John Hancock Funds
Discovery
Fund
Annual Report
Ocotber 31, 1997
<PAGE>
John Hancock Funds - Discovery Fund
Trustees
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl *
Richard A. Farrell *
Gail D. Fosler*
William F. Glavin *
Anne C. Hodsdon
John A. Moore*
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward 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
200 Clarendon Street
Boston, Massachusetts 02116
Transfer Agent
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
Investment Adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Principal Distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
<PAGE>
John Hancock Funds - Discovery Fund
Statement of Assets and Liabilities
October 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common Stocks (cost - $ 109,033,840) $140,917,366
Joint repurchase agreement (cost - $ 628,000) 628,000
Corporate savings account 46
----------------------
141,545,412
Receivable for investments sold 1,328,887
Receivable for shares sold 226,806
Interest receivable 121
Other assets 1,557
----------------------
Total Assets 143,102,783
-------------------------------------------
Liabilities:
Payable for investments purchased 1,367,970
Payable for shares repurchased 163,378
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 148,617
Accounts payable and accrued expenses 35,094
----------------------
Total Liabilities 1,715,059
-------------------------------------------
Net Assets:
Capital paid-in 108,031,718
Accumulated realized gain on investments and foreign currency transactions 1,474,030
Net unrealized appreciation of investments 31,883,717
Accumulated net investment loss (1,741)
----------------------
Net Assets $141,387,724
===========================================
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)
Class A - $46,288,680 / 2,707,537 $17.10
=====================================================================================================================
Class B - $95,099,044 / 5,843,429 $16.27
=====================================================================================================================
Maximum Offering Price Per Share*
Class A - ($17.10 x 105.26%) $18.00
=====================================================================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
</TABLE>
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
Statement of Operations
Year ended October 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Interest $ 271,392
Dividends 248,091
----------
519,483
----------
Expenses:
Investment management fee - Note B 1,064,031
Distribution and service fee - Note B
Class A 142,693
Class B 943,065
Transfer agent fee - Note B 564,586
Custodian fee 98,735
Registration and filing fees 59,711
Printing 30,434
Auditing fee 28,500
Financial services fee - Note B 26,051
Trustees' fees 11,875
Miscellaneous 4,432
Legal fees 1,775
----------
Total Expenses 2,975,888
------------------------------------------------------------
Net Investment Loss (2,456,405)
------------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold 3,061,999
Change in net unrealized appreciation/depreciation
of investments 8,352,255
----------
Net Realized and Unrealized Gain on
Investments 11,414,254
------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $8,957,849
============================================================
See Notes to Financial Statements
<PAGE>
John Hancock Funds - Discovery Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 1,
YEAR ENDED 1996 TO YEAR ENDED
JULY 31, OCTOBER 31, OCTOBER 31,
1996 1996 (1) 1997
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ($1,011,877) ($587,256) ($2,456,405)
Net realized gain (loss) on investments sold and foreign currency transactions 1,751,805 (1,588,518) 3,061,999
Change in net unrealized appreciation/depreciation of investments (1,130,239) 9,432,551 8,352,255
------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations (390,311) 7,256,777 8,957,849
------------ ------------ ------------
Distributions to Shareholders:
Distributions from net realized gain on investments sold
Class A - ($0.1312, none and $0.1140 per share, respectively) (61,866) - (377,494)
Class B - ($0.1312, none and $0.1140 per share, respectively) (350,267) - (775,851)
------------ ------------ ------------
Total Distributions to Shareholders (412,133) - (1,153,345)
------------ ------------ ------------
From Fund Share Transactions - Net: * 64,682,010 40,664,165 (14,937,605)
------------ ------------ ------------
Net Assets:
Beginning of period 36,720,317 100,599,883 148,520,825
------------ ------------ ------------
End of period (including accumulated net investment loss
of none, $1,087 and $1,741, respectively) $100,599,883 $148,520,825 $141,387,724
============ ============ ============
* Analysis of Fund Share Transactions:
PERIOD FROM
YEAR ENDED AUGUST 1, 1996 TO YEAR ENDED
JULY 31, 1996 OCTOBER 31, 1996 (1) OCTOBER 31, 1997
------------------------- ------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ --------- -----------
CLASS A
Shares sold 6,629,390 $105,087,816 6,727,252 $112,934,558 4,483,350 $67,441,611
Shares issued to shareholders in
reinvestment of distributions 4,495 57,719 - - 23,197 340,089
---------- ------------ ---------- ------------ --------- -----------
6,633,885 105,145,535 6,727,252 112,934,558 4,506,547 67,781,700
Less shares repurchased (4,904,679) (76,082,263) (5,595,291) (96,031,768) (5,051,999) (76,943,832)
========== ============ ========== ============ ========== ===========
Net increase (decrease) 1,729,206 $29,063,272 1,131,961 $16,902,790 (545,452) ($9,162,132)
========== ============ ========== ============ ========== ===========
CLASS B
Shares sold 3,295,866 $51,516,179 2,908,304 $46,987,243 3,577,728 $51,201,699
Shares issued to shareholders in
reinvestment of distributions 25,501 315,955 - - 47,151 662,535
---------- ------------ ---------- ------------ --------- -----------
3,321,367 51,832,134 2,908,304 46,987,243 3,624,879 51,864,234
Less shares repurchased (1,113,915) (16,213,396) (1,430,974) (23,225,868) (3,989,627) (57,639,707)
========== ============ ========== ============ ========= ===========
Net increase (decrease) 2,207,452 $35,618,738 1,477,330 $23,761,375 (364,748) ($5,775,473)
========== ============ ========== ============ ========= ===========
(1) Effective October 31, 1996 the fiscal period changed from July 31 to
October 31.
