- --------------------------------------------------------------------------------
John Hancock Funds
Discovery
Fund
FINAL REPORT
December 5, 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
<PAGE>
John Hancock Funds - Discovery Fund
Statement of Assets and Liabilities
Final Report December 5, 1997* (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments at value - Note C
Common Stocks (cost - $ 103,056,518) $134,338,879
Receivable for shares sold 128,749
Dividends receivable 18,945
Other assets 1,557
-------------
Total Assets 134,488,130
--------------------------------
Liabilities:
Due to custodian 673,043
Payable for shares repurchased 153,099
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 89,223
Accounts payable and accrued expenses 115,749
-------------
Total Liabilities 1,031,124
--------------------------------
Net Assets:
Capital paid-in 102,197,612
Accumulated realized loss on investments (21,418)
Net unrealized appreciation of investments 31,282,553
Accumulated net investment loss (1,741)
-------------
Net Assets $133,457,006
================================
<CAPTION>
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)
<S> <C> <C> <C>
Class A - $43,231,211 / 2,567,733 $16.84
====================================================================================
Class B - $90,225,795 / 5,636,912 $16.01
====================================================================================
Maximum Offering Price Per Share**
Class A - ($ 16.84 x 105.26%) $17.33
====================================================================================
</TABLE>
*The net assets of the John Hancock Discovery Fund ("the Fund") were merged into
the John Hancock Growth Fund as of the close of business on December 5, 1997 and
the Fund was subsequently terminated. The Statement of Assets and Liabilities
reflect the Fund's position prior to the transfer of net assets and the
termination of the Fund. (See Note A to the Notes to Financial Statements).
**On single retail sales of less than $50,000. On sales or more and on group
sales the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
John Hancock Funds - Discovery Fund
Statement of Operations
For the period November 1, 1997 to
December 5, 1997* (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends $ 51,975
Interest 2,102
---------------------
54,077
---------------------
Expenses:
Investment management fee - Note B 98,347
Distribution and service fee - Note B
Class A 12,875
Class B 88,210
Transfer agent fee - Note B 40,597
Legal fees 9,165
Custodian fee 6,700
Financial services fee - Note B 2,317
Trustees' fees 538
---------------------
Total Expenses 258,749
-------------------------------------------------------------
Net Investment Loss (204,672)
-------------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold 297,074
Change in net unrealized appreciation/depreciation
of investments (601,164)
---------------------
Net Realized and Unrealized Gain on
Investments (304,090)
-------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ($508,762)
=============================================================
</TABLE>
* The net assets of the John Hancock Discovery Fund ("the Fund") were merged
into the John Hancock Growth Fund as of the close of business on December 5,
1997 and the Fund was subsequently terminated. The Statement of Operations
reflects the Fund's position prior to the transfer of net assets and the
termination of the Fund. (See Note A to the Notes to Financial Statements).
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
John Hancock Funds - Discovery Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 1, 1996 TO
OCTOBER 31, 1996(1)
---------------------------
<S> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ($587,256)
Net realized gain (loss) on investments sold and foreign currency transactions (1,588,518)
Change in net unrealized appreciation/depreciation of investments 9,432,551
---------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 7,256,777
---------------------------
Distributions to Shareholders:
Distributions from net realized gain on investments sold
Class A - (none, $0.1140 and $0.2037 per share, respectively) --
Class B - (none, $0.1140 and $0.2037 per share, respectively) --
---------------------------
Total Distributions to Shareholders --
---------------------------
From Fund Share Transactions - Net: * 40,664,165
---------------------------
Net Assets:
Beginning of period 100,599,883
---------------------------
End of period (including accumulated net investment loss
of none, $1,741 and $1,741, respectively) $148,520,825
===========================
</TABLE>
<TABLE>
<CAPTION>
John Hancock Funds - Discovery Fund
