As filed with the Securities and Exchange Commission on January 7, 1999.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
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Pre-Effective Amendment No. __ /____/
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Post-Effective Amendment No. ___ /____/
(Check appropriate box or boxes)
JOHN HANCOCK DECLARATION TRUST
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(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
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(Address of principal executive office) Zip Code
(617) 375-1702
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(Registrant's Telephone Number, including Area Code)
Susan S. Newton, Esq.
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199
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(Name and address of agent for service)
Title of Securities Being Registered: shares of beneficial interest of John
Hancock Declaration Trust.
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. This Registration Statement relates to shares previously registered
on Form N-1A (File Nos. 33-64465 and 811-07437).
It is proposed that this filing will become effective on February 6, 1999
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
JOHN HANCOCK DECLARATION TRUST
CROSS-REFERENCE SHEET
Items Required by Form N-14
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PART A
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Item No. Item Caption Prospectus Caption
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1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE OF
Cover Page of Prospectus PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis and Risk Factors SUMMARY; INVESTMENT RISKS
4. Information About the INTRODUCTION; SUMMARY; INVESTMENT
Transaction RISKS; INFORMATION CONCERNING THE
MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF REORGANIZATION;
CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Registrant SUMMARY; ADDITIONAL INFORMATION
ABOUT THE FUNDS' BUSINESSES
6. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Company Being Acquired SUMMARY; ADDITIONAL INFORMATION
ABOUT THE FUNDS' BUSINESSES
7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS;
SUMMARY; INFORMATION CONCERNING
THE MEETING; VOTING RIGHTS AND
REQUIRED VOTE
8. Interest of Certain Persons EXPERTS
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be
Underwriters
<PAGE>
PART B
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Caption in Statement of
Item No. Item Caption Additional Information
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10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION ABOUT
About the Registrant V.A. STRATEGIC INCOME FUND
13. Additional Information About ADDITIONAL INFORMATION ABOUT
the Company Being Acquired V.A WORLD BOND FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT V.A. STRATEGIC INCOME
FUND; ADDITIONAL INFORMATION ABOUT V.A WORLD BOND
FUND; PRO FORMA COMBINED FINANCIAL STATEMENTS
PART C
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Item No. Item Caption
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15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
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<PAGE>
[JH: Logo]
February 12, 1999
Dear Declaration Contract Owner:
I am writing to ask you to consider an important matter that will affect your
annuity contract. Some or all of the value of your variable insurance contract
(variable contract) issued by either John Hancock Mutual Life Insurance Company
or John Hancock Variable Life Insurance Company (the insurance companies) is
invested in the John Hancock V.A. World Bond Fund (the "fund"). The insurance
companies hold shares of V.A. World Bond Fund in separate accounts for the
purpose of funding your annuity payments. For this reason, you have the right to
instruct your insurance company how to vote the fund shares attributable to your
variable contract.
Since its inception in August 1996, the fund has invested heavily in foreign
bonds as well as bonds issued by multinational organizations and the U.S.
government. In recent years it has become difficult to post strong returns with
this strategy because of increasing instability in the foreign markets coupled
with the growing strength of the U.S. dollar.
For this reason, the fund's trustees are recommending the merger of the fund
into John Hancock V.A. Strategic Income Fund, which invests in U.S. government
bonds and high yield U.S. corporate bonds as well as foreign bonds. Through its
broader investment approach, V.A. Strategic Income Fund allows investors to
participate in foreign investments without being as vulnerable to potential
downturns overseas.
This proposed merger has been unanimously approved by the fund's Board of
Trustees, who believe it will benefit the fund's shareholders and, indirectly,
holders of variable contracts based on the fund. The merger is detailed in the
enclosed proxy statement and summarized in the questions and answers on the
following page. I suggest you read both thoroughly before voting.
No matter what size your investment may be, your instructions are important. I
urge you to review the enclosed materials and to complete, sign and return the
enclosed voting instruction card to the insurance company, which will vote its
shares in the fund in accordance with your instructions. Your prompt response
will help avoid the need for additional mailings at the fund's expense. For your
convenience, we have provided a postage-paid envelope.
