<PAGE> 1
John Hancock Funds
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Discovery
Fund
ANNUAL REPORT
JULY 31, 1995
<PAGE> 2
--------------------------
CHAIRMAN'S MESSAGE
--------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
William A. Barron, III*
Douglas M. Costle*
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
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
INDEPENDENT AUDITORS
Ernst & Young llp
200 Clarendon Street
Boston, Massachusetts 02116
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
Educating shareholders has always been one of the most important
responsibilities of a mutual fund company. But that challenge has taken on new
significance in the past several years. Looking at the most recent statistics,
you can see why. According to the Investment Company Institute, the mutual fund
industry now manages more than $2.3 trillion for investors. More than half of
that money has come into mutual funds in just the last four years. Today, there
are more than 95 million mutual fund shareholder accounts. That's up from 12
million in 1980. These are people, like you, who are investing in mutual funds
to save for a home, to send their children to college or to build a nest egg for
a comfortable retirement. This explosive growth, coupled with the growing
complexity of the financial landscape, has made all of us in the mutual fund
industry work harder to inform our shareholders.
At John Hancock Funds, we strive to educate you about all aspects of your
fund: the performance, the strategies and the holdings. We want you to fully
understand what you own. We want you to have realistic expectations of the
potential rewards as well as the potential risks of your investment. These
shareholder reports -- which we send you twice a year -- are the best way to
give you the most in-depth and up-to-date information.
In the message that follows, the portfolio manager gives a candid commentary
on the market environment; the factors that affected performance; the Fund's
current investment strategies; and the outlook for the months ahead. The ensuing
financial statements provide a comprehensive look at the fund's statistics and
holdings.
We hope you find these shareholder reports a useful tool in evaluating your
investments. Of course, if you have any questions or need more information, feel
free to call one of our customer service representatives on our toll-free line
at 1-800-225-5291, from 8:00 a.m. to 8:00 p.m. eastern time, Monday through
Friday.
Sincerely,
/s/Edward J. Boudreau
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY BERNICE S.BEHAR, PORTFOLIO MANAGER
JOHN HANCOCK
DISCOVERY FUND
Fund handily outpaces its peers;
small stock rally still has room to go
Falling interest rates, a steadily-growing economy and rising corporate
earnings helped set the stage for a powerful small stock rally over the past six
months. The rally was at its strongest in the second quarter of the year and
helped account for the lion's share of the Fund's 12-month performance. That's
when investors, who had previously favored large, multi-national companies that
benefited from healthy export sales, turned their sights toward smaller
companies with higher rates of growth.
While most small stock funds benefited from these favorable conditions,
John Hancock Discovery Fund handily outpaced it peers. For the year ended July
31, 1995, the Fund's Class A and B shares had total returns of 55.80% and
54.97%, respectively, at net asset value. By comparison, the average
small-company growth fund returned 32.17%, according to Lipper Analytical
Services.(1)
TECHNOLOGY LEADS THE PACK
During the past six months we built up our technology stake to 43% of
investments, up from 26% six months earlier, and the
[A 2 1/2" x 3 3/4" photo of Bernice S. Behar at bottom right. Caption reads:
"Bernice S. Behar, Portfolio Manager."]
[CAPTION]
"...A POWERFUL SMALL STOCK RALLY...WAS AT ITS STRONGEST IN THE SECOND
QUARTER..."
3
<PAGE> 4
John Hancock Funds - Discovery Fund
[CAPTION]
"...WE BUILT UP OUR TECHNOLOGY STAKE..."
[Chart with heading "Top Five Common Stock Holdings" at top of left hand
column. The chart lists five holdings: 1) Teradyne 4.5% 2) Alternative
Resources 4.1% 3) Cypress Semiconductor 3.9% 4) LSI Logic 3.8% 5) Idexx
Laboratories 3.8%. A footnote below reads: "As a percentage of net assets on
July 31, 1995."]
explosive price surge in these holdings was one key to our strong performance.
Most of our technology stocks showed gains ranging from 30% to 50% or more
during the period. About half of our current technology holdings is concentrated
in companies that produce high-performance, high-speed semiconductor chips, or
that manufacture the equipment needed to produce and test these chips. Cypress
Semiconductor Corp. and Integrated Silicon Solution, which make static
random-access memories, were two of our largest holdings and among our biggest
winners. Teradyne and Aseco Corp., both manufacturers of chip testing equipment,
skyrocketed as exploding sales of chips translated into increased demand for the
equipment used to make and test chips.