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
NOVEMBER 1, 1997 TO
YEAR ENDED DECEMBER 5, 1997
OCTOBER 31, 1997 (UNAUDITED)**
-------------------- ---------------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ($2,456,405) ($204,672)
Net realized gain (loss) on investments sold and foreign currency transactions 3,061,999 297,074
Change in net unrealized appreciation/depreciation of investments 8,352,255 (601,164)
-------------------- ---------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 8,957,849 (508,762)
-------------------- ---------------------
Distributions to Shareholders:
Distributions from net realized gain on investments sold
Class A - (none, $0.1140 and $0.2037 per share, respectively) (377,494) (535,006)
Class B - (none, $0.1140 and $0.2037 per share, respectively) (775,851) (1,147,721)
-------------------- ---------------------
Total Distributions to Shareholders (1,153,345) (1,682,727)
-------------------- ---------------------
From Fund Share Transactions - Net: * (14,937,605) (5,739,229)
-------------------- ---------------------
Net Assets:
Beginning of period 148,520,825 141,387,724
-------------------- ---------------------
End of period (including accumulated net investment loss
of none, $1,741 and $1,741, respectively) $141,387,724 $133,457,006
==================== =====================
</TABLE>
<PAGE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1996 TO YEAR ENDED
OCTOBER 31, 1996 (1) OCTOBER 31, 1997
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold 6,727,252 $112,934,558 4,483,350 $67,441,611
Shares issued to shareholders in reinvestment of distributions -- -- 23,197 340,089
--------------------------- --------------------------
6,727,252 112,934,558 4,506,547 67,781,700
Less shares repurchased (5,595,291) (96,031,768) (5,051,999) (76,943,832)
--------------------------- --------------------------
Net increase (decrease) 1,131,961 $16,902,790 (545,452) ($9,162,132)
=========================== ==========================
CLASS B
Shares sold 2,908,304 $46,987,243 3,577,728 $51,201,699
Shares issued to shareholders in reinvestment of distributions -- -- 47,151 662,535
--------------------------- --------------------------
2,908,304 46,987,243 3,624,879 51,864,234
Less shares repurchased (1,430,974) (23,225,868) (3,989,627) (57,639,707)
--------------------------- --------------------------
Net increase (decrease) 1,477,330 $23,761,375 (364,748) ($5,775,473)
=========================== ==========================
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1997 TO
DECEMBER 5, 1997
(UNAUDITED)
-------------------------
SHARES AMOUNT
<S> <C> <C>
CLASS A
Shares sold 184,923 $3,070,676
Shares issued to shareholders in reinvestment of distributions 30,019 488,108
---------- -----------
214,942 3,558,784
Less shares repurchased (354,746) (5,891,796)
---------- -----------
Net increase (decrease) (139,804) ($2,333,012)
========== ===========
CLASS B
Shares sold 48,899 $715,848
Shares issued to shareholders in reinvestment of distributions 61,849 956,178
---------- -----------
110,748 1,672,026
Less shares repurchased (317,265) (5,078,243)
---------- -----------
Net increase (decrease) (206,517) ($3,406,217)
========== ===========
</TABLE>
** The net assets of the John Hancock Discovery Fund ("the Fund") were merged
into the John Hancock Growth Fund as of the close of business on December 5,
1997 and the Fund was subsequently terminated. The Statement of Changes in Net
Assets reflects the Fund's position prior to the transfer of net assets and the
termination of the Fund. (See Note A to the Notes to Financial Statements).
(1) Effective October 31, 1996 the fiscal period changed from July 31 to October
31.
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,
--------------------------------------------------------
1993 1994 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.95 $10.81 $8.56 $12.95
---------- ---------- ---------- ----------
Net Investment Loss (0.16) (0.16)(1) (0.17)(1) (0.19)(1)
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency Transactions 2.15 (0.43) 4.83 2.46
---------- ---------- ---------- ----------
Total from Investment Operations 1.99 (0.59) 4.66 2.27
---------- ---------- ---------- ----------
Less Distributions:
Distributions from Net
Realized Gain on Investments Sold (0.13) (1.66) (0.27) (0.13)
---------- ---------- ---------- ----------
Net Asset Value, End of Period $10.81 $8.56 $12.95 $15.09
========== ========== ========== ==========
Total Investment Return at Net
Asset Value (2) 22.33% (6.45%) 55.80% 17.72%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $4,692 $3,226 $5,075 $32,009
Ratio of Expenses to Average
Net Assets 2.17% 2.01% 2.10% 1.72%