If you have any questions or need additional information, please contact your
investment professional or call a Declaration customer service representative at
1-800-824-0335, Monday through Friday between 8:00 A.M. and 6:00 P.M. Eastern
time. I thank you for your prompt attention to this matter.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
John Hancock V.A. World Bond Fund
<PAGE>
What are the benefits of merging V.A. World Bond Fund into V.A. Strategic Income
Fund?
V.A. Strategic Income Fund has a much wider investment scope than V.A. World
Bond Fund. As owner of a variable contract based on V.A. Strategic Income Fund,
you can continue to participate in the international sector while opening your
portfolio to a broad range of opportunities in the U.S. government and corporate
high-yield sectors. This diversification will also help to make your investment
less dependent upon the success of international markets.
In addition, V.A. Strategic Income Fund's larger asset base after the merger may
allow for lower operating expenses than V.A. World Bond Fund has now. Following
the merger, annual fees are projected to be 0.85%, down from 1.00%. These
projected lower expenses should help bolster an investment's total return over
time.
How does V.A. Strategic Income Fund's strategy compare with that of V.A. World
Bond Fund?
V.A. Strategic Income Fund seeks a high level of current income while V.A. World
Bond Fund seeks a high total investment return from current income and capital
appreciation. Although both funds invest in foreign bonds as well as U.S.
government and agency securities, V.A. World Bond Fund has traditionally focused
on international sectors and multinational organizations. V.A. Strategic Income
Fund invests in domestic corporate bonds as well as foreign and U.S. government
bonds, providing greater diversification so investors are less vulnerable to
weakness in any single sector.
The corporate U.S. portion of V.A. Strategic Income Fund's portfolio typically
focuses on corporate high-yield bonds. These bonds entail some credit risk,
which V.A. Strategic Income Fund minimizes by applying a relatively conservative
investment approach. This strategy also allows V.A. Strategic Income Fund to
seek higher current income than V.A. World Bond Fund.
Who manages V.A. Strategic Income Fund?
V.A. Strategic Income Fund is managed by a team of portfolio managers led by
Frederick L. Cavanaugh, Jr. A senior vice president, Mr. Cavanaugh has more than
25 years of investment experience and has managed the fund since its inception
on August 29, 1996.
Mr. Cavanaugh is also a member of the fund's portfolio management team. His
expertise includes the high-yield bond market and international economies. With
the merger of V.A. World Bond Fund into V.A. Strategic Income Fund, Mr.
Cavanaugh and his team will allocate the fund's assets among domestic and
foreign bonds, emphasizing bond sectors where they see the strongest
opportunities at any given time.
<PAGE>
How has V.A. Strategic Income Fund performed?
Although past performance does not necessarily guarantee future results, V.A.
Strategic Income Fund has been a steady performer. The fund's shares have posted
average annual total returns of 10.50% for the 12 month period ended June 30,
1998 and 12.65% since inception on August 29, 1996.* To review V.A. Strategic
Income Fund in more detail, please refer to the John Hancock Declaration Trust
prospectus and V.A. Strategic Income Fund's most recent annual and semiannual
reports, all of which are enclosed.
* Performance figures assume all distributions are reinvested. The return and
principal value of any mutual fund investment will fluctuate, so that shares,
when redeemed, may be worth more or less than their original cost.
How do I provide my voting instructions?
Complete, sign and return the enclosed voting instruction card using the
pre-paid envelope provided.
How will the merger happen?
If the merger is approved, the insurance company's V.A. World Bond Fund shares
will be exchanged for V.A. Strategic Income Fund shares, using the funds' net
asset value share prices as of the close of trading on March 26, 1999. This
exchange will not affect the total dollar value of the insurance company's
investment or your rights under your variable contract.
Will the merger affect my contract rights?
