| Ser 2001B | 5.250 | 10-01-31 | AAA | 1,500 | 1,597,950 | ||
| Rev Wheelock College Ser 2000B | 5.625 | 10-01-30 | Aaa | 1,000 | 1,058,970 | ||
| Massachusetts Housing | |||||||
| Finance Agency, | |||||||
| Rev Rental Mtg Ser 2001A | 5.800 | 07-01-30 | AAA | 975 | 1,024,315 | ||
| Rev Ser 2003B | 4.700 | 12-01-16 | AA– | 1,310 | 1,355,653 | ||
| Massachusetts Industrial | |||||||
| Finance Agency, | |||||||
| Rev Assisted Living Facil Newton | |||||||
| Group Properties | 8.000 | 09-01-27 | AAA | 1,975 | 2,071,499 | ||
See notes to financial statements
Massachusetts Tax-Free Income Fund
11
F I N A N C I A L S T A T E M E N T S
| Interest | Maturity | Credit | Par value | ||||
| State, issuer, description | rate | date | rating (A) | (000) | Value | ||
| Massachusetts (continued) | |||||||
| Massachusetts Industrial | |||||||
| Finance Agency, (continued) | |||||||
| Rev Assisted Living Facil TNG | |||||||
| Marina Bay LLC Proj | 7.500% | 12-01-27 | AAA | $900 | $949,347 | ||
| Rev Dana Hall School Iss (G) | 5.800 | 07-01-17 | AA | 1,090 | 1,119,125 | ||
| Rev Ref Resource Recovery Ogden | |||||||
| Haverhill Proj Ser 1998A | 5.600 | 12-01-19 | BBB | 500 | 519,170 | ||
| Rev Wtr Treatment American | |||||||
| Hingham Proj | 6.900 | 12-01-29 | A | 1,210 | 1,226,686 | ||
| Rev Wtr Treatment American | |||||||
| Hingham Proj | 6.750 | 12-01-20 | A | 2,780 | 2,816,084 | ||
| Massachusetts Municipal Wholesale | |||||||
| Electric Co, | |||||||
| Rev Pwr Supply Sys (P) | 7.528 | 07-01-18 | AAA | 1,000 | 1,011,260 | ||
| Massachusetts Port Auth, | |||||||
| Rev Ser 1999C | 5.750 | 07-01-29 | AAA | 1,250 | 1,332,163 | ||
| Rev Spec Facil US Air Proj | |||||||
| Ser 1996A | 5.750 | 09-01-16 | AAA | 1,000 | 1,021,810 | ||
| Massachusetts Special Obligation | |||||||
| Dedicated Tax, | |||||||
| Rev Spec Oblig Dedicated Tax | 5.250 | 01-01-26 | AAA | 1,000 | 1,092,880 | ||
| Massachusetts Turnpike Auth, | |||||||
| Rev Ref Metro Hwy Sys Sr | |||||||
| Ser 1997A | 5.125 | 01-01-23 | AAA | 4,300 | 4,390,128 | ||
| Rev Ref Metro Hwy Sys Sr | |||||||
| Ser 1997A | 5.000 | 01-01-37 | AAA | 300 | 305,154 | ||
| Rev Ref Metro Hwy Sys Sr | |||||||
| Ser 1997C | Zero | 01-01-20 | AAA | 1,000 | 588,610 | ||
| Massachusetts Water Pollution | |||||||
| Abatement Trust, | |||||||
| Preref Pool Prog Ser 9 | 5.250 | 08-01-18 | AAA | 2,440 | 2,709,303 | ||
| Rev Preref Pool Prog Ser 7 | 5.125 | 02-01-31 | AAA | 645 | 682,449 | ||
| Rev Ref Pool Prog | 5.250 | 08-01-25 | AAA | 1,000 | 1,164,690 | ||
| Rev Unref Bal Pool Prog Ser 9 | 5.250 | 08-01-18 | AAA | 60 | 66,329 | ||
| Rev Unref Bal Pool Prog Ser 7 | 5.125 | 02-01-31 | AAA | 1,775 | 1,853,224 | ||
| Narragansett Regional School District, | |||||||
| Gen Oblig Unltd | 5.375 | 06-01-18 | Aaa | 1,000 | 1,060,740 | ||
| Pittsfield, City of, | |||||||
| Gen Oblig Ltd | 5.000 | 04-15-19 | AAA | 1,000 | 1,062,220 | ||
| Plymouth, County of, | |||||||
| Rev Ref Cert of Part Correctional | |||||||
| Facil Proj | 5.000 | 04-01-22 | AAA | 1,000 | 1,038,510 | ||
| Rail Connections, Inc., | |||||||
| Rev Cap Apprec Rte 128 Pkg | |||||||
| Ser 1999B | Zero | 07-01-18 | Aaa | 1,750 | 919,888 | ||
| Rev Cap Apprec Rte 128 Pkg | |||||||
| Ser 1999B | Zero | 07-01-19 | Aaa | 2,415 | 1,188,470 | ||
| Route 3 North Transit Improvement | |||||||
| Associates, | |||||||
| Rev Lease | 5.375 | 06-15-29 | AAA | 3,100 | 3,266,501 | ||
| University of Massachusetts, | |||||||
| Rev Bldg Auth Facil Gtd Ser 2000A | 5.125 | 11-01-25 | AAA | 1,000 | 1,050,950 | ||
See notes to financial statements
Massachusetts Tax-Free Income Fund
12
F I N A N C I A L S T A T E M E N T S
| Interest | Maturity | Credit | Par value | ||||
| State, issuer, description | rate | date | rating (A) | (000) | Value | ||
| Puerto Rico 9.32% | $9,782,829 | ||||||
| Puerto Rico Aqueduct & | |||||||
| Sewer Auth, | |||||||
| Rev Inverse Floater (Gtd) (P) | 8.022% | 07-01-11 | AAA | $2,000 | 2,353,920 | ||
| Puerto Rico, Commonwealth of, | |||||||
| Gen Oblig Unltd Ser 975 (P) | 6.130 | 07-01-18 | Aaa | 1,500 | 1,736,850 | ||
| Rev Inverse Floater (P) | 8.082 | 07-01-11 | AAA | 1,000 | 1,181,160 | ||
| Puerto Rico Highway & | |||||||
| Transportation Auth, | |||||||
| Rev Preref Hwy Ser 1996Y | 6.250 | 07-01-14 | A– | 955 | 1,111,591 | ||
| Rev Ref Hwy Ser 2003AA | 5.500 | 07-01-19 | AAA | 2,000 | 2,328,080 | ||