Our software holdings also posted strong performance. Top holdings include
Informix, a maker of data base software; Symantec, which sells computer
utilities including a well-known anti-virus program; and CBT Group, which
produces training software.
[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 Cypress
Semiconductor followed by an up arrow and the phrase "Explosion in orders." The
second listing is Alternative Resources followed by an up arrow and the phrase
"Higher demand for services." The third listing is Rock Bottom Restaurants
followed by a down arrow and the phrase "Lower-than-expected earnings." Footnote
below reads: "See "Schedule of Investments." Investment holdings are subject to
change."]
Both the media and investors have begun to question whether technology
stocks can continue to maintain their strong recent performance. In our view,
the answer is yes and we believe they should continue to do quite well over the
next several years. Despite their recent run-up, the prices of technology stocks
still seem reasonable in light of their rapidly growing earnings. And we think
that they will continue to perform well over the long term as both computer
hardware and software becomes quicker, cheaper, more sophisticated and easier to
use. The recent introduction of Microsoft's Windows 95 program is just one
example of the type of development which will fuel the demand for new computers
and programs to run them. We can expect the industry to grow even more rapidly
as it develops other new devices, products and services which enhance and expand
personal computer performance. Having said that, however, it's reasonable to
expect that at some point we could see a short-term correction. What's more, the
technology sector could be more volatile in the near term if investors decide to
sell their holdings to lock in gains.
HEALTH CARE STRONG
While they were somewhat overshadowed by our technology holdings, many of our
health-care stocks -- at 18% of holdings -- also turned in strong performances.
We've focused on companies that are likely to benefit from a relentless trend
towards cost-consciousness. PhyCor and American Oncology Resources are two
recent additions to the fund. These physician practice
4
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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 year ended July 31, 1995." The chart is
scaled in increments of 10% from bottom to top, with 60% at the top and 0% at
the bottom. Within the chart, there are three solid bars. The first represents
the 55.80% total return for John Hancock Discovery Fund: Class A. The second
represents the 54.97% total return for John Hancock Discovery Fund: Class B.
The third represents the 32.17% 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.
See page seven for historical performance information."]
management companies provide groups of doctors with billing and other
management services they need to compete effectively.
The need to manage costs more efficiently is also likely to benefit companies
that provide information systems to health-care organizations. One of our
favorites is Phamis, Inc., which has developed an electronic, on-line medical
records system and has procured large contracts with major hospital groups.
We've also favored medical device companies with niche products, including
Boston Scientific Corp. and Research Industries Corp.
OTHER OPPORTUNITIES
Cost consciousness isn't limited to the health-care industry, so we've
selectively chosen companies that we think can help businesses and government
deal with cost-cutting challenges. One example is Corrections Corp, which is a
private builder and manager of prisons. Another is RTW, which aids companies in
controlling workers' compensation costs. Alternative Resources, another large
position in the Fund, provides both short- and long-term technology staffing
solutions and continues to grow rapidly.
In the last six months, we've cut our consumer-related holdings in half,
primarily by selling some apparel companies that have been hit hard by increased
competition and more thrifty consumers. But we haven't turned our back on the
group and, despite our increased technology position, we continue to look for
good opportunities in the consumer and retail sectors. We still maintain such
stocks as First Team Sports, a leading marketer of in-line skates. The company
remains on a track of strong earnings and sales gains. We also held onto Tommy
Hilfiger, a maker of men's and boys' clothing which is profiting from the
growing trend toward casual clothing in the workplace. One stock which we
continue to like, Rock Bottom Restaurants, stumbled recently on
lower-than-expected earnings. But the company is rapidly expanding its chain of
micro-brewery restaurants which provide good food at a reasonable price.
[CAPTION]
"...IT WILL BE IMPORTANT FOR US TO BE MORE SELECTIVE IN THE COMING MONTHS."
