<PAGE> 1
JOHN HANCOCK FUNDS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Discovery
Fund
SEMI-ANNUAL REPORT
January 31, 1995
<PAGE> 2
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
William A. Barron, III*
Douglas M. Costle*
Hugh A. Dunlap, Jr.
Leland O. Erdahl*
Richard A. Farrell*
William F. Glavin*
Patrick Grant*
Ralph Lowell, Jr.*
John A. Moore*
Patti McGill Peterson*
John W. Pratt*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Hugh A. Dunlap, Jr.
Vice Chairman
Anne C. Hodsdon
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Michael P. DiCarlo
Senior Vice President
James K. Ho
Senior Vice President
David S. Beckwith
Vice President
John A. Morin
Vice President
Susan S. Newton
Vice President, Assistant Secretary and
Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" a 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer flush right, next to second paragraph.]
Now that we are into 1995, early returns on New Year's resolutions are coming
in. Dieting and saving money -- Americans' long-time favorites -- are often
the most difficult resolutions to keep. This year, however, Congress may give
savers an additional incentive to stick to their guns.
Both the Republicans and Democrats want to revive Individual
Retirement Accounts (IRAs). In an effort to encourage savings, IRAs were
made available to all working Americans in 1981. Anyone with earned income
could contribute up to $2,000 annually. The contributions were fully
tax-deductible, and the earnings weren't taxed until withdrawal. IRAs became
the most successful savings program in the U.S., drawing in more than $250
billion and 13 million new participants by 1985.
Sweeping tax reforms in 1986, however, changed all that. As it stands
now, the full deduction only applies to individuals who earn less than $25,000,
married couples who earn less than $40,000 and people without
employer-sponsored retirement plans. The result of this congressional
tinkering: the number of IRA contributors declined dramatically, from 16.2
million in 1985 to 4.2 million in 1992.
Legislators are now taking a closer look at expanding the accessibility
of IRAs once again. Several proposals are on the table: (1) the Republicans'
"Contract with America" includes the American Dream Savings Account, a type of
IRA; (2) President Clinton has proposed expanding eligibility by raising
income limits; and (3) several congressional representatives have introduced
legislation to restore the universal availability of a fully tax-deductible
IRA.
We enthusiastically support restoring IRAs to their original luster.
Not only will it provide a tax break to middle-income Americans, but it will go
a long way toward raising the nation's dangerously low personal savings rate,
which is the lowest of any major industrialized country. There's an increasing
awareness that Social Security and pension plans will no longer provide for the
retirement needs of middle-income Americans. Increasing IRA accessibility for
more working individuals and families is one of the most sensible ways to help
Americans take responsibility for their future financial needs. We urge you to
support the expanded IRA by contacting your congressional representative or
senator.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR.,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY BERNICE S. BEHAR, PORTFOLIO MANAGER
JOHN HANCOCK
DISCOVERY FUND
FUND PERFORMS WELL IN CHOPPY
----------------------------
SMALL-STOCK ENVIRONMENT
-----------------------
Small stocks once again lived up to their volatile nature during the last six
months. Concerns about rising interest rates kept the group unsettled. The
Federal Reserve Board started lifting short-term interest rates on
February 4, 1994 in an effort to rein in the U.S. economy. Ever since,
worries about how much higher rates will go have weighed heavily on small
stocks.
Despite the ups and downs, John Hancock Discovery Fund ended the
period with solid returns. For the six months ended January 31, 1995, the
Fund's Class A and B shares had total returns of 6.11% and 5.79%, respectively,
at net asset value. By comparison, the average small-company growth fund
returned 5.06%, according to Lipper Analytical Services(1).
[A 2 1/2" x 3 3/4 photo of Bernice S. Behar at bottom right. Caption reads
"Bernice S. Behar, Portfolio Manager."]
CONSUMER PRODUCTS: SKATES AND BABY CLOTHES
We've preserved our focus on consumer stocks. Leisure and recreational
products companies, apparel companies and other retailers together
accounted for roughly 30% of the Fund's investments at the end of January. Our
largest common stock holding was First Team Sports, a major competitor to
Rollerblade in the in-line
[CAPTION]
"Small stocks once again lived up to their volatile nature..."
