John Hancock Funds
Discovery
Fund
Annual Report
October 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costile*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore*
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*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
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02110
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 ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Most analysts agree that the Social Security system will run out of
money by the year 2030 unless Congress makes some changes. Although it
seems a long way off, the issue is serious enough that at least one
group has already studied the problem, and experts and politicians alike
have weighed in with a slew of prescriptions. Legislative action could
be in the offing in 1997.
The problem stems from demographic and societal changes. The number
of retirees collecting Social Security is growing rapidly, while the
number of workers supporting the system is shrinking. Consider this: in
1950, there were 16 workers paying into the Social Security system for
each retiree collecting benefits. Today, there are three workers for
each retiree and by 2019 there will be two. Starting then, the Social
Security Administration estimates that the amount paid out in Social
Security benefits will start to be greater than the amount collected in
Social Security taxes. Compounding the issue is the fact that people are
retiring earlier and living longer.
The state of the system has already left many people, especially younger
and middle-aged workers, feeling insecure about Social Security. A
recent survey by the Employee Benefits Research Institute (EBRI) found
that 79% of current workers polled had little confidence in the ability
of Social Security to maintain the same level of benefits as those
received by today's retirees. Instead, they said they expect to use
their own savings or employer-sponsored pensions for their retirement.
Yet, remarkably, another EBRI survey revealed that only slightly more
than half of America's current workers are saving money for retirement.
Fewer than half own IRAs or participate in employer-sponsored pension or
savings plans.
No matter how Social Security's problems get solved, one thing is clear.
Americans need to rely on themselves for accumulating the bulk of their
retirement savings. There's no law that says you should have to reduce
your standard of living once you stop working. So we encourage you to
save all that you can now, so you can live the way you'd like to later.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and
Chief Executive Officer, flush right, next to second
paragraph.
BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGER
John Hancock
Discovery Fund
Growth stocks turn in strong performance for the year;
Fund outpaces competitors
"Growth stocks
made a strong
showing over
the past 12
months."
Recently, the Fund's fiscal year end changed from July to October. What
follows is a discussion of the Fund's performance for the 12 months
ended October 31, 1996.
Growth stocks made a strong showing over the past 12 months. When the
period began in November 1995 conditions were fairly favorable. U.S.
company earnings were strong, interest rates and inflation were low, and
economic growth was moderate. As a group, growth stocks spent the winter
and spring basking in these conditions. But by summer, indications that
the economy was growing faster than expected caused investors to fret
over the prospect of higher inflation and rising interest rates.
Investors generally dislike higher interest rates because they can
translate into higher costs of capital, an important element in the
success of growth companies. What's more, investors started to question
whether the high levels stocks had reached in the previous months could
be justified by future earnings. The stock market took a drubbing in
July, and languished off its previous highs for several weeks. In the
fall, there were signs that the economy wasn't able to sustain its early
growth. Investors breathed a sigh of relief and growth stocks --
particularly the larger companies -- resumed their climb through the end
of October.
A 2 1/4" x 3 1/4" photo of fund management team at bottom
right. Caption reads: "Fund Management Team Members (l-r):
Rob Hallisey, Bernice Behar, Anurag Pandit, Andrew Slabin".
John Hancock Discovery Fund did well both on an absolute and relative
basis over the past 12 months. For the year ended October 31, 1996, the
Fund's Class A and Class B shares had total returns of 29.02% and
28.15%, respectively, at net asset value. Those returns handily outpaced
that of the average growth fund, which returned 18.47% for the same
period, according to Lipper Analytical Services.1 Please see pages six
and seven for longer-term performance information.
Chart with heading "Top Five Common Stock Holdings" at top of
left hand column. The chart lists five holdings: 1) Dura
Pharmaceuticals 2.3%; 2) Transaction Systems Architects 2.2%;
3) Comverse Technology 2.1%; 4) Family Golf Centers 2.0%; 5)
Apollo Group 2.0%. Footnote below states: "As a percentage of
net assets on October 31, 1996."
"Business
service
companies
also were
strong
gainers..."
Productivity enhancers = growth opportunities
Throughout the year we maintained a heavy stake in companies that aid in
improving workplace productivity. CBT Group PLC, which provides
interactive software designed for business information-technology and
education and training, and HNC Software, which develops and produces
client/server software used in decision-making applications, were two of
our strongest performers for much of the year. True, they did suffer
along with most other technology stocks in a July correction, but
they've recently retraced some of their previous losses. And despite
their summer troubles, we're convinced that companies with productivity-
enhancing products and services represent some of the most exciting
growth opportunities over the longer term.
