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John Hancock Funds
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Discovery
Fund
SEMI-ANNUAL REPORT
January 31, 1996
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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.*
DR. JOHN A. MOORE*
PATTI McGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
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
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" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders - technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place - slow economic growth, muted inflation and decent corporate earnings - it
would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always be
able to count on consistent customer service performance. At John Hancock Funds,
we never stop working to find ways to sustain and improve the quality of
information and assistance we provide you. Our commitment to this task is no
less than John Hancock's loyalty was to his fledgling country when he is said to
have uttered, "if it does the public good, burn Boston." We won't go that far,
of course, but we share our namesake's dedication to putting the public before
all else.
In our case, that public is you, our shareholders. We take very seriously the
role you have entrusted to us, that of helping you achieve your financial goals.
Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY BERNICE S. BEHAR, PORTFOLIO MANAGER
John Hancock
Discovery Fund
Market moves higher over the last six months, but technology
stocks retreat; Fund expands investment universe
Throughout the past six months, the Dow Jones Industrial Average - one of the
most widely-watched stock market barometers - continued to grab headlines as it
catapulted to a series of new highs. In the third quarter of 1995, virtually the
entire stock market benefited from strong company earnings, a relatively benign
inflation environment and a moderately growing economy. But late in the fourth
quarter and in early January, the technology sector experienced a sharp pullback
even as many other areas of the market were still on the rise. Investors began
to worry that the high prices some technology stocks were commanding might be
unrealistic given their future earnings prospects.
For the six-month period ended January 31, 1996, John Hancock Discovery
Fund's Class A and Class B shares had total returns of 3.52% and 3.15%,
respectively, at net asset value. By comparison, the average small company
growth fund returned 5.18% for the same period, according to Lipper Analytical
Services.1 In November, 1995, shareholders voted to expand the Fund's investment
universe to include not only small- and medium-sized companies, but also large
capitalization stocks in an effort to enhance the Fund's flexibility. This
change necessitated that the Fund move into the Lipper growth fund category.
"...the technology sector experienced a sharp pullback..."
[A 2 1/2" x 3 1/2" photo of Bernice S. Behar at bottom right. Caption reads:
"Bernice S. Behar, Portfolio Manager."]
3
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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) Idexx Laboratories 4.3% 2) Omnicare 4.0% 3)
Zoran 3.8% 4) Boston Scientific 3.7% 5) Alternative Resources 3.3%. A footnote
below reads: "As a percentage of net assets on January 31, 1996."]
"Throughout the period, we increased our stake in health-care holdings..."
Beginning with this report, the Fund will be comp ared to the average growth
fund, which returned 8.28% for the six months ended January 31, 1996, according
to Lipper Analytical Services.
Technology ups and downs
In the latter part of the period, investors became wary of semiconductor stocks
as microchip supply caught up to, and in some instances surpassed, demand. Our
exposure to these companies caused the Fund's performance to suffer. As the
downturn occurred, we quickly pared back most of our semiconductor-related
holdings. In their place, we added Internet-related and software companies that
can help companies improve workplace productivity. One successful addition was
CMG Information Services, which invests in other Internet-related companies. Its
price nearly doubled during the period.
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance ... and what's behind the numbers." The first listing is CBT Group
followed by an up arrow and the phrase "Strong ties in Microsoft, Oracle." The
second listing is Corrections Corp. of America followed by an up arrow and the
phrase "Leader in private prison management." The third listing is Micro
Warehouse followed by a down arrow and the phrase "Problems with major vendor
Apple Computer." Footnote below reads: "See "Schedule of Investments."
Investment holdings are subject to change."]
CMG's most well-known product is Lycos, the popular World Wide Web "crawler"
that gives users easy access to the Internet. We also added CKS Group, an
advertising company that provides World Wide Web home-page design for several
Fortune 500 companies, among others. One of our strongest performers was
software company CBT Group, which contracted with Microsoft to develop a
training software package for Windows '95. This form of training is a
cost-effective way for companies to get their employees up to speed with new
software developments. Another productivity enhancer we added was Project
Software & Development, which provides client-server based maintenance software
for manufacturing facilities and prod uction equipment. As a whole, technology
stocks represented approximately 40% of the Fund's net assets throughout the
period.