3
<PAGE> 4
John Hancock Funds - Discovery Fund
[Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) First Team Sports 4.5% 2) HealthCare COMPARE
4.3% 3) LSI Logic 3.8% 4) Horizon Healthcare 3.8% 5) Alternative Resources 3.7%.
A footnote below reads: "As a percentage of net assets on January 31, 1995."]
skate business. By targeting mass merchants like Kmart, Wal-Mart and Target, the
company has carved a niche in the middle tier of the market -- currently
the fastest growing segment. First Team's Ultra Wheels sell for around $150 a
pair versus more than $250 for Rollerblades. The company's earnings have
exploded, and the stock price has followed.
In the apparel area, we've become more selective. With the tremendous
expansion of stores, competition is tough. As a result, we've emphasized apparel
makers that are continuing to gain market share. Top holdings include Gymboree,
which sells high-end baby clothes; Tommy Hilfiger, which makes men's and boy's
clothes; and AnnTaylor Stores, a women's clothier. One disappointment, however,
was Cygne Designs, which manufactures clothes for companies such as AnnTaylor
and The Limited. Due to quality problems and a significant delay in orders, the
company posted disappointing third-quarter earnings. As a result, we sold our
entire position. Two other favorite consumer-related stocks are Geerlings & Wade
and Micro Warehouse. These mail-order companies are profiting from the
increasing trend toward consumers buying products (namely, wine and computers)
directly by mail.
PRODUCTIVITY GAINS
Technology stocks made up our second largest sector weighting at about 26% of
the Fund. One of the most important trends in American business is
productivity enhancement. We're seeing this phenomenon occur across all
industries, and it will likely carry into the next decade. Technology stocks
were one of the market's best performing groups in the second half of 1994,
thanks mostly to booming PC sales and surging earnings. LSI Logic, which
makes semiconductor chips for specialized applications, was one of our
big winners. The company's extensive line of proprietary modules has
helped it meet custom orders faster and cheaper than its competitors. This has
boosted orders and, in turn, earnings.
Other top performers included digital editing companies Avid Technology
and Digidesign. These companies are revolutionizing editing in the media
business. They offer technology that not only speeds up the process, but
creates images and sounds like never before. Avid Technology recently acquired
Digidesign -- creating a company that's at the forefront of video and audio
editing.
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
Performance... and what's behind the numbers." The first listing is LSI Logic
followed by an up arrow and the phrase "Strong orders." The second listing is
First Team Sports followed by an up arrow and the phrase "Earnings surprise."
The third listing is Cygne Designs followed by a down arrow and the phrase
"Delay in orders/quality problems." Footnote below reads: "See "Schedule of
Investments." Investment holdings are subject to change."]
[CAPTION]
"Technology stocks made up our second largest sector weighting."
4
<PAGE> 5
John Hancock Funds - Discovery Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the six months ended January 31, 1995." The chart
is scaled in increments of 2% from bottom to top with 8% at the top and 0% at
the bottom. Within the chart there are three solid bars. The first represents
the 6.11% total return for John Hancock Discovery Fund:Class A. The second
represents the 5.79% total return for John Hancock Discovery Fund:Class B. The
third represents the 5.06% total return for the average small-company growth
fund. The footnote below states "Total returns for John Hancock Discovery Fund
are at net asset value with all distributions reinvested. The average small-
company growth fund is tracked by Lipper Analytical Services.1 See following
page for historical performance information.(1)"]
RECOVERY IN HEALTH CARE
One group we've added to is health-care stocks. By the end of January, they
totaled 20% of the Fund's assets, up from roughly 10% six months ago. After
being battered for several years, the group has bounced back in recent months.
The main reasons for its recovery: the demise of health-care reform and the
realization that the industry is prescribing its own treatment for high
costs.
In our view, small health-care companies are likely to benefit from
this overwhelming trend to get spiraling health-care costs under control. They
can more easily adjust to the new cost-conscious environment. What's
more, like other small companies, small health-care firms sell products and
services that fill a rapidly growing niche. Many are directly addressing the
industry's need to curtail expenses. Our focus is on companies that are
leading the charge to slash costs and improve efficiency. Some of our favorites
include Horizon Healthcare, which runs nursing homes; HealthCare COMPARE, a
managed-care company; and Omnicare, which provides pharmaceutical services to
institutions.