| Rev Unref Bal Hwy Ser 1996Y | 6.250 | 07-01-14 | A– | 45 | 51,538 | ||
| Puerto Rico Public | |||||||
| Buildings Auth, | |||||||
| Rev Gov’t Facils Ser 1997B (Gtd) | 5.000 | 07-01-27 | AAA | 1,000 | 1,019,690 | ||
| Interest | Par value | ||||||
| Issuer, description, maturity date | rate | (000) | Value | ||||
| Short-term investments 0.11% | $111,000 | ||||||
| (Cost $111,000) | |||||||
| Joint Repurchase Agreement 0.11% | 111,000 | ||||||
| Investment in a joint repurchase | |||||||
| agreement transaction with | |||||||
| Cantor Fitzgerald LP — Dated | |||||||
| 2-28-07, due 3-1-07 (Secured by | |||||||
| U.S. Treasury Inflation Indexed | |||||||
| Notes 1.875% due 7-15-13 and | |||||||
| 2.000% due 7-15-14). | |||||||
| Maturity value: $111,016 | 5.270% | $111 | 111,000 | ||||
| Total investments (Cost $97,319,294) 98.83% | $103,725,804 | ||||||
| Other assets and liabilities, net 1.17% | $1,231,624 | ||||||
| Total net assets 100.00% | $104,957,428 | ||||||
(A) Credit ratings are unaudited and are rated by Moody’s Investors Service or Fitch where Standard & Poor’s ratings are not available unless indicated otherwise.
(G) Security rated internally by John Hancock Advisers, LLC.
(P) Represents rate in effect on February 28, 2007.
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
Massachusetts Tax-Free Income Fund
13
Financial statements
F I N A N C I A L S T A T E M E N T S
Statement of assets and liabilities 2-28-07 (unaudited)
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 $97,319,294) | $103,725,804 |
| Cash | 400 |
| Receivable for shares sold | 76,375 |
| Receivable for dividends reinvested | 4,814 |
| Interest receivable | 1,285,825 |
| Other assets | 6,324 |
| Total assets | 105,099,542 |
| Liabilities | |
| Payable for shares repurchased | 26,479 |
| Payable to affiliates | |
| Management fees | 40,047 |
| Distribution and service fees | 6,784 |
| Other | 9,241 |
| Other payables and accrued expenses | 59,563 |
| Total liabilities | 142,114 |
| Net assets | |
| Capital paid-in | 98,532,543 |
| Accumulated net realized loss on investments | (22,393) |
| Net unrealized appreciation of investments | 6,406,510 |
| Accumulated net investment income | 40,768 |
| Net assets | $104,957,428 |
| Net asset value per share | |
| Based on net asset values and shares outstanding — the Fund has an | |
| unlimited number of shares authorized with no par value | |
| Class A ($79,000,150 ÷ 6,228,035 shares) | $12.68 |
| Class B ($15,009,230 ÷ 1,183,303 shares) | $12.68 |
| Class C ($10,948,048 ÷ 863,140 shares) | $12.68 |
| Maximum offering price per share | |
| Class A1 ($12.68 ÷ 95.5%) | $13.28 |
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
Massachusetts Tax-Free Income Fund
14
F I N A N C I A L S T A T E M E N T S
Statement of operations For the period ended 2-28-07 (unaudited)1
This Statement of Operations summarizes the Fund’s investment income earned
and expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
| Investment income | |
| Interest | $2,663,753 |
| Total investment income | 2,663,753 |
| Expenses | |
| Investment management fees (Note 2) | 260,377 |
| Distribution and service fees (Note 2) | 251,026 |
| Transfer agent fees (Note 2) | 32,390 |
| Accounting and legal services fees (Note 2) | 7,395 |
| Compliance fees | 1,308 |
| Custodian fees | 22,443 |
| Professional fees | 10,937 |
| Printing fees | 9,689 |
| Blue sky fees | 6,827 |
| Trustees’ fees | 2,297 |
| Miscellaneous | 3,483 |
| Total expenses | 608,172 |
| Less expense reductions | (2) |
| Net expenses | 608,170 |
| Net investment income | 2,055,583 |
| Realized and unrealized gain (loss) | |
| Net realized gain on investments | 63,254 |
| Change in net unrealized appreciation (depreciation) of investments | 334,010 |
| Net realized and unrealized gain | 397,264 |
| Increase in net assets from operations | $2,452,847 |
| 1 Semiannual period from 9-1-06 through 2-28-07. | |
See notes to financial statements
Massachusetts Tax-Free Income Fund
15
F I N A N C I A L S T A T E M E N T S
Statement of changes in net assets
These Statements of Changes in Net Assets show how the value of the Fund’s net assets
has changed during the last two periods. The difference reflects earnings less expenses,
any investment gains and losses, distributions, if any, paid to shareholders and the net of
Fund share transactions.