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 Universal Outdoor Holdings
followed by an up arrow and the phrase "Higher advertising prices
boost profits." The second listing is Chesapeake Energy followed
by an up arrow and the phrase "Rising oil, gas prices". The third
listing is DSP Communications followed by a down arrow and the
phrase "Proposed acquisition gets bad reviews". Footnote below
reads: "See "Schedule of Investments." Investment holdings are
subject to change."
Business service companies also were strong gainers during the past year
as more corporations outsourced tasks. Two examples were APAC
Teleservices, which provides telephone-based sales, market and customer-
management services, and National TechTeam, another leader in this area.
We found another exciting growth opportunity in Transaction Systems
Architects, which develops and supports computer software that is used
to process electronic transactions involving ATMs, credit cards, POS
(point-of-sale) terminals and other devices. With consumers using less
and less cash and fewer and fewer checks to make purchases, we believe
that the business of processing transactions will continue to mushroom.
Likewise, we saw burgeoning cellular telephone demand in Europe, which
favored our holdings in Comverse Technology. The company provides
increasingly popular messaging centers, primarily in foreign countries
with digital networks. But the growing demand for cellular services
overseas wasn't enough to protect DSP Communications, which makes chip
sets for digital cell phones, from a fall. After being one of the Fund's
best performers for most of the year, this stock tumbled when investors
reacted negatively to DSP's proposed acquisition of another company.
Winners: advertising, radio and energy
Legislative changes were the primary fuel driving up prices of many of
our advertising and radio holdings. New laws curtailing the tobacco
companies' use of billboards had a positive effect on companies that own
outdoor advertising space. That's because for many years tobacco
companies had negotiated long-term contracts with the billboard
companies at locked-in low rates. When these billboard companies were
able to sell space to other industries, they were able to raise their
prices. That translated into higher revenues, profits and stock prices
for Universal Outdoor Holdings and Lamar Advertising Company. Changes in
radio legislation along with consolidation within the industry led to
big gains for two of our radio holdings. Recently, the FCC allowed radio
companies to own more than one station in some markets. As a result of
that change, EZ Communications was acquired by a larger company at a
significant profit for the Fund. Meanwhile, Intermedia Communications of
Florida was one of the acquirers of radio stations, and its stock
performed well.
Bar chart with heading "Fund Performance" at top of left hand
column. Under the heading is the footnote: "For the year
ended October 31, 1996." The chart is scaled in increments of
5% from bottom to top, with 30% at the top and 0% at the
bottom. Within the chart there are three solid bars. The
first represents the 29.02% Total return for John Hancock
Discovery Fund: Class A. the second represents the 28.15%
total return for John Hancock Discovery Fund: Class B. The
third represents the 18.47% total return for the average
growth fund. Footnote below states: Total returns for John
Hancock Discovery Fund are at net asset value with all
distributions reinvested. The average growth fund is tracked
by Lipper Analytical Services. (1) See following two pages
for historical performance information."
Finally, a strong global economy caused healthy demand for energy. The
ensuing higher oil and natural gas prices favored many of our energy
holdings, including our largest energy holding Chesapeake Energy Corp.
"...smaller
company
earnings are
on track to
outpace those
of larger
companies..."
Outlook and strategy
The market's fall rally was led by larger, more liquid stocks. Even
though many smaller companies -- which are a primary focus of this Fund
- -- made progress, they lagged behind their larger counterparts. But our
sense is that coming months could see a reversal in that trend. For one,
many big stocks are in danger of being viewed as fully or over-priced.
If investors start to look for value, they're likely to find it more
readily in the small-company arena. What's more, the rise in the dollar
continues to favor small companies, which derive little of their
revenues offshore. That means they won't be as susceptible to
unfavorable currency translation as larger companies. Finally, we
believe that smaller company earnings are on track to outpace those of
larger companies in the coming year.
- -----------------------------------------------------------------------
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.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
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 September 30, 1996
One Five Life of
Year Years Fund
------ ----- --------
John Hancock
Discovery Fund: Class A(1) 31.46% N/A 125.06%
John Hancock
Discovery Fund: Class B(2) 32.41% 160.68% 168.26%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended September 30, 1996
One Five Life of
Year Years Fund
------ ----- --------
John Hancock Discovery
Fund: Class A(1) 31.46% N/A 18.66%
John Hancock Discovery
Fund: Class B(2) 32.41% 21.12% 20.56%
Notes to Performance
(1) Class A shares started on January 3, 1992.