OUTLOOK
It's impossible to know exactly what the months ahead will bring. The market, in
general, could remain volatile as investors try to figure out where inflation
and interest rates are headed. And that means small stocks could continue to be
choppy, too. Longer term, however, we're optimistic. All of the factors that
made us positive six months ago are still in place.
First, the current small-stock cycle still has further to go. Small
stocks tend to outperform large stocks in streaks of five to eight years. The
current rally began a little more than four years ago in November 1990. So if
history is a guide, we're only about halfway there. Second, last year's
battering drove small stocks down to bargain levels. By most historical
measures, the group is extremely undervalued. And finally, the economic
environment is ideal. Small stocks tend to shine in a moderately growing
economy. That's because they're the best place for investors to find growth.
With the economy slowing down, small stocks are poised to be one of the market's
top-performing groups.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested distributions
and do not take into account sales charges. Actual load-adjusted performance
would be lower.
[CAPTION]
"...the current small-stock cycle still has further to go."
5
<PAGE> 6
NOTES TO PERFORMANCE INFORMATION
John Hancock Funds - Discovery Fund
In accordance with the reporting requirements of the Securities and Exchange
Commission, the following data are supplied for the period ended December 31,
1994 with all distributions reinvested in shares. The average annualized total
returns for Class A shares for the 1-year period and since inception on January
3, 1992 were (5.74%) and 4.63%, respectively, and reflect payment of the maximum
sales charge of 5.00%. The average annualized total returns for Class B shares
for the 1-year period and since inception on August 30, 1991 were (6.38%)
and 9.71%, respectively, and reflect the applicable contingent deferred sales
charge (maximum contingent deferred sales charge is 5.00% and declines to 0%
over 6 years). For Class A shares different sales charges were in effect prior
to August 1992 and are not reflected in the above performance information. All
pe rformance data shown represent past performance and should not be considered
indicative of future performance. Returns and principal values of Fund
investments will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Consult your prospectus for more
information on the risks associated with small-stock investments.
[Discovery Fund
Class A shares
Line chart with the heading Discovery Fund: Class A, representing the growth of
a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines. The first line represents the value of the Standard & Poor's
500 Stock Index and is equal to $12,310* as of January 31, 1995. The second
line represents the value of the hypothetical $10,000 investment made in the
Discovery Fund on January 3, 1992, before sales charge, and is equal to $11,563
as of January 31, 1995. The third line represents the Discovery Fund after sales
charge and is equal to $10,990 as of January 31, 1995.
Discovery Fund
Class B shares
Line chart with the heading Discovery Fund: Class B, representing the growth of
a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines. The first line represents the value of the hypothetical
$10,000 investment made in the Discovery Fund on August 30, 1991, before
contingent deferred sales charge, and is equal to $13,117 as of January 31,
1995. The second line represents the value of the Standard & Poor's 500 Stock
Index and is equal to $13,241* as of January 31, 1995. The third line
represents Discovery Fund after contingent deferred sales charge and is equal
to $12,941 as of January 31, 1995.
* The Standard & Poor's 500 Stock Index is an unmanaged index that includes
500 widely traded common stocks and is a commonly used measure of stock market
performance.]
6
<PAGE> 7
FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON JANUARY 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF
THAT DATE.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1995 (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<S> <C>
ASSETS:
Investments at value - Note C:
Common stocks (cost - $21,788,652)..................... $25,781,650
Short-term investments (cost - $1,790,000)............. 1,790,000
-----------
27,571,650
Cash....................................................... 18
Receivable for investments sold............................ 906,000
Receivable for shares sold................................. 6,883
Interest receivable........................................ 287
Deferred organization expenses - Note A.................... 23,078
-----------
Total Assets.............. 28,507,916
----------------------------------------
LIABILITIES:
Payable for investments purchased.......................... 276,000
Payable for shares repurchased............................. 17,265
Payable to John Hancock Advisers, Inc. and
affiliates - Note B...................................... 33,511
Accounts payable and accrued expenses...................... 45,245
-----------
Total Liabilities......... 372,021
----------------------------------------
NET ASSETS:
Capital paid-in............................................ 25,697,764
Accumulated net realized loss on investments and
foreign currency transactions............................ (1,204,955)
Net unrealized appreciation of investments................. 3,992,998
Net investment loss........................................ (349,912)
-----------
Net Assets................ $28,135,895
========================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $3,619,152/410,471............................... $ 8.82
=========================================================================
Class B - $24,516,743/2,863,167............................ $ 8.56
=========================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($8.82 x 105.26%)................................ $ 9.28
=========================================================================
<FN>
* On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
</TABLE>
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED
AND EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES)
FOR THE PERIOD STATED.