| Year | Period | |
| ended | ended | |
| 8-31-06 | 2-28-071 | |
| Increase (decrease) in net assets | ||
| From operations | ||
| Net investment income | $4,121,482 | $2,055,583 |
| Net realized gain | 38,153 | 63,254 |
| Change in net unrealized appreciation (depreciation) | (1,948,756) | 334,010 |
| Increase in net assets resulting from operations | 2,210,879 | 2,452,847 |
| Distributions to shareholders | ||
| From net investment income | ||
| Class A | (3,084,823) | (1,566,479) |
| Class B | (646,607) | (272,838) |
| Class C | (325,306) | (182,839) |
| From net realized gain | ||
| Class A | (22,507) | (48,486) |
| Class B | (5,846) | (10,264) |
| Class C | (2,724) | (6,898) |
| (4,087,813) | (2,087,804) | |
| From Fund share transactions | 3,225,905 | (1,292,584) |
| Net assets | ||
| Beginning of period | 104,535,998 | 105,884,969 |
| End of period2 | $105,884,969 | $104,957,428 |
1 Semiannual period from 9-1-06 through 2-28-07. Unaudited.
2 Includes accumulated net investment income of $7,341 and $40,768, respectively.
See notes to financial statements
Massachusetts Tax-Free Income Fund
16
F I N A N C I A L S T A T E M E N T S
Financial highlights
The Financial Highlights show how the Fund’s net asset value for a share has changed
since the end of the previous period.
| CLASS A SHARES | ||||||
| Period ended | 8-31-021 | 8-31-03 | 8-31-04 | 8-31-05 | 8-31-06 | 2-28-072 |
| Per share operating performance | ||||||
| Net asset value, | ||||||
| beginning of period | $12.41 | $12.50 | $12.38 | $12.75 | $12.87 | $12.64 |
| Net investment income3 | 0.58 | 0.57 | 0.56 | 0.54 | 0.53 | 0.26 |
| Net realized and unrealized | ||||||
| gain (loss) on investments | 0.08 | (0.13) | 0.36 | 0.11 | (0.24) | 0.05 |
| Total from investment operations | 0.66 | 0.44 | 0.92 | 0.65 | 0.29 | 0.31 |
| Less distributions | ||||||
| From net investment income | (0.57) | (0.56) | (0.55) | (0.53) | (0.52) | (0.26) |
| From net realized gain | — | — | — | — | —4 | (0.01) |
| (0.57) | (0.56) | (0.55) | (0.53) | (0.52) | (0.27) | |
| Net asset value, end of period | $12.50 | $12.38 | $12.75 | $12.87 | $12.64 | $12.68 |
| Total return5 (%) | 5.54 | 3.57 | 7.55 | 5.21 | 2.38 | 2.426 |
| Ratios and supplemental data | ||||||
| Net assets, end of period | ||||||
| (in millions) | $65 | $66 | $71 | $76 | $78 | $79 |
| Ratio of net expenses to average | ||||||
| net assets (%) | 1.03 | 1.02 | 1.01 | 1.04 | 0.99 | 0.997 |
| Ratio of net investment income | ||||||
| (loss) to average net assets (%) | 4.72 | 4.54 | 4.40 | 4.20 | 4.19 | 4.137 |
| Portfolio turnover (%) | 15 | 13 | 44 | 26 | 15 | 86 |
See notes to financial statements
Massachusetts Tax-Free Income Fund
17
F I N A N C I A L S T A T E M E N T S
Financial highlights
| CLASS B SHARES | ||||||
| Period ended | 8-31-021 | 8-31-03 | 8-31-04 | 8-31-05 | 8-31-06 | 2-28-072 |
| Per share operating performance | ||||||
| Net asset value, | ||||||
| beginning of period | $12.41 | $12.50 | $12.38 | $12.75 | $12.87 | $12.64 |
| Net investment income3 | 0.50 | 0.49 | 0.47 | 0.45 | 0.44 | 0.21 |
| Net realized and unrealized | ||||||
| gain (loss) on investments | 0.08 | (0.13) | 0.36 | 0.11 | (0.24) | 0.05 |
| Total from investment operations | 0.58 | 0.36 | 0.83 | 0.56 | 0.20 | 0.26 |
| Less distributions | ||||||
| From net investment income | (0.49) | (0.48) | (0.46) | (0.44) | (0.43) | (0.21) |
| From net realized gain | — | — | — | — | —4 | (0.01) |
| (0.49) | (0.48) | (0.46) | (0.44) | (0.43) | (0.22) | |
| Net asset value, end of period | $12.50 | $12.38 | $12.75 | $12.87 | $12.64 | $12.68 |
| Total return5 (%) | 4.80 | 2.85 | 6.80 | 4.48 | 1.67 | 2.076 |
| Ratios and supplemental data | ||||||
| Net assets, end of period | ||||||
| (in millions) | $23 | $23 | $23 | $20 | $17 | $15 |
| Ratio of net expenses to average | ||||||
| net assets (%) | 1.73 | 1.72 | 1.71 | 1.74 | 1.69 | 1.697 |
| Ratio of net investment income | ||||||
| (loss) to average net assets (%) | 4.02 | 3.83 | 3.70 | 3.50 | 3.49 | 3.427 |
| Portfolio turnover (%) | 15 | 13 | 44 | 26 | 15 | 86 |
See notes to financial statements
Massachusetts Tax-Free Income Fund
18
F I N A N C I A L S T A T E M E N T S
Financial highlights
| CLASS C SHARES | ||||||
| Period ended | 8-31-021 | 8-31-03 | 8-31-04 | 8-31-05 | 8-31-06 | 2-28-072 |
| Per share operating performance | ||||||
| Net asset value, | ||||||
| beginning of period | $12.41 | $12.50 | $12.38 | $12.75 | $12.87 | $12.64 |
| Net investment income3 | 0.50 | 0.48 | 0.47 | 0.45 | 0.44 | 0.21 |