The insurance companies have advised V.A. World Bond Fund that as contract
owners in an annuity, you will continue to receive income payments according to
the payout option you have chosen under the contract prospectus. The merger will
not affect your contract rights, except that your variable payments will depend
on the performance of V.A. Strategic Income Fund instead of V.A. World Bond
Fund.
Will the merger have tax consequences?
The merger is intended to qualify as a tax-free reorganization for federal
income tax purposes and therefore will not result in the recognition of gain or
loss by the funds or the insurance company, nor will it affect your taxes as an
owner of a variable contract.
Will the transfer of my units from the V.A. World Bond Fund to the V.A.
Strategic Income Fund be a taxable event?
No! One of the many advantages of investing in a variable annuity is the ability
to transfer your assets to any of the investment options available tax-free (no
Form 1099R will be generated).
Will the transfer due to the merger count towards the 12 free transfers allowed
per contract year?
No, the merger transfer will be free and it will not count toward your allowable
12 free transfers per contract year on your Declaration Variable Annuity.
What if I don't want to have my units of the V.A. World Bond Fund transferred to
the V.A. Strategic Income Fund?
Prior to the merger, you may contact a Declaration Customer Service
Representative at 1-800-824-0335, Monday through Friday between 8:00 a.m. and
6:00 p.m. Eastern Time and request a transfer of your V.A. World Bond Fund units
to any of the 14 Declaration investment portfolios or Fixed Account options (if
available in your state). Please consult with your Investment Professional prior
to reallocating your assets.
<PAGE>
JOHN HANCOCK V.A. WORLD BOND FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, MA 02199
NOTICE OF MEETING OF SHAREHOLDERS
SCHEDULED FOR MARCH 18, 1999
This is the formal agenda for the fund's shareholder meeting. It tells contract
owners and the insurance companies what matters will be voted on and the time
and place of the meeting. The insurance companies are owners of the fund's
shares. The insurance companies will vote their V.A. World Bond Fund shares as
instructed by their contract owners, who are also referred to in the proxy
materials as "shareholders" for this limited purpose.
To the shareholders of John Hancock V.A. World Bond Fund:
A shareholder meeting for V.A. World Bond Fund will be held at 101 Huntington
Avenue, Boston, Massachusetts on Thursday, March 18, 1999 at 9:00 a.m., Eastern
time, to consider the following:
1. A proposal to approve an Agreement and Plan of Reorganization between
John Hancock V.A. World Bond Fund and John Hancock V.A. Strategic
Income Fund. Under this Agreement, V.A. World Bond Fund would transfer
all of its assets to V.A. Strategic Income Fund in exchange for shares
of V.A. Strategic Income Fund. These shares would be distributed
proportionately to the shareholders of V.A. World Bond Fund. V.A.
Strategic Income Fund would also assume V.A. World Bond Fund's
liabilities. V.A. World Bond Fund's board of trustees recommends that
shareholders vote FOR this proposal.
2. Any other business that may properly come before the meeting.
Shareholders of record as of the close of business on January 22, 1999 are
entitled to vote at the meeting and any related follow-up meetings.
Whether or not you expect to attend the meeting, please complete and return the
enclosed proxy card (voting instruction card). If shareholders do not return
their proxies in sufficient numbers, the fund will incur the cost of extra
solicitations, which is indirectly borne by shareholders.
By order of the Board of Trustees,
Susan S. Newton
Secretary
February 12, 1999
020PX [ ]
<PAGE>
PROXY STATEMENT OF
JOHN HANCOCK V.A. WORLD BOND FUND
(a series of John Hancock Declaration Trust)
PROSPECTUS FOR
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
(a series of John Hancock Declaration Trust)
This proxy statement and prospectus contains the information shareholders should
know before voting on the proposed reorganization of John Hancock V.A. World
Bond Fund into John Hancock V.A. Strategic Income Fund. Please read it carefully
and retain it for future reference.
How the Reorganization Will Work
o V.A. World Bond Fund will transfer all of its assets to V.A.