<TABLE>
STATEMENT OF OPERATIONS
Six months ended January 31, 1995 (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<S> <C>
INVESTMENT INCOME:
Interest................................................. $ 21,852
Dividends (net of foreign withholding taxes of $844)..... 21,290
-----------
43,142
-----------
Expenses:
Investment management fee - Note B..................... 146,732
Distribution/service fee - Note B
Class A.............................................. 5,163
Class B.............................................. 120,853
Transfer agent fee - Note B
Class A.............................................. 4,879
Class B.............................................. 29,836
Custodian fee.......................................... 26,806
Auditing fee........................................... 19,952
Registration and filing fees........................... 15,545
Printing............................................... 9,235
Organization expense - Note A.......................... 7,390
Trustees' fees......................................... 4,350
Miscellaneous.......................................... 1,504
Legal fees............................................. 809
-----------
Total Expenses.......... 393,054
----------------------------------------
Net Investment Loss..... (349,912)
----------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on investments sold.................... (1,202,349)
Net realized loss on foreign currency transactions....... (2,593)
Change in net unrealized appreciation/depreciation
of investments......................................... 3,246,917
-----------
Net Realized and
Unrealized Gain on
Investments and Foreign
Currency Transactions... 2,041,975
----------------------------------------
Net Increase in Net
Assets Resulting from
Operations.............. $ 1,692,063
========================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 8
<TABLE>
FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 1995 JULY 31,
(UNAUDITED) 1994
---------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment loss........................................ ($ 349,912) ($ 831,202)
Net realized gain (loss) on investments sold and
foreign currency transactions............................ ( 1,204,942) 1,895,546
Change in net unrealized appreciation/depreciation
of investments........................................... 3,246,917 ( 3,261,315)
----------- -----------
Net Increase (Decrease) in Net Assets Resulting
from Operations......................................... 1,692,063 ( 2,196,971)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gain on investments sold
Class A - ($0.2685 and $1.6619 per share, respectively).. (101,860) ( 902,081)
Class B - ($0.2685 and $1.6619 per share, respectively).. (755,311) ( 5,438,402)
----------- -----------
Total Distributions to Shareholders................... ( 857,171) ( 6,340,483)
----------- -----------
FROM FUND SHARE TRANSACTIONS -- NET*............................... ( 2,462,290) ( 5,063,020)
----------- -----------
NET ASSETS:
Beginning of period........................................ 29,763,293 43,363,767
----------- -----------
End of period (including net investment loss of $349,912
and none, respectively).................................... $28,135,895 $29,763,293
=========== ===========
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
JANUARY 31, 1995 YEAR ENDED JULY 31,
(UNAUDITED) 1994
--------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- --------- -----------
<S> <C> <C> <C> <C>
CLASS A
Shares sold.................................. 114,535 $1,055,868 2,972,453 $30,392,925
Shares issued to shareholders in
reinvestment of distributions.............. 10,315 92,837 90,127 825,563
-------- ---------- --------- -----------
124,850 1,148,705 3,062,580 31,218,488
Less shares repurchased...................... ( 91,391) ( 839,069) (3,119,595) ( 31,598,574)
-------- ---------- --------- -----------
Net increase (decrease)...................... 33,459 $ 309,636 ( 57,015) ($ 380,086)
======== ========== ========= ===========
CLASS B
Shares sold................................... 97,453 $ 859,890 243,890 $ 2,401,058
Shares issued to shareholders in reinvestment
of distributions.............................. 79,529 695,881 545,000 4,888,647
-------- ---------- --------- -----------
176,982 1,555,771 788,890 7,289,705
Less shares repurchased...................... ( 494,874) ( 4,327,697) (1,238,061) ( 11,972,639)
-------- ---------- --------- -----------
Net decrease................................. ( 317,892) ($2,771,926) ( 449,171) ($ 4,682,934)
======== ========== ========= ===========
</TABLE>
THE STATEMENT OF CHANGES IN NET ASSETS SHOWS HOW THE VALUE OF THE FUND'S NET
ASSETS HAVE CHANGED SINCE THE END OF THE PREVIOUS PERIOD. THE DIFFERENCE
REFLECTS EARNINGS LESS EXPENSES, ANY INVESTMENT GAINS AND LOSSES, DISTRIBUTIONS
PAID TO SHAREHOLDERS, AND ANY INCREASE OR DECREASE IN MONEY SHAREHOLDERS
INVESTED IN THE FUND. THE FOOTNOTE ILLUSTRATES THE NUMBER OF FUND SHARES SOLD,
REINVESTED AND REDEEMED DURING THE LAST TWO PERIODS, ALONG WITH THE
CORRESPONDING DOLLAR VALUES.