| Net realized and unrealized | ||||||
| gain (loss) on investments | 0.08 | (0.12) | 0.36 | 0.11 | (0.24) | 0.05 |
| Total from investment operations | 0.58 | 0.36 | 0.83 | 0.56 | 0.20 | 0.26 |
| Less distributions | ||||||
| From net investment income | (0.49) | (0.48) | (0.46) | (0.44) | (0.43) | (0.21) |
| From net realized gain | — | — | — | — | —4 | (0.01) |
| (0.49) | (0.48) | (0.46) | (0.44) | (0.43) | (0.22) | |
| Net asset value, end of period | $12.50 | $12.38 | $12.75 | $12.87 | $12.64 | $12.68 |
| Total return5 (%) | 4.80 | 2.85 | 6.80 | 4.48 | 1.67 | 2.076 |
| Ratios and supplemental data | ||||||
| Net assets, end of period | ||||||
| (in millions) | $4 | $7 | $8 | $8 | $11 | $11 |
| Ratio of net expenses to average | ||||||
| net assets (%) | 1.73 | 1.72 | 1.71 | 1.74 | 1.69 | 1.697 |
| Ratio of net investment income | ||||||
| (loss) to average net assets (%) | 4.02 | 3.81 | 3.69 | 3.49 | 3.48 | 3.437 |
| Portfolio turnover (%) | 15 | 13 | 44 | 26 | 15 | 86 |
1 As required, effective 9-1-01, 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 effect of this change on per share amounts for the year ended 8-31-02, was to increase net investment income per share by $0.01, decrease net realized and unrealized gain 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 9-1-01, have not been restated to reflect this change in presentation.
2 Semiannual period from 9-1-06 through 2-28-07. Unaudited.
3 Based on the average of the shares outstanding.
4 Capital gains distribution less than $0.01.
5 Assumes dividend reinvestment and does not reflect the effect of sales charges.
6 Not annualized.
7 Annualized.
See notes to financial statements
Massachusetts Tax-Free Income Fund
19
Notes to financial statements (unaudited)
Note 1
Accounting policies
John Hancock Massachusetts Tax-Free Income Fund (the “Fund”) is a non-diversified series of John Hancock Tax-Exempt Series Fund (the “Trust”), an open-end management investment company registered under the Investment Company Act of 1940 (the “1940 Act”), as amended. The Fund seeks a high level of current income, consistent with the preservation of capital, that is exempt from federal and Massachusetts personal income taxes. Since the Fund invests primarily in Massachusetts state issuers, the Fund may be affected by political, economic or regulatory developments in the state of Massachusetts.
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 (“SEC”) and the Internal Revenue Service. Shareholders of a class that bears distribution and service expenses under the terms of a distribution plan have exclusive voting rights to that distribution plan. Class B shares will convert to Class A shares eight years after purchase.
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 which have a remaining maturity of 60 days or less may be valued at amortized cost, which approximates market value.
Joint repurchase agreement
Pursuant to an exemptive order issued by the SEC, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the “Adviser”), a wholly owned subsidiary of John Hancock Financial Services, Inc., a subsidiary of Manulife Financial Corporation (“MFC”), 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 accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. 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 asset value of the respective classes. Distribution and service fees, if any, are calculated daily at the class level based on the appropriate net asset
Massachusetts Tax-Free Income Fund
20
value of each class and the specific expense rate(s) applicable to each class.
Expenses
The majority of expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund are allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative size 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 permits borrowings of up to $150 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 February 28, 2007.
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.
New accounting pronouncements
In June 2006, Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”) was issued, and is effective for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return, and requires certain expanded disclosures.
Management is currently evaluating the application of the Interpretation to the Fund and has not at this time quantified the impact, if any, resulting from the adoption of the Interpretation on the Fund’s financial statements. The Fund will implement this pronouncement no later than February 28, 2008.