(2) Class B shares started on August 30, 1991.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Discovery Fund would be worth on October 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.
Discovery Fund
Class A shares
Line chart with the heading Discovery Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines.The first line represents the value of
the Discovery Fund, before sales charge, and is equal to $21,362 as of
October 31, 1996. The second line represents the value of the
hypothetical $10,000 investment made in the Discovery Fund on January 3,
1992, after sales charge, and is equal to $20,303 as of October 31,
1996. The third line represents the Standard & Poor's 500 Stock Index
and is equal to $19,245 as of October 31, 1996.
Discovery Fund
Class B shares
Line chart with the heading Discovery Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines. The first line represents the value of
the Discovery Fund, before sales charge, and is equal to $24,184 as of
October 31, 1996. The second line represents the value of the
hypothetical $10,000 investment made in the Discovery Fund, after sales
charge, on August 30, 1991, and is equal to $24,084 as of October 31,
1996. The third line represents the value of the Standard & Poor's 500
Stock Index and is equal to $20,508 as of October 31, 1996.
FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common stocks (cost - $115,911,775) $139,443,150
Short-term investments (cost - $7,458,000) 7,458,000
Corporate savings account 5,157
-------------
146,906,307
Receivable for investments sold 4,868,548
Receivable for shares sold 614,628
Interest receivable 1,625
Other assets 1,087
-------------
Total Assets 152,392,195
- ---------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 3,562,000
Payable for shares repurchased 100,521
Payable to John Hancock Advisers, Inc. and affiliates - Note B 149,220
Accounts payable and accrued expenses 59,629
-------------
Total Liabilities 3,871,370
- ---------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 125,425,004
Accumulated net realized loss on investments and
foreign currency transactions (434,554)
Net unrealized appreciation of investments 23,531,462
Accumulated net investment loss (1,087)
-------------
Net Assets $148,520,825
=======================================================================================
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 - $52,478,553/3,252,989 $16.13
=======================================================================================
Class B - $96,042,272/6,208,177 $15.47
=======================================================================================
Maximum Offering Price Per Share*
Class A - ($16.13 x 105.26%) $16.98
=======================================================================================
* 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.
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 October 31, 1996.
You'll also find the net asset value and the maximum offering price per
share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
- ----------------------------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 1, 1996
YEAR ENDED TO OCTOBER 31,
JULY 31, 1996 1996 (1)
------------ ------------
<S> <C> <C>
Investment Income:
Interest $218,223 $154,716
Dividends (net of foreign withholding taxes
of $3,257 and none, respectively) 39,676 4,338
------------ ------------
257,899 159,054
------------ ------------
Expenses:
Investment management fee - Note B 455,664 266,770
Distribution/service fee - Note B
Class A 41,850 40,453
Class B 426,103 220,851
Transfer agent fee - Note B 122,389 111,459
Registration and filing fees 69,843 51,173
Custodian fee 42,793 12,409
Printing 39,116 9,516
Auditing fee 32,850 18,000
Organization expense - Note A 14,659 1,151
Legal fees 13,640 4,561
Trustees' fees 8,159 544
Miscellaneous 2,710 1,079
Financial services fee - Note B -- 8,344
------------ ------------
Total Expenses 1,269,776 746,310
- ----------------------------------------------------------------------------------------------------------
Net Investment Loss (1,011,877) (587,256)
- ----------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
on Investments
and Foreign Currency Transactions:
Net realized gain (loss) on
investments sold 1,749,903 (1,587,969)
Net realized gain (loss) on
foreign currency transactions 1,902 (549)
Change in net unrealized appreciation/
depreciation of investments (1,130,239) 9,432,551
------------ ------------
Net Realized and Unrealized Gain on
Investments and
Foreign Currency Transactions 621,566 7,844,033
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ($390,311) $7,256,777
==========================================================================================================
(1) Effective October 31, 1996, the fiscal period changed from July 31 to October 31.