The recent pullback in the technology sector was not that surprising given
the huge run-up it experienced during most of 1995. Looking ahead, we believe
that many technology stocks can continue to maintain their high levels of
growth. But the key will be selectivity. It's clear that there has been some
divergence in the market, and that only companies that can justify their stock
prices with high rates of earnings growth will continue to do well.
Health-care holdings grow
Throughout the period we increased our stake in health-care holdings to about
23% of net assets. We focused on finding companies that provided a niche
product, such as biotechnology company Myriad Genetics, which has isolated a
number of genes, including the gene tied to breast cancer; Idexx Laboratories, a
long time
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 six months ended January 31, 1996." The
chart is scaled in increments of 2% from bottom to top, with 10% at the top and
0% at the bottom. Within the chart, there are four solid bars. The first
represents the 3.52% total return for John Hancock Discovery Fund: Class A. The
second represents the 3.15% total return for John Hancock Discovery Fund: Class
B. The third represents the 5.18% total return for the average small-company
growth fund. The fourth represents the 8.28% total return for the average growth
fund. The footnote below states: "Total returns for John Hancock Discovery Fund
are at net asset value with all distributions reinvested. The average growth and
small-company growth funds are tracked by Lipper Analytical Services. See
following page for historical performance information."]
holding in the Fund which provides health testing for animals; and Dura
Pharmaceuticals, which provides over-the-counter products for respiratory
ailments.
Other opportunities
We added some natural resource stocks, particularly oil and natural gas
exploration and production companies. As Third World nations continue to develop
their economies, their use of energy is exploding. Energy demand is expected to
continue to rise while supply is expected to remain somewhat low. One of our
largest and most successful holdings in this area was Chesapeake Energy Corp.,
with rigs in Texas and Oklahoma.
Within the retail sector, we continued to shy away from traditional apparel
companies and discount retailers, and are focusing instead on companies with
niche products and services. Because the Fund is now allowed to buy larger
companies, we were able to add PetSmart, one of the largest and most successful
pet supply chains. We also added Rainforest Cafe, a theme-restaurant chain that
started with one store in the Mall of America in Minnesota and has plans to open
several more this year, including a new facility at Disney World. Garden Ridge,
a chain of craft stores, is attractive because we believe it has a strong growth
strategy and solid management.
"...we're still optimistic about the prospect for growth stocks."
Strategy and outlook
Going forward, we'll continue to concentrate on finding companies with
sustainable earnings growth rates of 20-25%, no matter what their size. As for
the market, we're still optimistic about the prospect for growth stocks. In our
view, interest rates could continue to fall. While the Federal Reserve may not
have much latitude to reduce interest rates further in front of the presidential
election, the market could drive interest rates down independent of any Fed
action. If either the economy slows or interest rates tick higher, that could
drag on corporate profits. But by their nature, growth stocks tend to be more
resilient than other types of stocks during periods of economic weakness. What's
more, in our view many growth stocks still have room to rise. As a whole, the
Fund's holdings are trading at a discount to their growth rate, which means
their prices still aren't fully reflecting their business prospects. Given that,
we're optimistic that 1996 can be another good period for growth stocks.
1 Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end
of the Fund's period discussed in this report. Of course, the manager's
views are subject to change as market and other conditions warrant.
5
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A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the 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. Performance
is affected by a 12b-1 plan. 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.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended December 31, 1995
ONE LIFE OF
YEAR FUND
---- ----
John Hancock Discovery Fund: Class A 39.89% 68.54%(1)
John Hancock Discovery Fund: Class B 41.21% 99.97%(2)
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended December 31, 1995
ONE LIFE OF
YEAR FUND
---- ----
John Hancock Discovery Fund: Class A 39.89% 13.97%(1)
John Hancock Discovery Fund: Class B 41.21% 17.36%(2)
Notes to Performance
(1) Class A shares started on January 3, 1992.