In September 2006, FASB Standard No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishing a framework for measuring fair value and expands disclosure about fair value measurements. Management is currently evaluating the application of FAS 157 to the Fund and its impact, if any, resulting from the adoption of FAS 157 on the Fund’s financial statements.
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 net realized gains, if any, 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, 2006, the tax character of distributions paid was as follows: ordinary income $6,154 and exempt income $4,050,581. Distributions paid by the Fund with respect to each class of shares are calculated in the same manner, at the same time and are in the same amount, except for the effect of expenses that may be applied differently to each class.
Such distributions, 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
Massachusetts Tax-Free Income Fund
21
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 2
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.
Effective December 31, 2005, the investment management teams of the Adviser were reorganized into Sovereign Asset Management LLC (“Sovereign”), a wholly owned indirect subsidiary of John Hancock Life Insurance Company (“JHLICO”), a subsidiary of MFC. The Adviser remains the principal advisor on the Fund and Sovereign acts as subadviser under the supervision of the Adviser. The restructuring did not have an impact on the Fund, which continues to be managed using the same investment philosophy and process. The Fund is not responsible for payment of the subadvisory fees.
Effective October 1, 2006, Sovereign changed its name to MFC Global Investment Management (U.S.), LLC.
The Fund has an agreement with its custodian bank, under which custody fees are reduced by balance credits applied during the period. Accordingly, the expense reductions related to custody fee offsets amounted to $2 which had no impact on the Fund’s ratio of expenses for the period ended February 28, 2007. If the Fund had not entered into this agreement, the assets not invested, on which these balance credits were earned, could have produced taxable income.
The Fund has a Distribution Agreement with John Hancock Funds, 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 1940 Act, as amended, 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 asset value and 1.00% of Class B and Class C average daily net asset value.
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.
Expenses under the agreements described above for the period ended February 28, 2007, were as follows:
| Distribution and | |
| Share class | service fees |
| Class A | $115,597 |
| Class B | 81,106 |
| Class C | 54,323 |
| Total | $251,026 |
Class A shares are assessed up-front sales charges. During the period ended February 28, 2007, JH Funds received net up-front sales charges of $24,294 with regard to sales of Class A shares. Of this amount, $3,086 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $19,524 was paid as sales commissions to unrelated broker-dealers and $1,684 was paid as sales commissions to sales personnel of Signator Investors, Inc. (“Signator Investors”), a related broker-dealer. The Adviser’s indirect parent, JHLICO, is the indirect sole shareholder 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
Massachusetts Tax-Free Income Fund
22
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 period ended February 28, 2007, CDSCs received by JH Funds amounted to $13,298 for Class B shares and $734 for Class C shares.
The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. (“Signature Services”), an indirect subsidiary of JHLICO. The Fund pays a monthly transfer agent fee at an annual rate of 0.01% of each class’s average daily net asset value, plus a fee based on the number of shareholder accounts and reimbursement for certain out-of-pocket expenses, aggregated and allocated to each class on the basis of its relative net asset value.
The Fund has an agreement with the Adviser and affiliates to perform necessary tax, accounting and legal services for the Fund. The compensation for the period amounted to $7,395. The Fund reimbursed JHLICO for certain compliance costs, included in the Fund’s Statement of Operations.
Mr. James R. Boyle is Chairman of the Adviser, as well as affiliated Trustee of the Fund, and is compensated by the Adviser and/or its affiliates. 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 investments, as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund.
Massachusetts Tax-Free Income Fund
23
Note 3
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.
| Year ended 8-31-06 | Period ended 2-28-071 | |||
| Shares | Amount | Shares | Amount | |
| Class A shares | ||||
| Sold | 849,330 | $10,705,888 | 529,525 | $6,701,187 |
| Distributions reinvested | 163,970 | 2,066,332 | 84,336 | 1,068,536 |
| Repurchased | (761,829) | (9,604,132) | (534,477) | (6,769,510) |
| Net increase | 251,471 | $3,168,088 | 79,384 | $1,000,213 |
| Class B shares | ||||
| Sold | 97,643 | $1,232,887 | 41,068 | $519,326 |
| Distributions reinvested | 27,451 | 346,032 | 11,913 | 150,927 |
| Repurchased | (318,594) | (4,011,749) | (247,626) | (3,133,701) |
| Net decrease | (193,500) | ($2,432,830) | (194,645) | ($2,463,448) |
| Class C shares | ||||
| Sold | 268,906 | $3,390,122 | 73,200 | $926,022 |
| Distributions reinvested | 16,986 | 213,988 | 10,001 | 126,714 |
| Repurchased | (88,583) | (1,113,463) | (69,773) | (882,085) |
| Net increase | 197,309 | $2,490,647 | 13,428 | $170,651 |
| Net increase (decrease) | 255,280 | $3,225,905 | (101,833) | ($1,292,584) |
1 Semiannual period from 9-1-06 through 2-28-07. Unaudited.
Note 4
Investment transactions
Purchases and proceeds from sales or maturities of securities, other than short-term securities and obligations of the U.S. government, during the period ended February 28, 2007, aggregated $8,661,540 and $10,913,746, respectively.
The cost of investments owned on February 28, 2007 including short-term investments, for federal income tax purposes, was $97,074,698. Gross unrealized appreciation of investments is $6,651,106. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the accretion of discounts on debt securities and the tax deferral of losses on certain sales of securities.