Ratio of Net Investment Loss
to Average Net Assets (1.61%) (1.64%) (1.73%) (1.26%)
Portfolio Turnover Rate 148% 108% 118% 116%
Average Broker Commission Rate (5) N/A N/A N/A N/A
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.87 $10.65 $8.34 $12.54
---------- ---------- ---------- ----------
Net Investment Loss (0.23) (0.22)(1) (0.22)(1) (0.27)(1)
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency Transactions 2.14 (0.43) 4.69 2.36
---------- ---------- ---------- ----------
Total from Investment Operations 1.91 (0.65) 4.47 2.09
---------- ---------- ---------- ----------
Less Distributions:
Distributions from Net
Realized Gain on Investments Sold (0.13) (1.66) (0.27) (0.13)
---------- ---------- ---------- ----------
Net Asset Value, End of Period $10.65 $8.34 $12.54 $14.50
========== ========== ========== ==========
Total Investment Return at Net
Asset Value (2) 21.63% (7.18%) 54.97% 16.85%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $38,672 $26,537 $31,645 $68,591
Ratio of Expenses to Average
Net Assets 2.86% 2.62% 2.70% 2.42%
Ratio of Net Investment Loss
to Average Net Assets (2.26%) (2.24%) (2.34%) (1.96%)
Portfolio Turnover Rate 148% 108% 118% 116%
Average Broker Commission Rate (5) N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
PERIOD PERIOD FROM
FROM NOVEMBER 1,
AUGUST 1, 1997 TO
1996 TO YEAR ENDED DECEMBER
OCTOBER OCTOBER 31, 5, 1997 (6)
31, 1996(6) 1997 (UNAUDITED)
----------- ---------- ------------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $15.09 $16.13 $17.10
---------- ---------- ----------
Net Investment Loss (0.05)(1) (0.19)(1) (0.02)(1)
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency Transactions 1.09 1.27 (0.04)
---------- ---------- ----------
Total from Investment Operations 1.04 1.08 (0.06)
---------- ---------- ----------
Less Distributions:
Distributions from Net
Realized Gain on Investments Sold -- (0.11) (0.20)
---------- ---------- ----------
Net Asset Value, End of Period $16.13 $17.10 $16.84
========== ========== ==========
Total Investment Return at Net
Asset Value (2) 6.89%(3) 6.84% (0.29%)(3)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $52,479 $46,289 $43,231
Ratio of Expenses to Average
Net Assets 1.65%(4) 1.63% 1.50%(4)
Ratio of Net Investment Loss
to Average Net Assets (1.20%)(4) (1.26%) (1.09%)(4)
Portfolio Turnover Rate 45% 262% 7%
Average Broker Commission Rate (5) $0.0628 $0.0679 $0.0700
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $14.50 $15.47 $16.27
---------- ---------- ----------
Net Investment Loss (0.08)(1) (0.29)(1) (0.02)(1)
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency Transactions 1.05 1.20 (0.04)
---------- ---------- ----------
Total from Investment Operations 0.97 0.91 (0.06)
---------- ---------- ----------
Less Distributions:
Distributions from Net
Realized Gain on Investments Sold -- (0.11) (0.20)
---------- ---------- ----------
Net Asset Value, End of Period $15.47 $16.27 $16.01
========== ========== ==========
Total Investment Return at Net
Asset Value (2) 6.69%(3) 6.03% (0.30%)(3)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $96,042 $95,099 $90,226
Ratio of Expenses to Average
Net Assets 2.37%(4) 2.33% 2.20%(4)
Ratio of Net Investment Loss
to Average Net Assets (1.93%)(4) (1.97%) (1.79%)(4)
Portfolio Turnover Rate 45% 262% 7%
Average Broker Commission Rate (5) $0.0628 $0.0679 $0.0700
</TABLE>
(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.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
John Hancock Funds - Discovery Fund
Schedule of Investments
December 5, 1997 (Unaudited)
- -------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (1.94%)
Outdoor Systems, Inc.* 75,000 $ 2,582,812
----------------
Beverages (1.84%)
Mondavi (Robert) Corp. (Class A)* 49,400 2,460,737
----------------
Business Services - Misc (1.37%)
Corrections Corporation of America* 50,000 1,771,875
Securacom, Inc.* 5,300 50,350
----------------
1,822,225
----------------
Computers (20.37%)
America Online, Inc.* 30,000 2,533,125
Aspect Development, Inc.* 27,100 1,080,612
BMC Software, Inc.* 35,000 2,471,875
CBT Group Plc,* American Depositary
Receipt (ADR), (Ireland) 32,800 2,488,700
Compaq Computer Corp. 25,000 1,620,312
E*TRADE Group, Inc.* 78,000 1,584,375
HBO & Co. 50,300 2,345,237
Iomega Corp.* 75,000 2,339,062
Network Appliance, Inc.* 63,100 3,367,962
Security Dynamics Technologies, Inc.* 61,400 2,129,812
Symantec Corp.* 102,500 2,767,500
Visio Corp.* 60,000 2,460,000
----------------
27,188,572
----------------
Electronics (9.68%)
ASM Lithography Holding N.V.*
(Netherlands) 19,200 1,374,000
ATMI, Inc.* 70,000 2,205,000
Level One Communications, Inc.* 50,000 1,640,625
Metromedia Fiber Network, Inc.