OUTLOOK STILL STRONG
Six months ago we said that the current small-stock cycle still had further to
go. We continue to believe that today, despite the recent rise in small stock
prices. It's important to remember that in 1994 small company stocks generally
suffered and, in our view, have only recently regained the ground they lost last
year. Given their expected growth in earnings, their current prices don't seem
to be excessive. By their nature, small company stocks are volatile, reacting
more
- -------------------------------------
(1)Source: Lipper Analytical Services
5
<PAGE> 6
John Hancock Funds - Discovery Fund
quickly to unexpected changes in financial and economic conditions. So
investors need to assess their comfort level with this type of investment. In
the coming months, it will be important for us to be even more selective in
choosing appropriate stocks for the Fund. We'll stick to finding companies with
earnings growth of 20-25% and focus on groups that may have been
under-appreciated during the recent rally.
Note: Participant-directed defined-contribution plans with at least 100 eligible
employees at inception of the account with the Fund, may purchase Class A shares
without an initial sales charge as of March 15, 1995. If those shares are
redeemed, however, during the year following the calendar year end during which
they were purchased, a contingent deferred sales charge will be assessed.
6
<PAGE> 7
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for John Hancock Discovery Fund. Total return is a performance
measure that equals the sum of all income and capital gains dividends, assuming
reinvestment of these distributions, and the change in the price of the Fund's
shares, expressed as a percentage of the Fund's shares. Performance figures
include the maximum applicable sales charge of 5% for Class A shares. The effect
of the maximum contingent deferred sales charge for Class B shares (5% and
declining to 0% over six years) is included in Class B performance. Remember
that all figures represent past performance and are no guarantee of how the Fund
will perform in the future. Also, keep in mind that the total return and share
price of the Fund's investments will fluctuate. As a result, your Fund's shares
may be worth more or less than their original cost depending on when you sell
them.
<TABLE>
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED JUNE 30, 1995
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND(1)
---- ----- -------
<S> <C> <C> <C>
John Hancock Discovery Fund: Class A(2) 29.22% N/A 40.55%
John Hancock Discovery Fund: Class B(2) 30.24% N/A 66.07%
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED JUNE 30, 1995
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND(1)
---- ----- -------
<S> <C> <C> <C>
John Hancock Discovery Fund: Class A(2) 29.22% N/A 10.24%
John Hancock Discovery Fund: Class B(2) 30.24% N/A 14.16%
<FN>
NOTES TO PERFORMANCE
(1) Class A shares started on January 3, 1992; Class B shares started on August
30, 1991.
(2) Performance is affected by a 12b-1 plan.
</TABLE>
7
<PAGE> 8
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in John Hancock
Discovery Fund would be worth on July 31, 1995, assuming you invested on the day
each class of shares started and reinvested all distributions. For comparison,
we've shown the same $10,000 investment in the Standard & Poor's 500 Stock-Index
- -- an unmanaged index that includes 500 widely traded common stocks and is often
used as a measure of stock market performance.
Line chart with the heading John Hancock 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 hypothetical $10,000 investment made
in the John Hancock Discovery Fund on January 3, 1992, before sales charge, and
is equal to $16,997 as of July 31, 1995. The second line represents the John
Hancock Discovery Fund after sales charge and is equal to $16,136 as of July
31, 1995. The third line represents the value of the Standard & Poor's 500
Stock Index and is equal to $14,899 as of July 31, 1995.
Line chart with the heading John Hancock 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 John Hancock Discovery Fund on August 30, 1991, before sales charge, and
is equal to $19,398 as of July 31, 1995. The second line represents the John
Hancock Discovery Fund after sales charge and is equal to $19,098 as of July
31, 1995. The third line represents the value of the Standard & Poor's 500
Stock Index and is equal to $15,876 as of July 31, 1995.