</TABLE>
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, PERIOD FROM
--------------------------------------- AUGUST 1, 4996 TO YEAR ENDED
1993 1994 1995 1996 OCTOBER 31, 1996 (6) OCTOBER 31, 1997
------- ------ ------ ------- -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.95 $10.81 $8.56 $12.95 $15.09 $16.13
------ ------ ------ ------- ------- -------
Net Investment Loss (0.16) (0.16)(1) (0.17)(1) (0.19)(1) (0.05)(1) (0.19)(1)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions 2.15 (0.43) 4.83 2.46 1.09 1.27
------ ------ ------ ------- ------- -------
Total from Investment Operations 1.99 (0.59) 4.66 2.27 1.04 1.08
------ ------ ------ ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain (0.13) (1.66) (0.27) (0.13) - (0.11)
on Investments Sold ------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $10.81 $8.56 12.95 $15.09 $16.13 $17.10
====== ====== ====== ======= ======= =======
Total Investment Return at Net Asset Value (2) 22.33% (6.45%) 55.80% 17.72% 6.89%(3) 6.84%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $4,692 $3,226 $5,075 $32,009 $52,479 $46,289
Ratio of Expenses to Average Net Assets 2.17% 2.01% 2.10% 1.72% 1.65%(4) 1.63%
Ratio of Net Investment Loss to (1.61%) (1.64%) (1.73%) (1.26%) (1.20%)(4) (1.26%)
Average Net Assets
Portfolio Turnover Rate 148% 108% 118% 116% 45% 262%
Average Broker Commission Rate (5) N/A N/A N/A N/A $0.0628 $0.0679
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.87 $10.65 $8.34 $12.54 $14.50 $15.47
------- ------- ------- ------- ------ -------
Net Investment Loss (0.23) (0.22)(1) (0.22)(1) (0.27)(1) (0.08)(1) (0.29)(1)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions 2.14 (0.43) 4.69 2.36 1.05 1.20
------- ------- ------- ------- ------- -------
Total from Investment Operations 1.91 (0.65) 4.47 2.09 0.97 0.91
------- ------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain
on Investments Sold (0.13) (1.66) (0.27) (0.13) - (0.11)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $10.65 $8.34 $12.54 $14.50 $15.47 $16.27
======= ======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (2) 21.63% (7.18%) 54.97% 16.85% 6.69% (3) 6.03%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $38,672 $26,537 $31,645 $68,591 $96,042 $95,099
Ratio of Expenses to Average Net Assets 2.86% 2.62% 2.70% 2.42% 2.37%(4) 2.33%
Ratio of Net Investment Loss to
Average Net Assets (2.26%) (2.24%) (2.34%) (1.96%) (1.93%) (4) (1.97%)
Portfolio Turnover Rate 148% 108% 118% 116% 45% 262%
Average Broker Commission Rate (5) N/A N/A N/A N/A $0.0628 $0.0679
(1) Based on the of the average of the shares outstanding at the end of each
month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Not annualized.
(4) Annualized.
(5) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(6) Effective October 31, 1996, the fiscal period changed from July 31 to
October 31.