Strategic Income Fund. V.A. Strategic Income Fund will
assume V.A. World Bond Fund's liabilities.
o V.A. Strategic Income Fund will issue shares to V.A.
World Bond Fund in an amount equal to the value of V.A.
World Bond Fund's shares. These shares will be distributed
to V.A. World Bond Fund's shareholders in proportion to their
holdings on the reorganization date.
o The reorganization will be tax-free.
o V.A. World Bond Fund will be liquidated and fund shareholders
will become shareholders of V.A. Strategic Income Fund.
Shares of V.A. Strategic Income Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution. These
shares are not federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
Shares of V.A. Strategic Income Fund have not been approved or disapproved by
the Securities and Exchange Commission. The Securities and Exchange Commission
has not passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Why V.A. World Bond Fund's Trustees are Recommending the Reorganization
V.A. World Bond Fund's Trustees believe that reorganizing the fund into a larger
fund with similar investment policies will enable the shareholders of the fund
to benefit from increased diversification, the ability to achieve better net
prices on securities trades and economies of scale that may contribute to a
lower expense ratio. Therefore, the Trustees recommend that V.A. World Bond
Fund's shareholders vote FOR the reorganization.
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Where to Get More Information
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Prospectus of V.A. World Bond Fund and V.A. In the same envelope as this proxy
Strategic Income Fund dated May 1, 1998. statement and prospectus. Incorporated by
reference into this proxy statement and
prospectus.
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V.A. Strategic Income Fund's annual and
semiannual reports to shareholders.
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V.A. World Bond Fund's annual and semiannual
reports to shareholders.
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A statement of additional information dated On file with the Securities and Exchange
February 12, 1999. It contains additional Commission ("SEC") and available at no
information about V.A. World Bond Fund and charge by calling 1-800-824-0335.
V.A. Strategic Income Fund. Incorporated by reference into this proxy
statement and prospectus
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To ask questions about this proxy statement Call our toll-free telephone
and prospectus. number: 1-800-824-0335
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The date of this proxy statement and prospectus is February 12, 1999.
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION
SUMMARY
INVESTMENT RISKS
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
CAPITALIZATION
ADDITIONAL INFORMATION ABOUT
THE FUNDS' BUSINESSES
BOARDS' EVALUATION AND RECOMMENDATION
VOTING RIGHTS AND REQUIRED VOTE
INFORMATION CONCERNING THE MEETING
OWNERSHIP OF SHARES OF THE FUNDS
EXPERTS
AVAILABLE INFORMATION
EXHIBITS
A. Agreement and Plan of Reorganization between John Hancock V.A. World
Bond Fund and John Hancock V.A. Strategic Income Fund (attached to this
document).
<PAGE>
INTRODUCTION
This proxy statement and prospectus is being used by V.A. World Bond Fund's
Board of Trustees to solicit proxies to be voted at a special meeting of V.A.
World Bond Fund's shareholders. This meeting will be held at 101 Huntington
Avenue, Boston, Massachusetts on Thursday, March 18, 1999 at 9:00 a.m., Eastern
time. The purpose of the meeting is to consider a proposal to approve an
Agreement and Plan of Reorganization providing for the reorganization of V.A.
World Bond Fund into V.A. Strategic Income Fund.
Who is Eligible to Vote?
Shareholders of record on January 22, 1999 (record date) are entitled to attend
and vote at the meeting or any adjourned meeting. Each share is entitled to one
vote. As of the record date, the insurance companies, on behalf of the separate
accounts, were shareholders of record of V.A. World Bond Fund. The insurance
companies will vote shares of V.A. World Bond Fund held by them in accordance
with voting instructions received from contract owners for whose accounts the
shares are held. The enclosed voting instruction card will be used by the
insurance companies to receive voting instructions from contract owners. The
notice of meeting, the proxy card (voting instruction card), the proxy statement
and prospectus are being mailed to the insurance companies and contract owners
on or about February 12, 1999.