Massachusetts Tax-Free Income Fund
24
Board Consideration of and
Continuation of Investment Advisory
Agreement and Subadvisory
Agreement: John Hancock
Massachusetts Tax-Free Income Fund
The Investment Company Act of 1940 (the “1940 Act”) requires the Board of Trustees (the “Board”) of John Hancock Tax-Exempt Series Fund (the “Trust”), including a majority of the Trustees who have no direct or indirect interest in the investment advisory agreement and are not “interested persons” of the Trust, as defined in the 1940 Act (the “Independent Trustees”), annually to review and consider the continuation of: (i) the investment advisory agreement (the “Advisory Agreement”) with John Hancock Advisers, LLC (the “Adviser”) and (ii) the investment subadvisory agreement (the “Subadvisory Agreement”) with Sovereign Asset Management LLC (the “Subadviser”) for the John Hancock Massachusetts Tax-Free Income Fund (the “Fund”). The Advisory Agreement and the Subadvisory Agreement are collectively referred to as the “Advisory Agreemen ts.”
At meetings held on May 1–2 and June 5–6, 2006,1 the Board considered the factors and reached the conclusions described below relating to the selection of the Adviser and Subadviser and the continuation of the Advisory Agreements. During such meetings, the Board’s Contracts/ Operations Committee and the Independent Trustees also met in executive sessions with their independent legal counsel.
In evaluating the Advisory Agreements, the Board, including the Contracts/Operations Committee and the Independent Trustees, reviewed a broad range of information requested for this purpose by the Independent Trustees, including: (i) the investment performance of the Fund relative to a category of relevant funds (the “Category”) and a peer group of comparable funds (the “Peer Group”) each selected by Morningstar Inc. (“Morningstar”), an independent provider of investment company data, for a range of periods ended December 31, 2005; (ii) advisory and other fees incurred by, and the expense ratios of, the Fund relative to a Category and a Peer Group; (iii) the advisory fees of comparable portfolios of other clients of the Adviser and the Subadviser; (iv) the Adviser’s financial results and condition including its and certain of its affiliates’ profitability from services performed for the Fund; (v ) breakpoints in the Fund’s and the Peer Group’s fees and information about economies of scale; (vi) the Adviser’s and Subadviser’s record of compliance with applicable laws and regulations with the Fund’s investment policies and restrictions and with the applicable Code of Ethics, and the structure and responsibilities of the Adviser’s and Subadviser’s compliance department; (vii) the background and experience of senior management and investment professionals and (viii) the nature, cost and character of advisory and non-investment management services provided by the Adviser and its affiliates and by the Subadviser.
The Board’s review and conclusions were based on a comprehensive consideration of all information presented to the Board and not the result of any single controlling factor. It was based on performance and other information as of December 31, 2005; facts may have changed between that date and the date of this shareholders report. The key factors considered by the Board and the conclusions reached are described below.
Nature, extent and quality of services
The Board considered the ability of the Adviser and the Subadviser, based on their resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory and supervisory personnel. The Board further considered the compliance programs and compliance records of the Adviser and Subadviser. In addition, the Board took into account the administrative services provided to the Fund by the Adviser and its affiliates.
Based on the above factors, together with those referenced below, the Board concluded that, within the context of its full deliberations, the nature, extent and quality of the investment advisory services provided to the Fund by the Adviser and Subadviser were sufficient to support renewal of the Advisory Agreements.
25
Fund performance
The Board considered the performance results for the Fund over various time periods ended December 31, 2005. The Board also considered these results in comparison to the performance of the Category, as well as the Fund’s benchmark index. Morningstar determined the Category and Peer Group for the Fund. The Board reviewed with a representative of Morningstar the methodology used by Morningstar to select the funds in the Category and the Peer Group.
The Board noted that the Fund’s performance during the periods under review was generally competitive with the performance of the Peer Group and Category medians, and its benchmark index, the Lehman Brothers Municipal Bond Index. The Board noted that, for the time periods under review ended December 31, 2005, the Fund’s performance was higher than the performance of the Peer Group and Category medians, and was higher than or not appreciably lower than the performance of the benchmark index.
Investment advisory fee and subad-
visory fee rates and expenses
The Board reviewed and considered the contractual investment advisory fee rate payable by the Fund to the Adviser for investment advisory services (the “Advisory Agreement Rate”). The Board received and considered information comparing the Advisory Agreement Rate with the advisory fees for the Peer Group and Category. The Board noted that the Advisory Agreement Rate was equal to the median rate of the Peer Group and Category.
The Board received and considered expense information regarding the Fund’s various components, including advisory fees, distribution and fees other than advisory and distribution fees, including transfer agent fees, custodian fees and other miscellaneous fees (e.g., fees for accounting and legal services). The Board considered comparisons of these expenses to the Peer Group median. The Board also received and considered expense information regarding the Fund’s total operating expense ratio (“Expense Ratio”). The Board received and considered information comparing the Expense Ratio of the Fund to that of the Category and Peer Group medians. The Board noted that the Fund’s Expense Ratio was higher than the Category and Peer Group medians.
The Adviser also discussed the Morningstar data and rankings, and other relevant information, for the Fund. Based on the above-referenced considerations and other factors, the Board concluded that the Fund’s overall expense results and performance supported the re-approval of the Advisory Agreements.