See notes to financial statements.
8
<PAGE> 9
FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout
the periods indicated, investment returns, key ratios and
supplemental data are listed as follows:
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JULY 31,
CLASS A JANUARY 31, 1995 -------------------------
PER SHARE OPERATING PERFORMANCE (UNAUDITED) 1994 1993 1992(a)
----------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...................................................... $ 8.56 $ 10.81 $ 8.95 $ 9.40
------- ------- ------- -------
Net Investment Loss....................................................................... (0.08) (0.16)+ (0.16) (0.05)
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions.. 0.61 (0.43) 2.15 (0.40)
------- ------- ------- -------
Total from Investment Operations........................................................ 0.53 (0.59) 1.99 (0.45)
------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold.................................. (0.27) (1.66) (0.13) --
------- ------- ------- -------
Net Asset Value, End of Period............................................................ $ 8.82 $ 8.56 $ 10.81 $ 8.95
======= ======= ======= =======
Total Investment Return at Net Asset Value................................................ 6.11%(b) (6.45)% 22.33% (4.79)%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)................................................. $ 3,619 $ 3,226 $ 4,692 $ 3,866
Ratio of Expenses to Average Net Assets................................................... 2.17%* 2.01% 2.17% 1.78%*
Ratio of Net Investment Loss to Average Net Assets........................................ (1.88)%* (1.64)% (1.61)% (1.20)%*
Portfolio Turnover Rate................................................................... 51% 108% 148% 138%
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...................................................... $ 8.34 $ 10.65 $ 8.87 $ 8.00
------- ------- ------- -------
Net Investment Loss....................................................................... (0.11) (0.22)+ (0.23) (0.11)
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions.. 0.60 (0.43) 2.14 0.98
------- ------- ------- -------
Total from Investment Operations........................................................ 0.49 (0.65) 1.91 0.87
------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold.................................. (0.27) (1.66) (0.13) --
------- ------- ------- -------
Net Asset Value, End of Period............................................................ $ 8.56 $ 8.34 $ 10.65 $ 8.87
======= ======= ======= =======
Total Investment Return at Net Asset Value................................................ 5.79%(b) (7.18)% 21.63% 10.88%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)................................................. $24,517 $26,537 $38,672 $34,636
Ratio of Expenses to Average Net Assets................................................... 2.75%* 2.62% 2.86% 2.56%*
Ratio of Net Investment Loss to Average Net Assets........................................ (2.45)%* (2.24)% (2.26)% (1.56)%*
Portfolio Turnover Rate................................................................... 51% 108% 148% 138%
<FN>
* On an annualized basis.
+ On average month end shares outstanding.
(a) Class A and Class B shares commenced operations on January 3, 1992 and August 30, 1991, respectively.
(b) Not annualized.