SUMMARY
The following is a summary of more complete information appearing later in this
proxy statement. Shareholders should read the entire proxy statement, Exhibit A
and the enclosed documents carefully, because they contain details that are not
in the summary. Information about rights of a holder of a variable contract can
be obtained from the John Hancock Declaration Annuity Prospectus.
<PAGE>
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Comparison of V.A. World Bond Fund to V.A. Strategic Income Fund
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World Bond Strategic Income
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Business: A non-diversified series of John A diversified series of John Hancock
Hancock Declaration Trust. The trust Declaration Trust. The trust is an open-end
is an open-end investment company investment company organized as a
organized as a Massachusetts Massachusetts business trust.
business trust.
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Net assets as of June 30, $2.4 million. $10.8 million.
1998:
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Investment adviser and John Hancock Advisers, Inc. John Hancock Advisers, Inc.
portfolio managers:
In September, 1998, Mr. Cavanaugh Fredrick L. Cavanaugh, Jr.
and Mr. Ho joined your fund's -Senior V.P. of adviser
portfolio management team: -Joined team in 1996
-Joined adviser in 1986
Fredrick L. Cavanaugh, Jr. -Began career in 1975
-Senior V.P. of adviser
-Joined team in 1998 Arthur N. Calavritinos, CFA
-Joined adviser in 1986 -V.P. of adviser
-Began career in 1975 -Joined team in 1996
-Joined adviser in 1988
James K. Ho, CFA -Began career in 1986
-Exec. V.P. of adviser
-Joined team in 1998
-Joined adviser in 1985
-Began career in 1977
Anthony A. Goodchild
-Senior V.P. of adviser
-Joined team in 1994
-Joined adviser in 1994
-Began career in 1968
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<PAGE>
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V.A. World Bond Fund V.A. Strategic Income Fund
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Investment objective/ The fund seeks a high total investment return, The fund seeks a high level of
Primary investments: a combination of current income and capital current income. This objective can
appreciation. This objective can be changed be changed without shareholder
without shareholder approval. approval.
The fund invests primarily (at least 65% of The fund invests primarily in:
assets) in:
o Foreign government and corporate
o Debt securities issued or guaranteed by debt securities from developed and
foreign governments and companies, including emerging markets;
those in emerging markets; o U.S. Government and agency
o U.S. Government and agency securities and securities; and
municipal securities; and o U.S. junk bonds rated as low as
o Multinational organizations such as the CC/Ca and their unrated equivalents.
World Bank.
The fund normally invests in securities
denominated in at least three currencies,
including the U.S. dollar.
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Foreign debt Each fund may invest in foreign debt securities without any percentage limit. Each
securities: fund limits its investment in government securities of any one country to 25% of total
assets.
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Junk bonds: The fund may invest up to 35% of total assets The
fund may invest without limit in in junk bonds rated as
low as CCC/Caa and their junk bonds rated as low as
CC/Ca and unrated equivalents. their unrated
equivalents.
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Equity securities: The fund does not invest in equity securities. The fund may invest up to 10% of net
However, the fund may invest in preferred assets in U.S. or foreign equity
stock, convertible securities and other debt securities.
securities that have rights (warrants) to
acquire equity securities.
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Diversification: The fund is non-diversified and can invest more The fund is diversified and, with
than 5% of total assets in securities of a respect to 75% of total assets,
single issuer. cannot invest more than 5% of total
assets in securities of a single
issuer.
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<PAGE>
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Pay-in-kind, The fund may not invest in pay-in-kind, delayed The fund may invest in pay-in-kind,
delayed and zero and zero coupon debt securities. delayed and zero coupon debt
coupon debt securities
securities:
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Illiquid securities: Each fund may invest up to 15% of net assets in illiquid
securities.
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Financial futures Each fund may invest without limit in financial futures, options on futures and
and related options on securities and indices.
options; options on
securities and
indices:
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Currency contracts: Each fund may enter into currency contracts for hedging or
speculative purposes.