</TABLE>
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
Schedule of Investments
October 31, 1997
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- --------- ------
COMMON STOCKS
Advertising (1.63%)
Outdoor Systems, Inc.* 75,000 2,306,250
-------------
Automobile / Trucks (1.04%)
Lear Corp.* 30,600 1,470,712
-------------
Beverages (1.93%)
Beringer Wine Estates Holdings, Inc. (Class B)* 6,900 213,900
Mondavi (Robert) Corp. (Class A)* 49,400 2,510,137
-------------
2,724,037
-------------
Building (.99%)
Royal Group Technologies Ltd.* (Canada) 55,000 1,395,625
-------------
Business Services - Misc (1.43%)
Corrections Corporation of America* 50,000 1,525,000
Market Facts, Inc. 22,000 445,500
Securacom, Inc.* 5,300 49,687
-------------
2,020,187
-------------
Computers (18.97%)
America Online, Inc.* 30,000 2,310,000
Aspect Development, Inc.* 36,900 1,725,075
Bay Networks, Inc.* 65,000 2,055,625
BMC Software, Inc.* 35,000 2,113,125
CBT Group PLC,* American Depositary
Receipt (ADR), (Ireland) 32,800 2,517,400
Compaq Computer Corp. 25,000 1,593,750
Discreet Logic, Inc.* 39,800 778,587
E*TRADE Group, Inc.* 78,000 2,408,250
HBO & Co. 50,300 2,188,050
Iomega Corp.* 95,000 2,547,188
Network Appliance, Inc.* 63,100 3,170,775
SCM Microsystems, Inc.* 2,300 53,475
SPR Inc.* 2,400 41,400
Symantec Corp.* 50,000 1,093,750
Visio Corp.* 60,000 2,231,250
--------------
26,827,700
--------------
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- --------- ------
Electronics (10.72%)
ASM Lithography Holding N.V.* (Netherlands) 28,200 2,065,650
ATMI, Inc.* 70,000 1,881,250
Level One Communications, Inc.* 50,000 2,250,000
Metromedia Fiber Network, Inc. (Class A)* 5,400 129,600
Novellus Systems, Inc.* 41,200 1,833,400
Semtech Corp.* 45,000 2,095,312
Teradyne, Inc.* 30,200 1,130,612
Unitrode Corp.* 60,000 1,608,750
Vitesse Semiconductor Corp.* 50,000 2,168,750
-------------
15,163,324
-------------
Finance (3.16%)
FIRSTPLUS Financial Group, Inc.* 37,600 2,068,000
Medallion Financial Corp. 114,000 2,394,000
-------------
4,462,000
-------------
Food (0.04%)
American Italian Pasta Co. (Class A)* 2,500 52,500
-------------
Insurance (2.25%)
Ace, Ltd. (Bermuda) 17,400 1,617,113
Progressive Corp. 15,000 1,563,750
--------------
3,180,863
--------------
Lasers - Systems / Components (.93%)
Cymer, Inc.* 52,700 1,205,513
General Scanning, Inc.* 4,400 113,575
-------------
1,319,088
-------------
Leisure (1.78%)
Carnival Corp. (Class A) 52,000 2,522,000
-------------
Machinery (1.62%)
Gardner Denver Machinery, Inc.* 63,900 2,292,413
-------------
Media (6.59%)
Central Newspapers, Inc. (Class A) 40,000 2,627,500
Clear Channel Communications, Inc.* 40,000 2,640,000
Heftel Broadcasting Corp. (Class A)* 35,000 2,327,500
Jacor Communications, Inc.* 40,000 1,675,000
Petersen Cos., Inc. (The) (Class A)* 2,200 43,450
-------------
9,313,450
-------------
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- --------- ------
Medical (2.11%)
Warner-Lambert Co. 11,500 1,646,656
Wesley Jessen VisionCare, Inc.* 45,900 1,342,575
-------------
2,989,231
-------------
Metal (1.50%)
Maverick Tube Corp.* 60,000 2,115,000
-------------
Office (1.68%)
HON Industries, Inc. 45,900 2,369,588
-------------
Oil & Gas (11.22%)
ENSCO International, Inc.* 75,000 3,154,688
EVI, Inc.* 43,600 2,798,575
Falcon Drilling Co., Inc.* 80,000 2,910,000
Marine Drilling Co., Inc.* 65,400 1,937,475
National-Oilwell, Inc.* 30,000 2,296,875
Precision Drilling Corp.* (Canada) 90,000 2,767,500
-------------
15,865,113
-------------
Pollution Control (10.00%)
ITEQ, Inc.* 194,400 2,430,000
Newpark Resources, Inc.* 80,200 3,328,300
Philip Services Corp.* (Canada) 246,000 4,305,000
US Filter Corp.* 60,000 2,407,500
USA Waste Services, Inc.* 45,000 1,665,000
-------------
14,135,800
-------------
Retail (9.48%)
Borders Group, Inc. * 70,000 1,815,625
Consolidated Stores Corp.* 57,500 2,292,813
Costco Cos., Inc.* 60,000 2,310,000
Dollar General Corp. 63,750 2,107,734
Home Depot, Inc. 55,000 3,059,375
Starbucks Corp.* 55,000 1,815,000
-------------
13,400,547
-------------
Schools / Education (1.93%)
Apollo Group, Inc. (Class A)* 64,500 2,725,125
--------------
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- --------- ------
Steel (1.48%)
Lone Star Technologies, Inc.* 55,000 2,100,313
-------------
Telecommunications (7.16%)
Comverse Technology, Inc.* 50,200 2,070,750
Innova Corp.* 35,400 761,100
Nextel Communications, Inc. (Class A)* 100,000 2,625,000
Qwest Communications International Inc.* 40,300 2,488,525
WorldCom, Inc.* 65,000 2,185,625
-------------
10,131,000
-------------
Transport (0.03%)
Jevic Transportation, Inc.* 2,000 35,500
-------------
TOTAL COMMON STOCK
(Cost $109,033,840) (99.67%) 140,917,366
------ -------------
<TABLE>
<CAPTION>
INTEREST PAR VALUE MARKET
SHORT-TERM INVESTMENTS RATE (000'S OMITTED) VALUE
- ---------------------- ---- --------------- -----
<S> <C> <C> <C>
Joint Repurchase Agreement (0.44%)
Investment in a joint repurchase agreement
transaction with Aubrey G. Lanston & Co. -
Dated 10-31-97, Due 11-03-97 (secured by
U.S. Treasury Notes, 5.00% thru 9.25%
due 02-28-98 thru 04-30-02), - Note A 5.68 628 628,000
------------
Corporate Savings Account ( 0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% 46
------------
TOTAL SHORT-TERM INVESTMENTS (0.44%) 628,046
------- ------------