(2) Class B shares started on August 30, 1991.
6
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John
Hancock Discovery Fund would be worth on January 31, 1996, 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 used often as a measure of stock market performance.
[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 hypothetical $10,000 investment made
in the Discovery Fund on January 3, 1992, before sales charge, and is equal to
$17,574 as of January 31, 1996. The second line represents the value of the
Standard & Poor's 500 Stock Index and is equal to $17,063 as of January 31,
1996. The third line represents the Discovery Fund after sales charge and is
equal to $16,703 as of January 31, 1996.]
[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 $20,010 as of January 31, 1996. The second line
represents the Discovery Fund after contingent deferred sales charge and is
equal to $19,810 as of January 31, 1996. The third line represents the value of
the Standard & Poor's 500 Stock Index and is equal to $18,183 as of January 31,
1996.]
7
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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, 1996. 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.
Statement of Assets and Liabilities
January 31, 1996 (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Assets:
Investments at value - Note C:
Common stocks (cost - $24,223,445) .................. $39,338,116
Joint repurchase agreement (cost - $1,472,000) ...... 1,472,000
-----------
40,810,116
Cash................................................... 413
Receivable for investments sold ....................... 929,900
Receivable for shares sold ............................ 150,023
Dividends and interest receivable ..................... 4,772
Deferred organization expenses - Note A ............... 8,429
Prepaid expenses ...................................... 29,528
Other assets .......................................... 993
-----------
Total Assets .............. 41,934,174
-----------------------------------------
Liabilities:
Payable for investments purchased .................... 886,255
Payable to John Hancock Advisers, Inc. and
affiliates - Note B ................................ 12,464
-----------
Total Liabilities ......... 898,719
-----------------------------------------
Net Assets:
Capital paid-in ...................................... 25,154,211
Accumulated net realized gain on investments and
foreign currency transactions ...................... 1,170,347
Net unrealized appreciation of investments ........... 15,114,671
Net investment loss .................................. ( 403,774)
-----------
Net Assets ..................... $41,035,455
----------------------------------------------
----------------------------------------------
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 - $6,583,114/495,944 ......................... $ 13.27
--------------------------------------------------------------------
--------------------------------------------------------------------
Class B - $34,452,341/2,691,702 ...................... $ 12.80
--------------------------------------------------------------------
--------------------------------------------------------------------
Maximum Offering Price Per Share*
Class A - ($13.27 x 105.26%) ......................... $ 13.97
--------------------------------------------------------------------
--------------------------------------------------------------------
* 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.