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZE THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: THE NET INVESTMENT INCOME, GAINS
(LOSSES) AND DISTRIBUTIONS OF THE FUND. IT SHOWS HOW THE FUND'S NET ASSET VALUE
FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD. IT ALSO SHOWS
THE TOTAL INVESTMENT RETURN FOR EACH PERIOD BASED ON THE NET ASSET VALUE
OF FUND SHARES. ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS
PRESENTED IN THE FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY THE
FUND ON JANUARY 31, 1995. THE MAIN CATEGORY OF SECURITIES, COMMON STOCKS, ARE
FURTHER BROKEN DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH REPESENT
THE FUNDS "CASH" POSITION, ARE LISTED LAST.
<TABLE>
SCHEDULE OF INVESTMENTS
January 31, 1995 (Unaudited)
<CAPTION>
NUMBER OF
ISSUER, DESCRIPTION SHARES MARKET VALUE
- ------------------- ------ ------------
<S> <C> <C>
COMMON STOCKS
APPLIANCES - HOUSEHOLD (2.26%)
Fedders Corp.**......................... 69,100 $ 457,787
Fedders Corp. - Class A.**.............. 34,550 177,069
-----------
634,856
-----------
AUDIO/VIDEO HOME PRODUCTION (1.60%)
Recoton Corp.**......................... 25,000 450,000
-----------
AUTOMOBILE/TRUCK (2.37%)
Autobacs Seven Co. (Japan)**............ 3,000 295,006
Royal Ltd. (Japan)**.................... 10,000 371,916
-----------
666,922
-----------
BUSINESS SERVICES (15.15%)
Alternative Resources Corp.**........... 30,000 1,050,000
CUC International, Inc.**............... 14,500* 502,063
Future Healthcare, Inc.**............... 35,000* 735,000
HealthCare COMPARE Corp.**.............. 35,000 1,216,250
Li & Fung Ltd. (Hong Kong).............. 300,000 178,350
Robert Half International, Inc.**....... 25,000* 581,250
-----------
4,262,913
-----------
COMPUTERS (6.18%)
Pinnacle Systems, Inc.**................ 25,000* 254,688
Read-Rite Corp.**....................... 30,000* 453,750
Sterling Software, Inc.**............... 15,000 536,250
Symantec Corp.**........................ 25,000* 493,750
-----------
1,738,438
-----------
ELECTRONICS (10.90%)
LSI Logic Corp.**....................... 25,000 1,062,500
Perception, Inc.**...................... 35,000* 630,000
Sonic Solutions, Inc.**................. 40,000* 400,000
Teradyne, Inc.**........................ 30,000 975,000
-----------
3,067,500
-----------
HOTELS & MOTELS (2.72%)
La Quinta Inns, Inc..................... 39,000 765,375
-----------
MEDICAL/DENTAL (9.43%)
Boston Scientific Corp.**............... 30,000* 555,000
Idexx Laboratories, Inc.**.............. 25,000 887,500
Isolyser Co, Inc.**..................... 16,750* 282,656
Omnicare, Inc........................... 20,000 927,500
-----------
2,652,656
-----------
NURSING HOMES (3.77%)
Horizon Healthcare Corp.**.............. 40,000 1,060,000
-----------
PHOTO EQUIPMENT (2.79%)
Avid Technology, Inc.**................. 28,430 $ 785,379
-----------
PROTECTION (3.09%)
First Alert, Inc.**..................... 20,000 300,000
Safety 1st, Inc.**...................... 20,000* 570,000
-----------
870,000
-----------
RETAIL (16.71%)
AnnTaylor Stores, Inc.**................ 30,000 1,005,000
Dollar General Corp..................... 25,625 826,406
Elkjop (Norway)......................... 14,300* 215,156
Geerlings & Wade Inc.**................. 34,200* 444,600
Gymboree Corp.**........................ 30,000* 720,000
Insight Enterprises, Inc.**............. 24,000* 246,000
Micro Warehouse, Inc.**................. 20,000 545,000
Next PLC (United Kingdom)............... 97,000* 388,049
Starbucks Corp.**....................... 13,000 312,000
-----------
4,702,211
-----------
TELECOMMUNICATIONS (4.54%)
General Instrument Corp.**.............. 25,000 681,250
TESSCO Technologies, Inc.**............. 35,000* 595,000
-----------
1,276,250
-----------
TEXTILES (2.17%)
Tommy Hilfilger Corp.**................. 30,000 611,250
-----------
TOYS/GAMES/HOBBY PRODUCTS (7.71%)
Cobra Golf, Inc.**...................... 28,000* 903,000
First Team Sports,Inc.**................ 49,200* 1,266,900
-----------
2,169,900
-----------
WHOLESALE SPECIAL LINE (0.24%)
Daisytek International Corp.**.......... 4,000* 68,000
-----------
TOTAL COMMON STOCKS
(Cost $21,788,652) (91.63%) $25,781,650
------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 11
FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
<TABLE>
<CAPTION>
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000'S OMITTED) MARKET VALUE
- ------------------- -------- --------------- ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (6.36%)