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.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, PERIOD FROM
---------------------------- AUGUST 1, 1996
1995 1996 OCT. 31, 1996(1)
------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ($666,945) ($1,011,877) ($587,256)
Net realized gain (loss) on investments
sold and foreign currency transactions (185,856) 1,751,805 (1,588,518)
Change in net unrealized appreciation/
depreciation of investments 14,483,069 (1,130,239) 9,432,551
------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 13,630,268 (390,311) 7,256,777
------------ ------------ ------------
Distributions to Shareholders:
Distributions from net realized gain
on investments sold
Class A - ($0.2685, $0.1312, and none
per share, respectively) (101,860) (61,866) --
Class B - ($0.2685, $0.1312, and none
per share, respectively) (755,311) (350,267) --
------------ ------------ ------------
Total Distributions to Shareholders (857,171) (412,133) --
------------ ------------ ------------
From Fund Share Transactions - Net* (5,816,073) 64,682,010 40,664,165
------------ ------------ ------------
Net Assets:
Beginning of period 29,763,293 36,720,317 100,599,883
------------ ------------ ------------
End of period (including accumulated
net investment loss of none,
none, and $1,087, respectively) $36,720,317 $100,599,883 $148,520,825
============ ============ ============
* Analysis of Fund Share Transactions:
YEAR ENDED JULY 31,
----------------------------------------------------------- PERIOD FROM AUGUST 1, 1996
1995 1996 TO OCTOBER 31, 1996 (1)
-------------------------- ---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ------------ ------------ ------------ ------------
CLASS A
Shares sold 334,726 $3,367,716 6,629,390 $105,087,816 6,727,252 $112,934,558
Shares issued to shareholders in
reinvestment of distributions 10,315 92,837 4,495 57,719 -- --
---------- ------------ ------------ ------------ ------------ ------------
345,041 3,460,553 6,633,885 105,145,535 6,727,252 112,934,558
Less shares repurchased (330,231) (3,351,654) (4,904,679) (76,082,263) (5,595,291) (96,031,768)
---------- ------------ ------------ ------------ ------------ ------------
Net increase 14,810 $108,899 1,729,206 $29,063,272 1,131,961 $16,902,790
========== ============ ============ ============ ============ ============
CLASS B
Shares sold 214,582 $2,091,432 3,295,866 $51,516,179 2,908,304 $46,987,243
Shares issued to shareholders in
reinvestment of distributions 79,634 696,802 25,501 315,955 -- --
---------- ------------ ------------ ------------ ------------ ------------
294,216 2,788,234 3,321,367 51,832,134 2,908,304 46,987,243
Less shares repurchased (951,880) (8,713,206) (1,113,915) (16,213,396) (1,430,974) (23,225,868)
---------- ------------ ------------ ------------ ------------ ------------
Net increase (decrease) (657,664) ($5,924,972) 2,207,452 $35,618,738 1,477,330 $23,761,375
========== ============ ============ ============ ============ ============
(1) Effective October 31, 1996, the fiscal period changed from July 31 to October 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency 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 value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each period
indicated, investment returns, key ratios and supplemental data are listed as follows:
YEAR ENDED JULY 31, PERIOD FROM
--------------------------------------------------------------------- AUGUST 1, 1996 TO
1992(1) 1993 1994 1995 1996 OCTOBER 31, 1996(7)
CLASS A ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $9.40 $8.95 $10.81 $8.56 $12.95 $15.09
------- ------- ------- ------- ------- -------
Net Investment Loss (0.05) (0.16) (0.16)(2) (0.17)(2) (0.19)(2) (0.05)(2)
Net Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency Transactions (0.40) 2.15 (0.43) 4.83 2.46 1.09
------- ------- ------- ------- ------- -------
Total from Investment Operations (0.45) 1.99 (0.59) 4.66 2.27 1.04
------- ------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Realized
Gain on Investments Sold -- (0.13) (1.66) (0.27) (0.13) --
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $8.95 $10.81 $8.56 $12.95 $15.09 $16.13