Statement of Operations
Six months ended January 31, 1996 (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Investment Income:
Interest .............................................. $ 25,915
Dividends (net of foreign withholding taxes of $1,057). 18,141
-----------
44,056
-----------
Expenses:
Investment management fee - Note B .................... 175,917
Distribution/service fee - Note B
Class A...................................... 8,857
Class B...................................... 163,089
Transfer agent fee - Note B ..................... 28,190
Registration and filing fees .................... 23,474
Custodian fee ................................... 15,103
Auditing fee .................................... 10,552
Printing ........................................ 8,157
Organization expense - Note A ................... 7,381
Legal fees ...................................... 3,766
Trustees' fees .................................. 2,664
Miscellaneous ................................... 680
-----------
Total Expenses .................. 447,830
-----------------------------------------------
Net Investment Loss ............. ( 403,774)
-----------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions
Net realized gain on investments sold ................. 1,766,862
Net realized loss on foreign currency transactions .... ( 14)
Change in net unrealized appreciation/depreciation
of investments ...................................... ( 114,479)
-----------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions ... 1,652,369
-----------------------------------------------
Net Increase in Net Assets
Resulting from Operations ....... $ 1,248,595
-----------------------------------------------
-----------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
Statement of Changes in Net Assets
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 1996 JULY 31,
(UNAUDITED) 1995
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ........................................................................ ($ 403,774) ($ 666,945)
Net realized gain (loss) on investments sold and foreign currency transactions ............. 1,766,848 ( 185,856)
Change in net unrealized appreciation/depreciation of investments ......................... ( 114,479) 14,483,069
----------- -----------
Net Increase in Net Assets Resulting from Operations ......................................... 1,248,595 13,630,268
----------- -----------
Distributions to Shareholders:
Distributions from net realized gain on investments sold
Class A - ($0.1312 and $0.2685 per share, respectively) .................................. ( 61,866) ( 101,860)
Class B - ($0.1312 and $0.2685 per share, respectively) .................................. ( 350,267) ( 755,311)
----------- -----------
Total Distributions to Shareholders .................................................... ( 412,133) ( 857,171)
----------- -----------
From Fund Share Transactions - Net* .......................................................... 3,478,676 ( 5,816,073)
----------- -----------
Net Assets:
Beginning of period ........................................................................ 36,720,317 29,763,293
----------- -----------
End of period (including net investment loss of $403,774 and none, respectively) ............. $41,035,455 $36,720,317
=========== ===========
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
JANUARY 31, 1996 YEAR ENDED
(UNAUDITED) JULY 31, 1995
------------------ ------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
CLASS A
Shares sold .................................................................. 926,457 $11,970,190 334,726 $3,367,716
Shares issued to shareholders in reinvestment of distributions ............... 4,495 57,719 10,315 92,837
------- ----------- ------- ----------
............................................................................... 930,952 12,027,909 345,041 3,460,553
Less shares repurchased ...................................................... (826,830) ( 10,708,964) (330,231) ( 3,351,654)
------- ----------- ------- ----------
Net increase ................................................................. 104,122 $ 1,318,945 14,810 $ 108,899
======= =========== ======= ==========
CLASS B
Shares sold .................................................................. 399,442 $ 5,005,228 214,582 $2,091,432
Shares issued to shareholders in reinvestment of distributions ............... 25,501 315,955 79,634 696,802
------- ----------- ------- ----------
............................................................................... 424,943 5,321,183 294,216 2,788,234
Less shares repurchased ...................................................... (256,636) ( 3,161,452) (951,880) ( 8,713,206)
------- ----------- ------- ----------
Net increase (decrease) ...................................................... 168,307 $ 2,159,731 (657,664) ($5,924,972)
======= =========== ======= ==========