(Class A)* 37,700 664,463
Novellus Systems, Inc.* 41,200 1,557,875
Semtech Corp.* 45,000 2,356,875
Teradyne, Inc.* 30,200 1,089,087
Vitesse Semiconductor Corp.* 50,000 2,035,935
----------------
12,923,860
----------------
See notes to financial statements.
<PAGE>
John Hancock Funds - Discovery Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Finance (2.94%)
FIRSTPLUS Financial Group, Inc.* 37,600 $ 1,494,600
Medallion Financial Corp. 114,000 2,422,500
----------------
3,917,100
----------------
Insurance (2.51%)
Ace, Ltd. (Bermuda) 17,400 1,722,600
Progressive Corp. 15,000 1,621,875
----------------
3,344,475
----------------
Leisure (3.90%)
Carnival Corp. (Class A) 52,000 2,772,250
Royal Caribbean Cruises Ltd. 50,000 2,428,125
----------------
5,200,375
----------------
Machinery (1.86%)
Gardner Denver Machinery, Inc.* 63,900 2,476,125
----------------
Media (7.94%)
Central Newspapers, Inc. (Class A) 40,000 2,832,500
Clear Channel Communications, Inc.* 40,000 2,920,000
Heftel Broadcasting Corp. (Class A)* 70,000 3,097,500
Jacor Communications, Inc.* 40,000 1,745,000
----------------
10,595,000
----------------
Medical (2.11%)
Warner-Lambert Co. 11,500 1,354,125
Wesley Jessen VisionCare, Inc.* 45,900 1,463,063
----------------
2,817,188
----------------
Metal (1.48%)
Maverick Tube Corp.* 60,000 1,972,500
----------------
See notes to financial statements.
<PAGE>
John Hancock Funds - Discovery Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Office (1.47%)
HON Industries, Inc. 35,600 $ 1,958,000
----------------
Oil & Gas (10.63%)
ENSCO International, Inc.* 75,000 2,939,063
EVI, Inc.* 38,600 2,067,513
Falcon Drilling Co., Inc.* 80,000 2,845,000
Marine Drilling Co., Inc.* 65,400 1,610,475
National-Oilwell, Inc.* 60,000 2,122,500
Precision Drilling Corp.* (Canada) 90,000 2,610,000
----------------
14,194,551
----------------
Pollution Control (7.90%)
ITEQ, Inc.* 170,600 2,004,550
Newpark Resources, Inc.* 160,400 3,187,950
Philip Services Corp.* (Canada) 211,000 3,415,563
US Filter Corp.* 60,000 1,935,000
----------------
10,543,063
----------------
Retail (12.01%)
Borders Group, Inc. * 46,200 1,406,213
Consolidated Stores Corp.* 57,500 2,839,063
Costco Cos., Inc.* 55,000 2,347,813
Dollar General Corp. 63,750 2,366,719
Fred Meyer, Inc.* 57,800 2,088,025
Home Depot, Inc. 47,000 2,808,250
Starbucks Corp.* 55,000 2,179,375
----------------
16,035,458
----------------
Schools / Education (2.17%)
Apollo Group, Inc. (Class A)* 64,500 2,902,500
----------------
Steel (1.05%)
Lone Star Technologies, Inc.* 45,400 1,404,563
----------------
See notes to financial statements.
<PAGE>
John Hancock Funds - Discovery Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Telecommunications (7.49%)
Comverse Technology, Inc.* 50,200 $ 1,694,250
Innova Corp.* 35,400 570,825
Nextel Communications, Inc. (Class A)* 100,000 2,425,000
Qwest Communications International Inc.* 40,300 2,297,100
Teligent, Inc. (Class A)* 2,200 54,725
Tellabs, Inc.* 13,500 756,000
WorldCom, Inc.* 65,000 2,201,875
----------------
9,999,775
----------------
TOTAL COMMON STOCKS
(Cost $103,056,518) (100.66%) 134,338,879
----------------
TOTAL INVESTMENTS (100.66%) 134,338,879
================
*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.
See notes to financial statements.
<PAGE>
Portfolio Concentration (Unaudited)
December 5, 1997
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 December 5, 1997 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- -------------
Bermuda 1.29%
Canada 4.52
Ireland 1.86
Netherlands 1.03
United States 91.96
-------------
TOTAL INVESTMENTS 100.66%
=============
See notes to financial statements.