======= ======= ======= ======= ======= =======
Total Investment Return at Net
Asset Value (3) (4.79%)(4) 22.33% (6.45%) 55.80% 17.72% 6.89%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $3,866 $4,692 $3,226 $5,075 $32,009 $52,479
Ratio of Expenses to Average
Net Assets 1.78%(5) 2.17% 2.01% 2.10% 1.72% 1.65%(5)
Ratio of Net Investment Loss
to Average Net Assets (1.20%)(5) (1.61%) (1.64%) (1.73%) (1.26%) (1.20%)(5)
Portfolio Turnover Rate 138% 148% 108% 118% 116% 45%
Average Broker Commission Rate (6) N/A N/A N/A N/A N/A $0.0628
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.00 $8.87 $10.65 $8.34 $12.54 $14.50
------- ------- ------- ------- ------- -------
Net Investment Loss (0.11) (0.23) (0.22)(2) (0.22)(2) (0.27)(2) (0.08)(2)
Net Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency Transactions 0.98 2.14 (0.43) 4.69 2.36 1.05
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.87 1.91 (0.65) 4.47 2.09 0.97
------- ------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain
on Investments Sold -- (0.13) (1.66) (0.27) (0.13) --
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $8.87 $10.65 $8.34 $12.54 $14.50 $15.47
======= ======= ======= ======= ======= =======
Total Investment Return at Net
Asset Value (3) 10.88%(4) 21.63% (7.18%) 54.97% 16.85% 6.69%(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) $34,636 $38,672 $26,537 $31,645 $68,591 $96,042
Ratio of Expenses to Average
Net Assets 2.56%(5) 2.86% 2.62% 2.70% 2.42% 2.37%(5)
Ratio of Net Investment Loss to
Average Net Assets (1.56%)(5) (2.26%) (2.24%) (2.34%) (1.96%) (1.93%)(5)
Portfolio Turnover Rate 138% 148% 108% 118% 116% 45%
Average Broker Commission Rate (6) N/A N/A N/A N/A N/A $0.0628
(1) Class A and Class B shares commenced operations on January 3, 1992 and August 30, 1991, respectively.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) Annualized.
(6) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
(7) Effective October 31, 1996, the fiscal period changed from July 31 to October 31.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Schedule of Investments is a complete list of all securities owned by the
Discovery Fund on October 31, 1996. It's divided into two main categories: common
stocks and short-term investments. Common stocks are further broken down by
industry groups. Short-term investments, which represent the Fund's "cash"
position, are listed last.
Schedule of Investments
October 31, 1996
- -------------------------------------------------------------------------------------------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS
Advertising (4.52%)
Catalina Marketing Corp.* 15,000 $763,125
Lamar Advertising Co.* 80,000 2,200,000
Outdoor Systems, Inc.* 40,000 1,790,000
Universal Outdoor Holdings, Inc.* 67,000 1,968,125
------------
6,721,250
------------
Automobile / Trucks (2.98%)
Cross-Continent Auto Retailers, Inc.* 80,000 2,050,000
Gentex Corp.* 100,000 2,375,000
------------
4,425,000
------------
Broker Services (1.04%)
E* TRADE Group, Inc.* 139,000 1,546,375
------------
Business Services - Misc (6.91%)
ABR Information Services, Inc.* 30,000 2,077,500
APAC Teleservices, Inc.* 59,900 2,762,887
Corrections Corp of America* 74,000 1,924,000
RMH Teleservices, Inc.* 114,600 845,175
Superior Consultant Holdings Corp.* 3,000 73,500
Ultrak, Inc.* 98,000 2,584,750
------------
10,267,812
------------
Computers (17.98%)
Aspect Development, Inc.* 81,900 2,037,262
Aurum Software, Inc.* 6,000 190,500
Baan Co., N.V. (Netherlands)* 70,800 2,619,600
CBT Group PLC, American Depositary
Receipts (ADR) (Ireland)* 51,900 2,854,500
CCC Information Service Group* 75,200 1,410,000
CyberMedia, Inc.* 2,600 57,850
Edify Corp.* 20,000 278,750
HNC Software, Inc.* 82,100 2,586,150
International Network Services, Inc. * 12,000 429,000
JDA Software Group, Inc.* 67,900 2,334,062
MDL Information Systems, Inc.* 11,900 182,962
National TechTeam, Inc.* 90,000 2,430,000
Orckit Communications Ltd. (Israel)* 38,200 458,400
Project Software & Development, Inc.* 60,000 2,040,000
Saville Systems Ireland PLC, (ADR)
(Ireland)* 25,000 1,078,125
Transaction Systems Architects, Inc.