TOTAL INVESTMENTS (100.11%) 141,545,412
========== ============
*Non-Income producing security.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer, however, security is U.S. dollar
denominated.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
</TABLE>
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery 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 condition 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 percentage of the
Fund's investments at October 31,1997 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ---------------
Canada 5.99%
Ireland 1.78
Netherlands 1.46
United States 89.74
Bermuda 1.14
----------------
TOTAL INVESTMENTS 100.11%
================
See Notes to Financial Statements.
<PAGE>
John Hancock Funds - Discovery Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust IV (the "Trust")(formerly Freedom InvestmentTrust
III) 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"). 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.
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.
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.
<PAGE>
John Hancock Funds - Discovery 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.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Advisor in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended October 31, 1997.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 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.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended October
31, 1997, net sales charges received with regard to sales of Class A shares
amounted to $456,183. Out of this amount, $72,968 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$249,811 was paid as sales commissions to unrelated broker-dealers and $133,404
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 ("JHMLICo"), is the indirect
sole shareholder of Distributors and was the indirect shareholder until November
29, 1996 of 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 year ended October 31, 1997,
contingent deferred sales charges paid to JH Funds amounted to $401,344.
In addition, to reimburse 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 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 Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses. The Fund has an agreement with the Adviser to
perform necessary tax and financial management services for the Fund. The
compensation for the year was at an annual rate of less than 0.02% of the
average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon, and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
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John Hancock Funds - Discovery Fund
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, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $192.
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 year
ended October 31, 1997, aggregated $356,721,974 and $366,578,572, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended October 31, 1997.
The cost of investments owned at October 31, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $109,697,788. Gross
unrealized appreciation and depreciation of investments aggregated $34,577,338
and $2,729,760, respectively, resulting in net unrealized appreciation of
$31,847,578.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated realized gain on investments of $70, a
decrease in accumulated net investment loss of $2,455,751 and a decrease in
capital paid-in of $2,455,681. This represents the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
October 31, 1997. 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 net investment loss. The calculation
of net investment income per share in the financial highlights excludes these
adjustments.
NOTE E --
SUBSEQUENT EVENT
On September 9, 1997 shareholders approved a vote on a proposed merger between
the Fund and the John Hancock Growth Fund ("Growth Fund"). The reorganization
provided for a transfer of substantially all the assets and liabilities of the
Fund to the Growth Fund. After the transaction and as of the close of business
on December 5, 1997, the Fund will be terminated.
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John Hancock Funds - Discovery Fund
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,including
the schedule of investments,of the John Hancock Discovery Fund (the "Fund"),as
of October 31, 1997, and the related statement of operations for the year ended,
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, 1997, 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, 1997, the results of its operations
for the year ended, and the changes in its net assets and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
December 11, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during its fiscal year ended October
31, 1997.
The Fund designated a distribution to shareholders of $ 1,153,345 as long-term
capital gain dividends. These amounts were reported on the 1996 U.S. Treasury
Department Form 1099-DIV.
With respect to the dividends paid by the fund for the fiscal year ended October
31, 1997, none qualify for the corporate dividends received deduction.
Shareholders will received a 1997 U.S. Treasury Department Form 1099-DIV in
January of 1998. This will reflect the total of all distributions which are
taxable for the calendar year 1997.