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
JOHN HANCOCK FUNDS - DISCOVERY FUND
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust IV (the "Trust")(formerly Freedom Investment Trust
III) was a diversified open-end management investment company, registered under
the Investment Company Act of 1940. The Trust consisted of one series: John
Hancock Discovery Fund (the "Fund"). The investment objective of the Fund was to
achieve long-term capital appreciation through investment primarily in companies
that appear to offer superior growth prospects.
The Trustees had authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represented an interest in the same portfolio of investments of the Fund and had
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may have been 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 bear distribution and service expenses under terms
of a distribution plan had exclusive voting rights to that distribution plan.
On November 12, 1997 shareholders of the Fund approved a plan of
reorganization between the Fund and the John Hancock Growth Fund ("Growth Fund")
providing for the transfer of substantially all the assets and liabilities of
the Fund to the Growth Fund in exchange solely form shares of beneficial
interest of the Growth Fund. After this transaction and as of the close of
business on December 5, 1997, the Fund will be terminated The financial
statements herein reflect the position of the Fund prior to the exchange of net
assets and termination of the Fund.
Significant accounting policies of the Fund were as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio were 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
were valued at amortized cost which approximates market value. All portfolio
transactions initially expressed in terms of foreign currencies had 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 have participated in a joint repurchase agreement. Aggregate cash balances
were 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 received delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser was responsible for ensuring that the agreement was
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions were recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments were determined on the identified cost basis. Capital gains realized
on some foreign securities were subject to foreign taxes and were accrued, as
applicable.
FEDERAL INCOME TAXES The Fund's policy was 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 provisions
were required.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment securities
were recorded on the ex-dividend date, or, in the case of some foreign
securities, on the date thereafter when the Fund was made aware of the dividend.
Interest income on investment securities was recorded on the accrual basis.
Foreign income may have been subject to foreign withholding taxes which were
accrued as applicable.
The Fund recorded all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions were
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 were calculated in the same manner, at the same
time and
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
JOHN HANCOCK FUNDS - DISCOVERY FUND
in the same amount, except for the effect of expenses that may have been applied
differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) were 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, were 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.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporated 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 was 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 enabled
the Fund to participate with other Funds managed by the Advisor in unsecured
lines of credit with banks which permited borrowings up to $600 million,
collectively. Interest was 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, was allocated among the participating Funds. The Fund had no
borrowing activity for the period ended December 5, 1997.
NOTE B-
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the investment management contract, 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) 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 had a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended December
5, 1997, net sales charges received with regard to sales of Class A shares
amounted to $6,482. Out of this amount, $951 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $2,631 was paid
as sales commissions to unrelated broker-dealers and $2,900 was paid as sales
commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), was the indirect sole
shareholder of Distributors.
Class B shares which were 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 were paid to JH Funds and were 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 December 5,
1997, contingent deferred sales charges paid to JH Funds amounted to $21,245.
In addition, to reimburse JH Funds for the services it provided as
distributor of shares of the Fund, the Fund had 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 made 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 have been 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 have occurred under certain circumstances.
The Fund had a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund paid transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund had an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Fund.
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
JOHN HANCOCK FUNDS - DISCOVERY 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 was
borne by the Fund. 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 made 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 were recorded on
the Fund's books as an other asset. The deferred compensation liability and the
related other asset were always equal and were marked to market on a periodic
basis to reflect any income earned by the investment as well as any unrealized
gains or losses. At December 5, 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 period
ended December 5, 1997, aggregated $10,171,367 and $16,445,763, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended December 5, 1997.
The cost of investments owned at December 5, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $103,077,936. Gross
unrealized appreciation and depreciation of investments aggregated $33,598,813
and $2,337,870, respectively, resulting in net unrealized appreciation of
$31,260,943.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 5, 1997, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of $109,795,
a decrease in accumulated net investment loss of $204,672 and a decrease in
capital paid-in of $94,877. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of December
5, 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 certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended December
5, 1997.
The Fund designated a distribution to shareholders of $1,682,727 as long-term
capital gain dividends, $172,717 is a 28% rate gain distribution and $1,510,010
is a 20% rate gain distribution.
With respect to the dividends paid by the fund for the fiscal year ended
December 5, 1997, none qualify for the corporate dividends received deduction.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV in
January 1998. This will reflect the tax character of all distributions for the
calendar year 1997.