8
<PAGE> 9
----------------------
FINANCIAL STATEMENTS
----------------------
John Hancock Funds - Discovery Fund
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at value - Note C:
Common stocks (cost - $21,667,328) .................... $ 36,896,478
Short-term investments (cost - $43,000) ............... 43,000
------------
36,939,478
Cash ................................................... 7,112
Receivable for investments sold ........................ 804,723
Receivable for shares sold ............................. 36,073
Interest receivable .................................... 11
Deferred organization expenses - Note A ................ 15,810
------------
Total Assets ......................... 37,803,207
----------------------------------------------------
LIABILITIES:
Payable for investments purchased ..................... 983,125
Payable for shares repurchased ........................ 13,463
Payable to John Hancock Advisers, Inc. and
affiliates - Note B ................................... 48,687
Accounts payable and accrued expenses .................. 37,615
------------
Total Liabilities .................... 1,082,890
----------------------------------------------------
NET ASSETS:
Capital paid-in ........................................ 21,675,535
Accumulated net realized loss on investments and
foreign currency transactions ......................... (184,368)
Net unrealized appreciation of investments ............. 15,229,150
------------
Net Assets ........................... $ 36,720,317
====================================================
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 - $5,075,356/391,822 ........................... $ 12.95
========================================================================
Class B - $31,644,961/2,523,395 ........................ $ 12.54
========================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - $(12.95 x 105.26%) ........................... $ 13.63
========================================================================
<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 ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON JULY 31, 1995. YOU'LL ALSO
FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF THAT
DATE.
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
Year ended July 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest ............................................... $ 60,431
Dividends (net of foreign withholding taxes
of $4,323) ............................................ 45,978
------------
106,409
------------
Expenses:
Investment management fee - Note B .................... 294,993
Distribution/service fee - Note B
Class A ............................................. 11,042
Class B ............................................. 249,491
Transfer agent fee - Note B
Class A ............................................. 13,194
Class B ............................................. 72,966
Custodian fee ......................................... 46,275
Auditing fee .......................................... 31,300
Registration and filing fees .......................... 17,387
Organization expense - Note A ......................... 14,658
Printing .............................................. 12,789
Trustees' fees ........................................ 6,547
Miscellaneous ......................................... 1,473
Legal fees ............................................ 1,239
------------
Total Expenses ....................... 773,354
----------------------------------------------------
Net Investment Loss .................. (666,945)
----------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on investments sold .................. (184,355)
Net realized loss on foreign currency transactions ..... (1,501)
Change in net unrealized appreciation/depreciation
of investments ........................................ 14,483,069
------------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions ........ 14,297,213
----------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............ $ 13,630,268
====================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
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----------------------
FINANCIAL STATEMENTS
----------------------
John Hancock Funds - Discovery Fund
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment loss ........................................................... $ (666,945) $ (831,202)
Net realized gain (loss) on investments sold and foreign currency
transactions ................................................................. (185,856) 1,895,546
Change in net unrealized appreciation/depreciation of investments ............. 14,483,069 (3,261,315)
------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations .............. 13,630,268 (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* ............................................ (5,816,073) (5,063,020)
------------- -------------
NET ASSETS:
Beginning of period ........................................................... 29,763,293 43,363,767
------------- -------------
End of period ................................................................. $ 36,720,317 $ 29,763,293
============= =============
</TABLE>
<TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ................................................... 334,726 $ 3,367,716 2,972,453 $ 30,392,925
Shares issued to shareholders in reinvestment of
distributions ................................................ 10,315 92,837 90,127 825,563
--------
345,041 3,460,553 3,062,580 31,218,488
Less shares repurchased ....................................... (330,231) (3,351,654) (3,119,595) (31,598,574)
-------- ----------- ---------- ------------
Net increase (decrease) ....................................... 14,810 $ 108,899 (57,015) $ (380,086)
======== =========== ========== ============
CLASS B
Shares sold .................................................. 214,582 $ 2,091,432 243,890 $ 2,401,058
Shares issued to shareholders in reinvestment of
distributions ............................................... 79,634 696,802 545,000 4,888,647
-------- ----------- ---------- ------------
294,216 2,788,234 788,890 7,289,705
Less shares repurchased ...................................... (951,880) (8,713,206) (1,238,061) (11,972,639)
-------- ----------- ---------- ------------
Net decrease.................................................. (657,664) $(5,924,972) (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.