(Class A)* 80,000 3,320,000
Trusted Information Systems, Inc.* 3,000 40,500
Versant Object Technology Corp* 119,000 2,320,500
XLConnect Solutions, Inc.* 1,400 40,950
------------
26,709,111
------------
Diversified Operations (0.19%)
Alyn Corp.* 21,000 288,750
------------
Electronics (3.22%)
DSP Communications, Inc.* 64,000 2,432,000
Fusion Systems Corp.* 6,000 108,000
SRS Labs, Inc.* 142,500 2,244,375
------------
4,784,375
------------
Finance (9.71%)
Aames Financial Corp. 55,100 2,458,838
Cityscape Financial Corp.* 80,000 2,060,000
Concord EFS, Inc.* 35,000 1,015,000
IMC Mortgage Co.* 75,700 2,838,750
Medallion Financial Corp.* 134,000 1,926,250
Metris Companies, Inc.* 74,400 1,767,000
PMT Services, Inc.* 117,500 2,350,000
------------
14,415,838
------------
Leisure (10.11%)
Cinar Films, Inc. (Class B) (Canada)* 115,000 2,817,500
Dover Downs Entertainment* 57,000 1,147,125
Family Golf Centers, Inc.* 100,000 2,937,500
Midway Games, Inc.* 14,800 296,000
Premier Parks, Inc.* 84,300 2,676,525
Regal Cinemas, Inc.* 79,500 2,067,000
Rio Hotel And Casino, Inc.* 75,000 1,087,500
Silicon Gaming, Inc.* 139,400 1,986,450
------------
15,015,600
------------
Media (3.18%)
Chancellor Corp. (Class A)* 52,000 1,677,000
Jacor Communications, Inc.* 40,000 1,120,000
Lin Television Corp.* 47,100 1,783,913
Univision Communications, Inc.* 4,000 135,000
------------
4,715,913
------------
Medical (9.44%)
CNS, Inc.* 65,000 1,105,000
Dura Pharmaceuticals, Inc.* 98,800 3,408,600
NCS HealthCare, Inc. (Class A)* 81,500 2,475,563
Omnicare, Inc. 57,200 1,558,700
Parexel International Corp.* 28,300 1,386,700
PhyCor, Inc.* 61,250 1,898,750
Schein (Henry), Inc.* 55,000 2,186,250
------------
14,019,563
------------
Oil & Gas (2.23%)
Benton Oil & Gas Co.* 25,000 612,500
Chesapeake Energy Corp.* 46,250 2,694,063
------------
3,306,563
------------
Real Estate Operations (1.87%)
Central Parking Corp. 80,000 2,770,000
------------
Retail (7.51%)
CompUSA, Inc.* 50,000 2,312,500
CUC International, Inc. * 60,000 1,470,000
Hibbett Sporting Goods, Inc.* 36,000 738,000
Papa John's International, Inc. * 50,000 2,487,500
PETsMART, Inc.* 84,000 2,268,000
Rainforest Cafe, Inc.* 57,800 1,878,500
------------
11,154,500
------------
Schools / Education (1.95%)
Apollo Group, Inc. (Class A)* 105,300 2,895,750
------------
Telecommunications (7.81%)
Advanced Fibre Communications* 8,000 457,000
Boston Communications Group, Inc.* 104,000 884,000
Comverse Technology, Inc.* 90,200 3,157,000
Intermedia Communications, Inc.* 77,000 2,464,000
McLeod, Inc. (Class A)* 85,000 2,762,500
Tel-Save Holdings, Inc.* 75,000 1,875,000
------------
11,599,500
------------
Textile (1.75%)
Tommy Hilfiger Corp.* 50,000 2,600,000
------------
Tobacco (1.49%)
Consolidated Cigar Holdings, Inc.* 81,000 2,207,250
------------
TOTAL COMMON STOCKS
(Cost $115,911,775) (93.89%) $139,443,150
-------- ------------
<CAPTION>
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S OMITTED) VALUE
- ------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.02%)
Investment in a joint repurchase
agreement transaction with
SBC Capital Markets, Inc.
Dated 10-31-96, Due
11-01-96 (Secured by U.S.
Treasury Bonds, 6.25% thru
12.00%, due 11-15-12
thru 8-15-23) -- Note A 5.54% $7,458 $7,458,000
------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 5,157
------------
TOTAL SHORT-TERM INVESTMENTS (5.02%) 7,463,157
-------- ------------
TOTAL INVESTMENTS (98.91%) $146,906,307
======== ============
* Non-income producing security
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
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 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 October 31, 1996 assigned
to country categories.