</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.
9
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FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
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:
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1996 ---------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(a)
----------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............ $ 12.95 $ 8.56 $ 10.81 $ 8.95 $ 9.40
------- ------- ------- ------ -------
Net Investment Loss ............................. ( 0.10)+ ( 0.17)+ ( 0.16)+ ( 0.16) ( 0.05)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions .................................. 0.55 4.83 ( 0.43) 2.15 ( 0.40)
------- ------- ------- ------ -------
Total from Investment Operations ............ 0.45 4.66 ( 0.59) 1.99 ( 0.45)
------- ------- ------- ------ -------
Less Distributions:
Distributions from Net Realized Gain on
Investments Sold .............................. ( 0.13) ( 0.27) ( 1.66) ( 0.13) --
------- ------- ------- ------ -------
Net Asset Value, End of Period .................. $ 13.27 $ 12.95 $ 8.56 $ 10.81 $ 8.95
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (c) .. 3.52%(b) 55.80 ( 6.45%) 22.33% ( 4.79%)(b)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ....... $ 6,583 $ 5,075 $ 3,226 $ 4,692 $ 3,866
Ratio of Expenses to Average Net Assets ......... 1.74%* 2.10% 2.01% 2.17% 1.78%*
Ratio of Net Investment Loss to Average
Net Assets .................................... ( 1.51%)* ( 1.73%) ( 1.64%) ( 1.61%) ( 1.20%)*
Portfolio Turnover Rate ......................... 73% 118% 108% 148% 138%
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............ $ 12.54 $ 8.34 $ 10.65 $ 8.87 $ 8.00
------- ------- ------- ------- -------
Net Investment Loss ............................. ( 0.14)+ ( 0.22)+ ( 0.22)+ ( 0.23) ( 0.11)
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions . 0.53 4.69 ( 0.43) 2.14 0.98
------- ------- ------- ------- -------
Total from Investment Operations ............ 0.39 4.47 ( 0.65) 1.91 0.87
------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain on
Investments Sold .............................. ( 0.13) ( 0.27) ( 1.66) ( 0.13) --
------- ------- ------- ------- -------
Net Asset Value, End of Period .................. $ 12.80 $ 12.54 $ 8.34 $ 10.65 $ 8.87
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (c) .. 3.15%(b) 54.97% ( 7.18%) 21.63% 10.88%(b)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ....... $34,452 $31,645 $26,537 $38,672 $34,636
Ratio of Expenses to Average Net Assets ......... 2.43%* 2.70% 2.62% 2.86% 2.56%*
Ratio of Net Investment Loss to Average
Net Assets .................................... ( 2.20%)* ( 2.34%) ( 2.24%) ( 2.26%) ( 1.56%)*
Portfolio Turnover Rate ......................... 73% 118% 108% 148% 138%
</TABLE>
* 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.
(c) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
+ On average month end shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
10
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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, 1996. 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.
Schedule of Investments
January 31, 1996 (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS
Advertising (1.32%)
CKS Group, Inc.** ....................... 15,000 $ 540,000
----------
Business Services (15.59%)
Apollo Group, Inc.** .................... 24,400 908,900
Alternative Resources Corp.** ........... 47,000 1,351,250
Central Parking Corp .................... 20,000 577,500
Corrections Corp of America** ........... 30,000 1,278,750
PhyCor, Inc.** .......................... 22,500 1,080,000
PMT Services, Inc.** .................... 60,000 1,200,000
----------
6,396,400
----------
Computers (25.00%)
Baan Company, N.V.** .................... 20,500 889,188
CBT Group PLC, American Depositary
Receipt ** ............................ 21,000 1,139,250
Fractal Design Corp.** .................. 40,000 525,000
HNC Software, Inc.** .................... 22,700 1,316,600
Iomega Corp.** .......................... 20,000 887,500
MDL Information Systems, Inc.** ......... 30,000 573,750
Network Appliance, Inc.** ............... 20,000 615,000
Open Text Corp.** ....................... 3,000 49,875
Phamis, Inc.** .......................... 15,000 391,875
Project Software & Development, Inc.** .. 20,000 710,000
Red Brick Systems, Inc.** ............... 4,400 148,500
Secure Computing Corp.** ................ 15,000 583,125
Sterling Software, Inc.** ............... 15,000 888,750
Zoran Corp.** ........................... 40,000 1,540,000
----------
10,258,413
----------
Electronics (1.29%)
Aseco Corp.** ........................... 20,000 280,000
ESS Technology, Inc.** .................. 13,000 250,250
----------
530,250
----------
Machine - Diversified (1.42%)
ASM Lithography Holding, N.V.** ......... 13,000 581,750
----------