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Structured Each fund may invest without limit in structured securities, which include indexed
securities: and/or leveraged mortgage-backed and other debt securities.
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When-issued and Both funds may purchase when-issued securities and purchase or
forward commitment sell securities in forward commitment transactions.
transactions:
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Short-term trading: Neither fund is subject to any limitations on short-term
trading.
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Repurchase Both funds may invest without limitation in repurchase agreements.
agreements:
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Securities lending: Each fund may lend portfolio securities up to 33 1/3% of
total assets.
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Short-term Each fund may invest without limit in cash and cash equivalents for temporary
securities: defensive purposes.
- --------------------- ---------------------------------------------------------------------------------------
Borrowing and The funds are not permitted to borrow except from banks for temporary or short-term
reverse repurchase purposes and only if after the borrowing there is asset coverage of at least 300%.
agreements: Each fund is permitted to enter into reverse repurchase agreements in amounts not to
exceed 33 1/3% of the value of the fund's total assets
(including the amount borrowed).
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<PAGE>
- --------------------- ---------------------------------------------------------------------------------------
Mortgage-backed and Each fund may invest without limitation in mortgage-backed securities. V.A.
asset-backed Strategic Income Fund may also invest without limit in asset-backed securities.
securities:
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The Funds' Expenses
Both funds pay various expenses. The first two expense tables appearing below
show the expenses for the twelve-month period ended June 30, 1998, adjusted to
reflect any changes. Future expenses may be greater or less. The examples
contained in each expense table show what you would pay if you invested $10,000
over the various time periods indicated. Each example assumes that you
reinvested all dividends and that the average annual return was 5%. The examples
are for comparison purposes only and are not a representation of either fund's
actual expenses or returns, either past or future.
V.A. World Bond Fund
Shareholder transaction expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 0.00%
Maximum sales charge imposed on
reinvested dividends none
Maximum deferred sales charge none
Redemption fee none
Exchange fee none
Annual fund operating expenses
(as a % of average net assets)
Management fee 0.75%
Other expenses 1.56%
Total fund operating expenses 2.31%
Expense reimbursement (at least until 12/31/99) 1.31%
Actual operating expenses 1.00%
<PAGE>
Example
Year 1 Year 3 Year 5 Year 10
At end of period $102 $595 $1,116 $2,544
(1) The fund's adviser has agreed to limit other expenses to 0.25% for at
least one year.
V.A. Strategic Income Fund
Shareholder transaction expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 0.00%
Maximum sales charge imposed on
Reinvested dividends none
Maximum deferred sales charge none
Redemption fee none
Exchange fee none
Annual fund operating expenses
(as a % of average net assets)
Management fee 0.60%
Other expenses 0.53%
Total fund operating expenses 1.13%
Expense reimbursement (at least until 12/31/99) 0.28%
Actual operating expenses 0.85%
Example
Year 1 Year 3 Year 5 Year 10
At end of period $87 $331 $595 $1,350
(1) The fund's adviser has agreed to limit other expenses to 0.25% for at
least one year.
<PAGE>
Pro Forma Expense Table
The following expense table shows the pro forma expenses of V.A. Strategic
Income Fund assuming that a reorganization with V.A. World Bond Fund occurred on
June 30, 1997. The expenses shown in the table are based on fees and expenses
incurred during the twelve months ended June 30, 1998, adjusted to reflect any
changes. V.A. Strategic Income Fund's actual expenses after the reorganization
may be greater or less than those shown. The example contained in the pro forma
expense table shows what you would pay on a $10,000 investment if the
reorganization had occurred on June 30, 1997. The example assumes that you
reinvested all dividends and that the average annual return was 5%. The pro
forma example is for comparison purposes only and is not a representation of
V.A. Strategic Income Fund's actual expenses or returns, either past or future.