The Board also received information about the investment subadvisory fee rate (the “Subadvisory Agreement Rate”) payable by the Adviser to the Subadviser for investment subadvisory services. The Board concluded that the Subadvisory Agreement Rate was fair and equitable, based on its consideration of the factors described here.
Profitability
The Board received and considered a detailed profitability analysis of the Adviser based on the Advisory Agreements, as well as on other relationships between the Fund and the Adviser and its affiliates, including the Subadviser. The Board concluded that, in light of the costs of providing investment management and other services to the Fund, the profits and other ancillary benefits reported by the Adviser were not unreasonable.
Economies of scale
The Board received and considered general information regarding economies of scale with respect to the management of the Fund, including the Fund’s ability to appropriately benefit from economies of scale under the Fund’s fee structure. The Board recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Board’s understanding that most of the Adviser’s costs are not specific to individual Funds, but rather are incurred across a variety of products and services.
To the extent the Board and the Adviser were able to identify actual or potential economies of scale from Fund-specific or allocated expenses, in order to ensure that any such economies continue to be reasonably shared
26
with the Fund as its assets increase, the Adviser and the Board agreed to continue the existing breakpoints to the Advisory Agreement Rate.
Information about services to other clients
The Board also received information about the nature, extent and quality of services and fee rates offered by the Adviser and Subadviser to their other clients, including other registered investment companies, institutional investors and separate accounts. The Board concluded that the Advisory Agreement Rate and the Subadvisory Agreement Rate were not unreasonable, taking into account fee rates offered to others by the Adviser and Subadviser, respectively, after giving effect to differences in services.
Other benefits to the Adviser
The Board received information regarding potential “fall-out” or ancillary benefits received by the Adviser and its affiliates as a result of the Adviser’s relationship with the Fund. Such benefits could include, among others, benefits directly attributable to the relationship of the Adviser with the Fund and benefits potentially derived from an increase in the business of the Adviser as a result of its relationship with the Fund (such as the ability to market to shareholders other financial products offered by the Adviser and its affiliates).
The Board also considered the effectiveness of the Adviser’s, Subadviser’s and Fund’s policies and procedures for complying with the requirements of the federal securities laws, including those relating to best execution of portfolio transactions and brokerage allocation.
Other factors and broader review
As discussed above, the Board reviewed detailed materials received from the Adviser and Subadviser as part of the annual re-approval process. The Board also regularly reviews and assesses the quality of the services that the Fund receives throughout the year. In this regard, the Board reviews reports of the Adviser at least quarterly, which include, among other things, a detailed portfolio review, detailed fund performance reports and compliance reports. In addition, the Board meets with
portfolio managers and senior investment officers at various times throughout the year.
After considering the above-described factors and based on its deliberations and its evaluation of the information described above, the Board concluded that approval of the continuation of the Advisory Agreements for the Fund was in the best interest of the Fund and its shareholders. Accordingly, the Board unanimously approved the continuation of the Advisory Agreements.
1 The Board previously considered information about the Subadvisory Agreement at the September and
December 2005 Board meetings in connection with the Adviser’s reorganization.
27
For more information
The Fund’s proxy voting policies, procedures and records are available without charge,
upon request:
| By phone | On the Fund’s Web site | On the SEC’s Web site |
| 1-800-225-5291 | www.jhfunds.com/proxy | www.sec.gov |
| Trustees | Francis V. Knox, Jr. | Custodian |
| Ronald R. Dion, Chairman | Chief Compliance Officer | The Bank of New York |
| James R. Boyle† | Gordon M. Shone | One Wall Street |
| James F. Carlin | Treasurer | New York, NY 10286 |
| Richard P. Chapman, Jr.* | John G. Vrysen | |
| William H. Cunningham | Chief Financial Officer | Transfer agent |
| Charles L. Ladner* | John Hancock Signature | |
| Dr. John A. Moore* | Investment adviser | Services, Inc. |
| Patti McGill Peterson* | John Hancock Advisers, LLC | 1 John Hancock Way, |
| Steven R. Pruchansky | 601 Congress Street | Suite 1000 |
| *Members of the Audit Committee | Boston, MA 02210-2805 | Boston, MA 02217-1000 |
| †Non-Independent Trustee | ||
| Subadviser | Legal counsel | |
| Officers | MFC Global Investment | Kirkpatrick & Lockhart |
| Keith F. Hartstein | Management (U.S.), LLC | Preston Gates Ellis LLP |
| President and | 101 Huntington Avenue | 1 Lincoln Street |
| Chief Executive Officer | Boston, MA 02199 | Boston, MA 02110-2950 |
| Thomas M. Kinzler | ||
| Secretary and | Principal distributor | |
| Chief Legal Officer | John Hancock Funds, LLC | |
| Boston, MA 02210-2805 | 601 Congress Street | |
The Fund’s investment objective, risks, charges and expenses are included in the prospectus and should be considered carefully before investing. For a prospectus, call your financial professional, call John Hancock Funds at 1-800-225-5291 or visit the Fund’s Web site at www.jhfunds.com. Please read the prospectus carefully before investing or sending money.
| How to contact us | ||
| Internet | www.jhfunds.com | |
| Regular mail: | Express mail: | |
| John Hancock | John Hancock | |
| Signature Services, Inc. | Signature Services, Inc. | |
| 1 John Hancock Way, Suite 1000 | Mutual Fund Image Operations | |
| Boston, MA 02217-1000 | 380 Stuart Street | |
| Boston, MA 02116 | ||
| Phone | Customer service representatives | 1-800-225-5291 |
| EASI-Line | 1-800-338-8080 | |
| TDD line | 1-800-554-6713 | |
A listing of month-end portfolio holdings is available on our Web site, www.jhfunds.com. A more detailed portfolio holdings summary is available on a quarterly basis 60 days after the fiscal quarter on our Web site or upon request by calling 1-800-225-5291, or on the Securities and Exchange Commission’s Web site, www.sec.gov.