10
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----------------------
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>
CLASS A YEAR ENDED JULY 31,
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 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 ............................................ (0.17)+ (0.16)+ (0.16) (0.05)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ............................ 4.83 (0.43) 2.15 (0.40)
------- ------- ------- --------
Total from Investment Operations ............................. 4.66 (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 ................................. $ 12.95 $ 8.56 $ 10.81 $ 8.95
======= ======= ======= =======
Total Investment Return at Net Asset Value ..................... 55.80% (6.45)% 22.33% (4.79)%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ...................... $ 5,075 $ 3,226 $ 4,692 $ 3,866
Ratio of Expenses to Average Net Assets ........................ 2.10% 2.01% 2.17% 1.78%*
Ratio of Net Investment Loss to Average Net Assets ............. (1.73)% (1.64)% (1.61)% (1.20)%*
Portfolio Turnover Rate ........................................ 118% 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 ............................................ (0.22)+ (0.22)+ (0.23) (0.11)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ............................ 4.69 (0.43) 2.14 0.98
------- ------- ------- --------
Total from Investment Operations ............................. 4.47 (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 ................................. $ 12.54 $ 8.34 $ 10.65 $ 8.87
======= ======= ======= =======
Total Investment Return at Net Asset Value ..................... 54.97% (7.18)% 21.63% 10.88%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ...................... $31,645 $26,537 $38,672 $34,636
Ratio of Expenses to Average Net Assets ........................ 2.70% 2.62% 2.86% 2.56%*
Ratio of Net Investment Loss to Average Net Assets ............. (2.34)% (2.24)% (2.26)% (1.56)%*
Portfolio Turnover Rate ........................................ 118% 108% 148% 138%
<FN>
* On an annualized basis.
(a) Class A and Class B shares commenced operations on January 3, 1992 and
August 30, 1991, respectively.
(b) Not annualized.
+ On average month end shares outstanding.
</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.
11
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----------------------
FINANCIAL STATEMENTS
----------------------
John Hancock Funds - Discovery Fund
<TABLE>
SCHEDULE OF INVESTMENTS
July 31, 1995
- --------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY THE
FUND ON JULY 31, 1995. THE MAIN CATEGORY OF SECURITIES, COMMON STOCKS, ARE
FURTHER BROKEN DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH REPRESENT
THE FUNDS "CASH" POSITION, ARE LISTED LAST.
<CAPTION>
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
<S> <C> <C>
COMMON STOCKS
APPLIANCES - HOUSEHOLD(1.15%)
Fedders Corp. ......................... 19,100 $ 128,925
Fedders Corp. (Class A) ............... 60,463 294,755
----------
423,680
----------
BROADCASTING/RADIO/TV (2.26%)
Citicasters, Inc.** ................... 15,000* 498,750
Evergreen Media Corp. (Class A)** ..... 10,000* 330,000
----------
828,750
----------
BUSINESS SERVICES (13.15%)
Alternative Resources Corp.** ......... 50,000 1,500,000
Corrections Corp of America** ......... 15,000* 616,875
CRA Managed Care, Inc.** .............. 10,000* 227,500
Li & Fung Ltd. (Hong Kong) ............ 300,000 238,410
PhyCor, Inc.** ........................ 15,000* 615,000
PMT Services, Inc.** .................. 30,000* 547,500
Seattle Filmworks, Inc.** ............. 45,000* 894,375
RTW, Inc.** ........................... 10,000* 188,750
----------
4,828,410
----------
COMPUTERS (18.06%)
Astea International, Inc.** ........... 5,000* 106,250
Baan Company, N.V.** .................. 3,500* 116,812
CBT Group PLC, American Depositary
Receipt ** ........................... 14,000* 634,375
Discreet Logic, Inc. ** ............... 2,500* 105,000
Eagle Point Software Corp.** .......... 20,000* 415,000
HCIA, Inc.** .......................... 22,900* 681,275