V.A. Strategic Income Fund (PRO FORMA)
(Assuming reorganization with V.A. World Bond Fund)
Shareholder transaction expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 0.00%
Maximum sales charge imposed on
Reinvested dividends none
Maximum deferred sales charge none
Redemption fee none
Exchange fee none
Annual fund operating expenses
(as a % of average net assets)
Management fee 0.60%
Other expenses 0.57%
Total fund operating expenses 1.17%
Expense reimbursement (at least until 12/31/99) 0.32%
Actual operating expenses 0.85%
Pro Forma Example
Year 1 Year 3 Year 5 Year 10
At end of period $87 $366 $665 $1,518
<PAGE>
(1) The fund's adviser has agreed to limit other expenses to 0.25% for at
least one year.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern
time, on March 26, 1999, but may occur on any later date
before October 31, 1999. V.A. World Bond Fund will transfer
all of its assets to V.A. Strategic Income Fund. V.A.
Strategic Income Fund will assume V.A. World Bond Fund's
liabilities. The net asset value of both funds will be
computed as of 5:00 p.m., Eastern time, on the reorganization
date.
o V.A. Strategic Income Fund will issue to V.A. World Bond Fund
shares in an amount equal to the aggregate net asset value of
V.A. World Bond Fund's shares. These shares will be
distributed immediately to V.A. World Bond Fund's shareholders
in proportion to their holdings on the reorganization date.
As a result, shareholders of V.A. World Bond Fund will end
up as shareholders of V.A. Strategic Income Fund.
o After the reorganization is over, V.A. World Bond Fund will be
terminated.
o The reorganization will be tax-free and will not take place
unless both funds receive a satisfactory opinion concerning
the tax consequences of the reorganization from Hale and Dorr
LLP, counsel to the funds.
<PAGE>
The following diagram shows how the reorganization would be carried out.
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V. A. World Bond V. A. World Bond Fund V.A. Strategic Income
Fund transfers assets assets and liabilities Fund receives assets
& liabilities to V.A. ____________?______________ & assumes liabilities
Strategic Income of V.A. World Bond
Fund Fund
Shareholders _____________?______________ Issues Shares
V.A. World Bond Fund receives V.A. Strategic Income Fund
shares and distributes them to its shareholders.
</TABLE>
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets: V.A.
World Bond Fund--0.75% and V.A. Strategic Income Fund--0.60%. V.A. Strategic
Income Fund's management fee rate of 0.60% and its pro forma management fee rate
of 0.60% are lower than V.A. World Bond Fund's management fee rate of 0.75%.
V.A. World Bond Fund's gross total annual operating expenses of 2.31% are
substantially higher that those of V.A. Strategic Income Fund which are 1.13%.
Even after the reduction of each fund's other expenses as a result of the
adviser's voluntary agreement to limit the funds' other expenses, V.A. World
Bond Fund's total annual operating expenses (1.00%) are higher than those of
V.A. Strategic Income Fund (0.85%). After the reorganization, V.A. Strategic
Income Fund's pro forma total annual operating expenses (0.85%) are less than
those of V.A. World Bond Fund's gross total annual operating expenses (2.31%)
and net total annual operating expenses (1.00%).
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table shows that the
risks affecting each fund are similar and compares the risks affecting each
fund.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------- ---------------------------------------------- -------------------------------------
V.A. World Bond Fund V.A. Strategic Income Fund
- ------------------------------- ------------------------------------------------------------------------------------
Risks of debt securities The value of the funds' portfolios will
change in response to movements of the bond
market. As with any fund that invests
primarily in debt securities, a rise in
interest rates typically causes the value of
debt securities and hence the value of the fund
to fall. A fall in interest rates typically
causes the value of debt securities to rise.
Debt securities held by the funds are also
subject to the risk that the issuer of a
security will have its credit rating downgraded,
will default or will otherwise fail to meet its
obligations.