28
J O H N H A N C O C K F A M I L Y O F F U N D S
| EQUITY | INTERNATIONAL |
| Balanced Fund | Greater China Opportunities Fund |
| Classic Value Fund | International Allocation Portfolio |
| Classic Value Fund II | International Classic Value Fund |
| Classic Value Mega Cap Fund | International Core Fund |
| Core Equity Fund | International Fund |
| Focused Equity Fund | International Growth Fund |
| Global Shareholder Yield Fund | |
| Growth Fund | INCOME |
| Growth Opportunities Fund | Bond Fund |
| Growth Trends Fund | Government Income Fund |
| Intrinsic Value Fund | High Yield Fund |
| Large Cap Equity Fund | Investment Grade Bond Fund |
| Large Cap Select Fund | Strategic Income Fund |
| Mid Cap Equity Fund | |
| Mid Cap Growth Fund | TAX-FREE INCOME |
| Multi Cap Growth Fund | California Tax-Free Income Fund |
| Small Cap Equity Fund | High Yield Municipal Bond Fund |
| Small Cap Fund | Massachusetts Tax-Free Income Fund |
| Small Cap Intrinsic Value Fund | New York Tax-Free Income Fund |
| Sovereign Investors Fund | Tax-Free Bond Fund |
| U.S. Core Fund | |
| U.S. Global Leaders Growth Fund | MONEY MARKET |
| Value Opportunities Fund | Money Market Fund |
| U.S. Government Cash Reserve | |
| ASSET ALLOCATION | |
| Allocation Core Portfolio | CLOSED-END |
| Allocation Growth + Value Portfolio | Bank and Thrift Opportunity Fund |
| Lifecycle 2010 Portfolio | Financial Trends Fund, Inc. |
| Lifecycle 2015 Portfolio | Income Securities Trust |
| Lifecycle 2020 Portfolio | Investors Trust |
| Lifecycle 2025 Portfolio | Patriot Global Dividend Fund |
| Lifecycle 2030 Portfolio | Patriot Preferred Dividend Fund |
| Lifecycle 2035 Portfolio | Patriot Premium Dividend Fund I |
| Lifecycle 2040 Portfolio | Patriot Premium Dividend Fund II |
| Lifecycle 2045 Portfolio | Patriot Select Dividend Trust |
| Lifecycle Retirement Portfolio | Preferred Income Fund |
| Lifestyle Aggressive Portfolio | Preferred Income II Fund |
| Lifestyle Balanced Portfolio | Preferred Income III Fund |
| Lifestyle Conservative Portfolio | Tax-Advantaged Dividend Income Fund |
| Lifestyle Growth Portfolio | |
| Lifestyle Moderate Portfolio | |
| SECTOR | |
| Financial Industries Fund | |
| Health Sciences Fund | |
| Real Estate Fund | |
| Regional Bank Fund | |
| Technology Fund | |
| Technology Leaders Fund | |
For more complete information on any John Hancock Fund and an Open-End fund prospectus, which includes charges and expenses, call your financial professional, or John Hancock Funds at 1-800-225-5291 for Open-End fund information and 1-800-852-0218 for Closed-End fund information. Please read the Open-End fund prospectus carefully before investing or sending money.
1-800-225-5291
1-800-554-6713 TDD
1-800-338-8080 EASI-Line
www.jhfunds. com
Now available: electronic delivery
www.jhfunds. com/edelivery
This report is for the information of the shareholders of John Hancock Massachusetts Tax-Free Income Fund.
770SA 2/07
4/07
ITEM 2. CODE OF ETHICS.
As of the end of the period, February 28, 2007, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief Executive Officer, Chief Financial Officer and Treasurer (respectively, the principal executive officer, the principal financial officer and the principal accounting officer, the “Senior Financial Officers”). A copy of the code of ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to previously disclosed John Hancock Funds – Governance Committee Charter.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's principal executive officer and principal financial officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-
year in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(b) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, are attached. The certifications furnished pursuant to this paragraph are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certifications are not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference.
(c)(1) Submission of Matters to a Vote of Security Holders is attached. See attached “John Hancock Funds – Governance Committee Charter”.
(c)(2) Proxy Voting Policies and Procedures are attached.
(c)(3) Contact person at the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Tax-Exempt Series Fund
By: /s/ Keith F. Hartstein
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Keith F. Hartstein
President and Chief Executive Officer
Date: April 30, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Keith F. Hartstein
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Keith F. Hartstein
President and Chief Executive Officer
Date: April 30, 2007
By: /s/ John G. Vrysen
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John G. Vrysen
Chief Financial Officer
Date: April 30, 2007