HNC Software, Inc.** .................. 20,700* 501,975
Informix Corp.** ...................... 34,000* 1,007,250
Novadigm, Inc.** ...................... 6,000* 124,500
Phamis, Inc.** ........................ 14,000* 409,500
Pinnacle Systems, Inc.** .............. 25,000* 676,563
Read-Rite Corp.** ..................... 20,000* 825,000
Sterling Software, Inc.** ............. 15,000 615,000
Symantec Corp.** ...................... 15,000* 408,750
----------
6,627,250
----------
ELECTRONICS (17.96%)
ANADIGICS, Inc.** ..................... 8,000* 224,000
Aseco Corp.** ......................... 35,000* 695,625
Cypress Semiconductor Corp.** ......... 27,000* 1,424,250
Integrated Silicon Solution, Inc.** ... 15,000* 1,035,000
LSI Logic Corp.** ..................... 30,000 1,402,500
OnTrak Systems, Inc.** ................ 6,000* $ 175,500
Teradyne, Inc.** ...................... 20,000 1,637,500
----------
6,594,375
----------
MACHINE - DIVERSIFIED (3.48%)
AG Associates, Inc.** ................. 10,000* 368,125
ASM Lithography Holding, N.V.** ....... 13,000* 728,000
Opal, Inc.** .......................... 7,500* 181,875
----------
1,278,000
----------
MEDICAL/DENTAL (16.59%)
American Oncology Resources, Inc.** ... 18,000* 596,250
Boston Scientific Corp.** ............. 30,000* 1,095,000
Idexx Laboratories, Inc.** ............ 45,000 1,383,750
i-STAT Corp.** ........................ 10,000* 372,500
InStent, Inc.** ....................... 20,000* 265,000
Isolyser Co, Inc.** ................... 16,750* 598,813
Omnicare, Inc. ....................... 40,000 1,240,000
Research Industries Corp.** ........... 16,000* 380,000
Ventritex, Inc.** ..................... 10,000* 159,375
----------
6,090,688
----------
PHARMACEUTICALS (1.40%)
Dura Pharmaceuticals, Inc.** .......... 20,000* 515,000
----------
PHOTO EQUIPMENT (1.69%)
Avid Technology, Inc.** ............... 14,000 621,250
----------
PRECIOUS METALS/JEWELRY (0.69%)
Fossil, Inc.** ........................ 10,000* 255,000
-------
RETAIL (10.02%)
Dollar General Corp. ................. 22,031 743,555
Dollar Tree Stores, Inc.** ............ 9,100* 276,412
Elkjop Norge AS (Norway) .............. 14,300* 324,863
Geerlings & Wade Inc.** ............... 34,200* 410,400
Global DirectMail Corp.** ............. 14,200* 355,000
Micro Warehouse, Inc.** ............... 20,000 975,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
----------------------
FINANCIAL STATEMENTS
----------------------
John Hancock Funds - Discovery Fund
<TABLE>
<CAPTION>
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
<S> <C> <C>
RETAIL (CONTINUED)
Next PLC (United Kingdom) ............. 97,000* $ 594,445
-----------
3,679,675
-----------
RESTAURANTS/FOOD SERVICE (2.07%)
Rock Bottom Restaurants, Inc.** ....... 29,500* 759,625
-----------
TELECOMMUNICATIONS (6.61%)
DSP Communications, Inc.** ............ 25,000* 631,250
Palmer Wireless, Inc.** ............... 16,500* 338,250
Spectrian Corp.** ..................... 20,000* 877,500
Telcom Semiconductor Inc.** ........... 2,000* 30,375
U.S. Order, Inc.** .................... 25,000* 550,000
-----------
2,427,375
-----------
TEXTILES (2.15%)
Tommy Hilfiger Corp.** ................ 25,000 790,625
-----------
TOYS/GAMES/HOBBY PRODUCTS (3.20%)
First Team Sports, Inc.** ............. 41,200* 1,176,775
-----------
TOTAL COMMON STOCKS
(Cost $21,667,328) ....... (100.48%) $36,896,478
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAR VALUE
ISSUER DISCRIPTION RATE (OOO's OMITTED) MARKET VALUE
- ------------------ ---- --------------- ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (0.12%)
Investment in a joint repurchase
agreement transaction with
Lehman Brothers, Inc. - Dated
07-31-95, Due 08-01-95 (secured
by U.S. Treasury Bond, 13.125%
due 05-15-01 , U.S. Treasury
Note, 8.625% due 10-15-95,
and U.S.Treasury Bill, 5.47%
due 06-27-96) Note A .......... 5.85% 43 $ 43,000
-----------
TOTAL SHORT-TERM INVESTMENTS (0.12%) 43,000
-------- -----------
TOTAL INVESTMENTS (100.60%) $36,939,478
======== ===========
<FN>
* Securities, other than short-term investments, newly added to the portfolio
during the year ended July 31, 1995.