Medical/Dental (19.24%)
American Oncology Resources, Inc.** ..... 13,000 614,250
Boston Scientific Corp.** ............... 30,000 1,537,500
CNS, Inc.** ............................. 15,000 256,875
ESC Medical Systems Ltd.** .............. 7,500 190,312
Idexx Laboratories, Inc.** .............. 35,000 1,758,750
i-STAT Corp.** .......................... 10,000 330,000
InStent, Inc.** ......................... 25,000 493,750
Medical/Dental (continued)
Isolyser Co, Inc.** ..................... 18,500 $ 249,750
Myriad Genetics, Inc.** ................. 25,000 837,500
Omnicare, Inc. .......................... 35,000 1,627,500
----------
7,896,187
----------
Oil & Gas - Exploration (2.72%)
Benton Oil & Gas Co.** .................. 6,100 75,487
Chesapeake Energy Corp.** ............... 22,500 1,040,625
----------
1,116,112
----------
Pharmaceuticals (4.23%)
Dura Pharmaceuticals, Inc.** ............ 30,000 1,155,000
Elan Corp.PLC, American Depositary
Receipt** ............................... 10,000 580,000
----------
1,735,000
----------
Photo Equipment (2.24%)
Seattle Filmworks, Inc.** ............... 40,000 920,000
----------
Publishing - Newspaper (1.64%)
Desktop Data, Inc.** .................... 25,000 675,000
----------
Retail (10.94%)
Elkjop Norge AS (Norway) ................ 14,300 294,210
Garden Ridge Corp.** .................... 20,400 673,200
Global DirectMail Corp.** ............... 14,200 395,825
Henry Schein, Inc.** .................... 25,000 737,500
Micro Warehouse, Inc.** ................. 10,300 386,250
Next PLC (United Kingdom) ............... 97,000 671,269
PetSmart, Inc.** ........................ 32,000 976,000
Strawbridge & Clothier - Class A ........ 14,500 355,250
----------
4,489,504
----------
Restaurants/Food Service (1.91%)
Rainforest Cafe, Inc.** ................. 28,000 784,000
----------
Telecommunications (6.47%)
CMG Information Services, Inc.** ........ 10,000 592,500
DSP Communications, Inc.** .............. 25,000 1,075,000
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Telecommunications (continued)
Omnipoint Corp.** ...................... 25,000 $ 512,500
Palmer Wireless, Inc.** ................ 11,500 195,500
P-Com, Inc.** .......................... 20,000 280,000
-----------
2,655,500
-----------
Textiles - Apparel Manufacturing (1.85%)
Tommy Hilfiger Corp.** ................. 20,000 760,000
-----------
TOTAL COMMON STOCK
(Cost $24,223,445) ...... (95.86%) 39,338,116
-----------
INTEREST PAR VALUE
RATE (000'S OMITTED)
---- ---------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.59%)
Investment in a joint repurchase
agreement transaction with
Lehman Brothers, Inc. -
Dated 01-31-96, Due 02-01-96
(secured by U.S. Treasury Bond,
7.250% due 05-15-16, 8.875%
due 02-15-19, 6.250% due
08-15-23, 7.500% due 11-15-16
and 11.875% due 11-15-03) -
Note A ............................ 5.92% 1,472 1,472,000
-----------
TOTAL SHORT-TERM INVESTMENTS ( 3.59%) 1,472,000
------ -----------
TOTAL INVESTMENTS (99.45%) $40,810,116
====== ===========
** 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.
Portfolio Concentration (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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 January 31, 1996 assigned to country
categories.
MARKET VALUE
OF SECURITIES
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
Norway ....................................... 0.72%
United Kingdom ............................... 1.64
United States ................................ 97.09
-----
TOTAL INVESTMENTS 99.45%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
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. The Trust consists
of one series portfolio: John Hancock Discovery Fund (the "Fund"). The
investment objective of the Fund is to achieve long-term growth of capital.
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 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.
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.
13
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
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, effective December 1, 1995,
the Fund pays a monthly management fee to the Adviser, for a continuous
investment program equivalent, on an annual basis, to the sum of (a) 0.75% of
the first $750,000,000 of the Fund's average daily net asset value and (b) 0.70%
of the Fund's average daily net asset value in excess of $750,000,000.
Prior to December 1, 1995, the Fund paid 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. For the period ended January
31, 1996, net sales charges received with regard to sales of Class A shares
amounted to $32,745. Out of this amount, $5,343 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $3,762
was paid as sales commissions to unrelated broker-dealers and $23,640 was paid
as sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., Inc. ("Sutro"), all of which are broker-dealers. 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.