Investment in a joint repurchase
agreement transaction with
Lehman Brothers Inc. - Dated
01-31-95, Due 02-01-95
(secured by U.S. Treasury Bond,
10.625% due 08-15-15 and
U.S. Treasury Notes, 4.125%
due 05-31-95, 4.25% due
05-15-96, 6.25% due 08-31-96,
8.50% due 07-15-97), Note A....... 5.81% $1,790 $ 1,790,000
-----------
TOTAL SHORT-TERM INVESTMENTS ( 6.36%) 1,790,000
------- -----------
TOTAL INVESTMENTS ( 97.99%) $27,571,650
======= ===========
<FN>
* Securities, other than short-term investments, newly added to the portfolio during the six months ended January 31, 1995.
** Non-income producing security.
The percentage shown for each investment category is the total value of that category as a percentage of net assets of the Fund.
</TABLE>
PORTFOLIO CONCENTRATION (UNAUDITED)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE PERFORMANCE OF THE FUND IS CLOSELY TIED TO THE ECONOMIC AND FINANCIAL
CONDITIONS WITHIN THE COUNTRIES IN WHICH IT INVESTS. THE CONCENTRATION OF
INVESTMENTS BY INDUSTRY CATEGORY FOR INDIVIDUAL SECURITIES HELD BY THE FUND IS
SHOWN IN THE SCHEDULE OF INVESTMENTS.
IN ADDITION, CONCENTRATION OF INVESTMENTS CAN BE AGGREGATED BY VARIOUS
COUNTRIES. THE TABLE BELOW SHOWS THE PERCENTAGES OF THE FUND'S INVESTMENTS AT
JANUARY 31, 1995 ASSIGNED TO COUNTRY CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE
OF SECURITIES
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ---------------
<S> <C>
Hong Kong................................................................ 0.63%
Japan.................................................................... 2.37%
Norway................................................................... 0.77%
United Kingdom........................................................... 1.38%
United States............................................................ 92.84%
-----
TOTAL INVESTMENTS 97.99%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust III (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940. As of
December 16, 1994, the Trust consisted of two series portfolios: John Hancock
Discovery Fund (the "Fund"), and John Hancock Freedom Environmental Fund.
On November 30, 1994, the shareholders approved a plan of
reorganization between the John Hancock Freedom Environmental Fund and John
Hancock Special Opportunities Fund ("Special Opportunities Fund") providing for
the transfer of substantially all of the assets and liabilities of the John
Hancock Freedom Environmental Fund to Special Opportunities Fund in exchange
solely for shares of beneficial interest of Special Opportunities Fund. After
this transaction and as of the close of business on December 16, 1994, John
Hancock Freedom Environmental Fund was terminated.
The Trustees have authorized the issuance of multiple classes of the
Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution/service expenses under terms
of a distribution plan, have exclusive voting rights to such distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial
Group, may participate in a joint repurchase agreement transaction. Aggregate
cash balances are invested in one or more repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of
the Internal Revenue Code that are applicable to regulated investment
companies. It will not be subject to Federal income tax on taxable earnings
which are distributed to shareholders.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment securities
is recorded on the ex-dividend date, or, in the case of some foreign
securities, on the date thereafter when the Fund is made aware of the dividend.
Interest income on investment securities is recorded on the accrual basis.
Foreign income may be subject to foreign withholding taxes which are accrued as
applicable. The Fund records all distributions to shareholders from net
investment income and realized gains on the ex-dividend date. Such
distributions are determined in conformity with income tax regulations, which
may differ from generally accepted accounting principles. Dividends paid by the
Fund with respect to each class of shares will be calculated in the same
manner, at the same time and will be in the same amount, except for the effect
of expenses that may be applied differently to each class as explained
previously.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
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 sizes of the funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each
class of shares based on the appropriate net assets of the respective classes.