** Non-income producing security.
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of net assets of the fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 14
----------------------
FINANCIAL STATEMENTS
----------------------
John Hancock Funds - Discovery Fund
Portfolio Concentration
- --------------------------------------------------------------------------------
THE DISCOVERY FUND INVESTS PRIMARILY IN SECURITIES ISSUED IN THE UNITED STATES
OF AMERICA. 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
JULY 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...................................... 0.65%
Norway......................................... 0.89
United Kingdom................................. 1.62
United States.................................. 97.44
------
TOTAL INVESTMENTS 100.60%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 15
-------------------------------
NOTES TO FINANCIAL STATEMENTS
-------------------------------
John Hancock Funds - Discovery Fund
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 two classes of shares of the Fund,
designated as Class A and Class B shares. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemptions, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under the 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. All portfolio
transactions initially expressed in terms of foreign currencies have been
translated into U.S. dollars as described in "Foreign Currency Translation"
below.
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 and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $184,368 of capital loss
carryforward available, to the extent provided by regulations, to offset future
net realized capital gains. If such carryforward is used by the Fund, no capital
gain distributions will be made. The carryforward expires July 31, 2003.
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
15
<PAGE> 16
-------------------------------
NOTES TO FINANCIAL STATEMENTS
-------------------------------
John Hancock Funds - Discovery Fund
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 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 investments 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 July 31, 1995, JH Funds received net sales charges of $21,836 with
regard to sales of Class A shares. Out of this amount, $3,274 was retained and
used for printing prospectuses, advertising, sales literature and other
purposes, $13,065 was paid as sales commissions to unrelated broker-dealers and
$5,497 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker
Anthony") and Sutro & Co., Inc.
16
<PAGE> 17
-------------------------------
NOTES TO FINANCIAL STATEMENTS
-------------------------------
John Hancock Funds - Discovery Fund
("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 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 July 31, 1995
contingent deferred sales charges received by JH Funds amounted to $42,273.
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 the number of shareholder accounts and
certain out-of-pocket expenses. 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.
Mr. Edward J. Boudreau, Jr. is a director and officer of the Adviser, and/or
its affiliates, as well as a Trustee of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. Effective with the fees paid for
1995, 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 will make investments into other John Hancock funds,
as applicable, to cover its liability with regard to the deferred compensation.
Investments to cover the Fund's deferred compensation liability will be recorded
on the Fund's books as an other asset. The deferred compensation liability will
be marked to market on a periodic basis and income earned by the investment will
be recorded on the Fund's books.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended July 31, 1995, aggregated $34,136,849 and $38,536,977, respectively. There
were no purchases or sales of long-term obligations of the U.S. government and
its agencies during the period ended July 31, 1995.
The cost of investments owned at July 31, 1995 for federal income tax
purposes was $21,710,328. Gross unrealized appreciation and depreciation of
investments aggregated $15,291,081 and $61,931 respectively, resulting in net
unrealized appreciation of $15,229,150.
17
<PAGE> 18
-------------------------------
NOTES TO FINANCIAL STATEMENTS
-------------------------------
John Hancock Funds - Discovery Fund
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended July 31, 1995, the Fund has reclassified $1,501 from
accumulated net realized loss on investments to accumulated net investment loss
and reclassified the accumulated net investment loss of $668,446 to capital
paid-in. This represents the cumulative amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of July 31,
1995. These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to certain differences in the computation
of distributable income and capital gains under federal tax rules versus
generally accepted accounting principles.
18
<PAGE> 19
John Hancock Funds - Discovery Fund
REPORT OF ERNST &YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock Discovery Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Discovery Fund (the "Fund"), including the schedule of investments, as
of July 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights of John Hancock Discovery Fund for the period
ended July 31, 1992, were audited by other independent auditors whose report
dated September 18, 1992 expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Discovery Fund at July 31, 1995, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and its financial highlights for each of the three years in
the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
September 8, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended July 31,
1995.
The Fund designated distributions to shareholders of $857,100 as long-term
capital gain dividends. Shareholders were mailed a 1994 U.S. Treasury Department
Form 1099-DIV in January 1995 representing their proportionate share. The Fund
has not paid any distributions of ordinary income dividends during the fiscal
year ended July 31, 1995.
None of the distributions noted above qualify for the corporate dividends
received deduction.
19
<PAGE> 20
[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 the page.
A box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond 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 3400A 7/95