MARKET VALUE AS A
COUNTRY DIVERSIFICATION PERCENTAGE OF FUND'S NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Canada 1.90%
Ireland 2.65
Israel 0.31
Netherlands 1.75
United States 92.30
------
TOTAL INVESTMENTS 98.91%
======
</TABLE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Discovery Fund
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust III (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company
Act of 1940. The Trust consists of one series: John Hancock Discovery
Fund (the "Fund"). On May 21, 1996, the Board of Trustees voted to
change the fiscal period end from July 31 to October 31. The investment
objective of the Fund is to achieve long-term capital appreciation
through investment primarily in companies that appear to offer superior
growth prospects.
The Trustees have authorized the issuance of multiple 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 and service expenses under terms of a
distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or, at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which
approximates market value. 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.
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.
Capital gains realized on some foreign securities are subject to foreign
taxes and are accrued, as applicable.
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 had $981,469 of a capital loss
carryforward available, to the extent provided by regulation, to offset
future net realized capital gains. If such carry forwards are used by
the Fund, no capital gain distributions will be made. The carry forward
expires October 31, 2004.
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 calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution and service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
ORGANIZATION EXPENSE Expenses incurred in connection with the
organization of the Fund have been capitalized and are being charged to
the Fund's operations ratably over a five-year period that began with
the commencement of investment operations of the Fund.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
could differ from these estimates.
FOREIGN CURRENCY TRANSLATION All assets and 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
or losses arise from changes in the value of assets and liabilities
other than investments in securities at fiscal year end, 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, 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
October 31, 1996, net sales charges received with regard to sales of
Class A shares amounted to $372,269. Out of this amount, $56,134 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $217,951 was paid as sales commissions to
unrelated broker dealers and $98,184 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 for providing distribution
related services to the Fund in connection with the sale of Class B
shares. For the period ended October 31, 1996, contingent deferred sales
charges paid to JH Funds amounted to $37,549.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution
Plan 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 compensate JH Funds for its
distribution and 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. The Fund pays transfer agent fees based on
the number of shareholder accounts and certain out-of-pocket expenses.
On August 27, 1996, the Board of Trustees approved retroactively to July
1, 1996, an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for 1996
is estimated to be at an annual rate of 0.01875% of the average net
assets of each Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are directors and/or officers of the Adviser and/or its
affiliates, as well as a Trustees 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 for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. At
October 31, 1996, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $87.
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 October 31, 1996, aggregated $98,672,034 and
$57,319,371, respectively. There were no purchases or sales of
obligations of the U.S. government and its agencies during the period
ended October 31, 1996.
The cost of investments owned at October 31, 1996 for federal income tax
purposes was $123,976,275. Gross unrealized appreciation and
depreciation of investments aggregated $27,325,037 and $4,400,162,
respectively, resulting in net unrealized appreciation of $22,924,875.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1996, the Fund has reclassified
amounts to reflect a decrease in accumulated net investment loss of
$586,169, a decrease in accumulated net realized loss on investments of
$562 and a decrease in capital paid-in of $586,731. This represents the
cumulative amount necessary to report these balances on a tax basis,
excluding certain temporary differences, as of October 31, 1996.
Additional adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to the treatment of net operating
losses in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principle.
The calculation of net investment income per share in the financial
highlights excludes these adjustments.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Discovery Fund
We have audited the accompanying statement of assets and liabilities of
the John Hancock Discovery Fund (the "Fund"), including the schedule of
investments, as of October 31, 1996, and the related statements of
operations for the period from August 1, 1996 to October 31, 1996 and
for the year ended July 31, 1996, and the statement of changes in net
assets and the financial highlights for each of the periods indicated
therein. 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.
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 October 31, 1996, by
correspondence with the custodian and brokers, and other auditing
procedures when replies from brokers were not received. 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 the John Hancock Discovery Fund at October 31,
1996, the results of its operations for the period from August 1, 1996
to October 31, 1996 and the year ended July 31, 1996, and the changes in
its net assets and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
/S/Ernst & Young LLP
Boston, Massachusetts
December 10, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund during the fiscal period
ended October 31, 1996.
It is anticipated that there will be a distribution from net realized
gains from sales of securities to shareholders of record on December 23,
1996 and payable on December 30, 1996. Shareholders will receive a 1996
U.S. Treasury Department Form 1099-DIV in January 1997 representing
their proportionate share. None of the distributions noted above qualify
for the corporate dividends received deduction.
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Permit No. 75
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.
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"Printed on Recycled Paper." 3400A 10/96
12/96