Distribution/service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rates applicable to each class.
ORGANIZATION EXPENSE Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged ratably to the Fund's
operations over a five-year period that began with the commencement of
investment operations of the Fund.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in
terms of foreign currencies are translated into U.S. dollars based on London
currency exchange quotations as of 5:00 p.m., London time, on the date of
any determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/loss on investments are
translated at the rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arise
from sales of foreign currency, currency gains or losses realized between
the trade and settlement dates on securities transactions and the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and losses
arise from changes in the value of assets and liabilities other than investmen
ts in securities, resulting from changes in the exchange rate.
NOTE B --
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser, for a continuous investment program
equivalent, on an annual basis, to the sum of (a) 1.00% of the first
$250,000,000 of the Fund's average daily net asset value, (b) 0.80% of the next
$250,000,000 and (c) 0.75% of the Fund's average daily net asset value in
excess of $500,000,000.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent of such
excess, and the Adviser will make additional arrangements necessary to
eliminate any remaining excess expenses. The current limits are 2.5% of the
first $30,000,000 of the Fund's average daily net asset value, 2.0% of the next
$70,000,000, and 1.5% of the remaining average daily net asset value.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly-owned subsidiary of the Adviser. Prior to January 1,
1995, JH Funds was known as John Hancock Broker Distribution Services, Inc. For
the period ended January 31, 1995, JH Funds received net sales charges of
$14,474 with regard to sales of Class A shares. Out of this amount, $2,183 was
retained and used for printing prospectuses, advertising, sales literature and
other purposes, $9,761 was paid as sales commissions to unrelated
broker-dealers and $2,530 was paid as sales commissions to sales personnel of
John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated
("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"). The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro, all of which are
broker-dealers.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
declining rates beginning at 5.0% of the lesser of the current market value at
the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in whole or
in part to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of Class B shares. For the
period ended January 31, 1995 contingent deferred sales charges received by JH
Funds amounted to $63,810.
In addition, to compensate JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans
with respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds, for
distribution and service expenses at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution/service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation, ("Investor Services"), a wholly-owned subsidiary of The
Berkeley Financial Group. Prior to January 1, 1995, Investor Services was known
as John Hancock Fund Services, Inc. Effective January 1, 1995, Class A and
Class B shares pay transfer agent fees based on transaction volume and the
number of shareholder accounts. Prior to January 1, 1995, the Fund paid
Investor Services a monthly transfer agent fee equivalent, on an annual basis,
to 0.25% and 0.21% of the average daily net asset value of Class A and Class B
shares of the Fund, respectively, plus out of pocket expenses incurred by
Investor Services on behalf of the Fund for proxy mailings.
Messers Edward J. Boudreau, Jr. and Hugh A. Dunlap, Jr. are directors
and/or officers of the Adviser, and/or its affiliates, as well as Trustees
of the Fund. The compensation of unaffiliated Trustees is borne by the Fund.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
securities, during the period ended January 31, 1995, aggregated $14,260,345
and $17,521,155, respectively.
The cost of investments owned at January 31, 1995 for federal income
tax purposes was $23,578,652. Gross unrealized appreciation and
depreciation of investments aggregated $4,926,110 and $933,112 respectively,
resulting in net unrealized appreciation of $3,992,998.
14
<PAGE> 15
NOTES
John Hancock Funds - Discovery Fund
Effective March 15, 1995, participant directed defined contribution plans with
at least 100 eligible employees at the inception of the Fund account may
purchase Class A shares of the Fund without an initial sales charge.
15
<PAGE> 16
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A GLOBAL INVESTMENT MANAGEMENT FUND U.S. Postage
101 Huntington Avenue Boston, MA 02199-7603 PAID
Brockton, MA
Permit No. 582
[A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a dimond in lower right. A tag line below
reads: "A Global Investment Management Firm."
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Discovery Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with the caption "Printed on
Recycled Paper."]
JHD 340SA 1/95