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
14
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
providing distribution related services to the Fund in connection with the sale
of Class B shares. For the period ended January 31, 1996 contingent deferred
sales charges received by JH Funds amounted to $23,339.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B 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 these 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 October 1, 1995, the Fund paid transfer agent fees as
a class specific expense based on the number of shareholder accounts and certain
out-of-pocket expenses. For the two months ended September 30, 1995, the
transfer expense, calculated as a class specific expense, was $3,576 for Class A
and $14,720 for Class B, respectively. Effective October 1, 1995, transfer agent
expense is a fund expense.
Messrs. Edward J. Boudreau, Jr. and Richard S. Scipione are directors and
officers 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 makes 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
are recorded on the Fund's books as an other asset. The deferred compensation
liability is marked to market on a periodic basis and income earned by the
investment is 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 January 31, 1996, aggregated $28,274,959 and $27,445,582, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended January 31, 1996.
The cost of investments owned at January 31, 1996 for federal income tax
purposes was $25,695,445. Gross unrealized appreciation and depreciation of
investments aggregated $15,592,752 and $478,081 respectively, resulting in net
unrealized appreciation of $15,114,671.
15
<PAGE>
================================================================================
ADDITIONAL INFORMATION
John Hancock Funds - Discovery Fund
SHAREHOLDER MEETING
On November 15, 1995, a Special Meeting of the Fund was held to approve the
terms of a new Investment Management Contract, including a reduction in the fee
payable by the Fund for investment management services. The votes were:
1,475,134 FOR, 3,308 AGAINST, and 56,205 ABSTAINING.
The shareholders voted to amend the Fund's fundamental investment objective
and redesignate it as non-fundamental, with the votes as follows: 1,237,850 FOR,
41,462 AGAINST, and 78,597 ABSTAINING.
The shareholders voted to amend the Fund's fundamental investment restriction
with regard to short sales, with the votes as follows: 1,171,240 FOR, 103,955
AGAINST, and 82,713 ABSTAINING.
The shareholders voted to amend the Fund's fundamental investment restriction
with regard to lending portfolio securities, with the votes as follows:
1,156,752 FOR, 111,796 AGAINST, and 89,361 ABSTAINING.
The shareholders voted to elect eighteen Trustees, effective July 1, 1996,
with the votes as follows:
WITHHELD
FOR AUTHORITY
--- ---------
Dennis S. Aronowitz.......... 1,472,921 61,727
William A. Barron, III....... 1,471,511 63,137
Edward J. Boudreau, Jr....... 1,474,651 59,997
Richard P. Chapman, Jr....... 1,473,880 60,768
William J. Cosgrove.......... 1,473,773 60,875
Douglas M. Costle............ 1,474,484 60,164
Leland O. Erdahl............. 1,474,376 60,271
Richard A. Farrell........... 1,474,651 59,997
Gail D. Fosler............... 1,473,853 60,795
William F. Glavin............ 1,470,740 63,908
Patrick Grant................ 1,471,511 63,137
Bayard Henry................. 1,474,651 59,997
Ralph Lowell, Jr............. 1,471,511 63,137
Patti McGill Peterson........ 1,473,804 60,844
Dr. John A. Moore............ 1,471,150 63,498
John W. Pratt................ 1,474,376 60,271
Richard S. Scipione.......... 1,473,015 61,633
Edward J. Spellman........... 1,473,282 61,366
16
<PAGE>
================================================================================
NOTES
John Hancock Funds - Discovery Fund
17
<PAGE>
================================================================================
NOTES
John Hancock Funds - Discovery Fund
18
<PAGE>
================================================================================
NOTES
John Hancock Funds - Discovery Fund
19
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
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Brockton, MA
Permit No. 582
- --------------------------------------------------------------------------------
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.
[RECYCLE BUG] Printed on Recycled Paper JHD 340SA 1/96 3/96