- ------------------------------- ------------------------------------------------------------------------------------
Risks of lower-rated below The value of below investment grade debt securities,
investment grade debt also called junk bonds, fluctuates more than
securities higher rated debt securities and there is a
greater risk of securities loss of principal and
income. Lower ratings reflect a greater
possibility of an adverse change in the
financial condition of the issuer. The market
price and liquidity of below investment grade
securities generally respond more to short-term
developments affecting the issuer of below
investment grade debt securities than of higher
rated securities because these developments are
perceived to have a closer relationship to the
ability of an issuer to meet its obligations.
---------------------------------------------- -------------------------------------
V.A. World Bond Fund may invest up to 35% of V.A. Strategic Income Fund may
its assets in these securities, has invested invest without limit in these
in these securities in the past, and has securities. To the extent that
been subject to these risks. the fund invests in these
securities, it is exposed to these
risks.
- ------------------------------- ------------------------------------------------------------------------------------
Risks of equity securities The market value of equity securities may move up
and down, sometimes rapidly and unpredictably.
These fluctuations may cause the stock to be worth
less than the price originally paid for it, or
less than it was worth at an earlier time.
---------------------------------------------- -------------------------------------
V.A. World Bond Fund does not invest V.A. Strategic Income Fund may
directly in equity securities. However, the invest up to 10% of its assets in
fund may acquire equity securities as a equity securities. To the extent
result of investing in convertible that the fund invests in these
securities, preferred stock and other debt securities, it is exposed to these
instruments with rights to acquire equity risks.
securities attached. If the fund acquired
equity securities, it would be exposed to
these risks.
- ------------------------------- ---------------------------------------------- -------------------------------------
<PAGE>
- ------------------------------- ---------------------------------------------- -------------------------------------
Diversification risks The fund is non-diversified, which means The fund is diversified and not
that it can invest more of its assets in a subject to the risk of non-diversification.
single issuer than a fund that is
diversified. To the extent the fund invests more
of its assets in a single issuer, the fund's
share price may be adversely affected by events
affecting that issuer.
- ------------------------------- ---------------------------------------------- -------------------------------------
Foreign securities and Each fund's investments in foreign securities are subject
currency risks to the risks of adverse foreign government actions,
political instability or a lack of adequate and
accurate information. Also, currency exchange
rate movements could reduce gains or create
losses. The risks of international investing are
higher in emerging markets such as those of
Latin America and Southeast Asia.
- ------------------------------- ------------------------------------------------------------------------------------
Risks of restricted and Each fund's investments in restricted and illiquid securities may be difficult or
illiquid securities impossible to sell at a desirable time or a fair price. Restricted and illiquid
securities also present a greater risk of inaccurate valuation.
- ------------------------------- ------------------------------------------------------------------------------------
Risks of unleveraged Unleveraged derivative instruments involve the risk that a
derivative instruments rise in interest rates will cause the value of the
including asset-backed and instrument to fall. A fall in interest rates will
mortgage-backed typically cause the value of these instruments to rise.
securities These instruments are also subject to the risk that the
issuer will default or otherwise fail to meet
its obligations. In addition, mortgage-backed securities
are subject to the risk that the life of the security
will be extended beyond its expected repayment time.
This typically occurs during periods of rising interest
rates and often reduces the security's value. During
periods of falling interest rates, unanticipated
prepayments may occur which also reduces the
security's value.
- ------------------------------- ------------------------------------------------------------------------------------
Risks of derivative Many derivative instruments involve leverage, which
instruments, including increases market risks. Leverage magnifies gains and
financial futures, losses on derivatives relative to changes in the value of
Options on futures, underlying assets. If a derivative is used for hedging purposes, changes
Securities and index in the value of the derivative may not match those of the hedged
options, swaps, asset. Over the counter derivatives may be illiquid or hard to value
caps, floors, collars accurately. In addition, the other party may default on its obligations.
and structured securities. If markets for underlying assets do not move in the right direction,
a fund's performance may be worse than if it had not used derivatives.
- ------------------------------- ------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
Shareholders are being asked to approve an Agreement and Plan of Reorganization,
a copy of which is attached as Exhibit A. The Agreement provides for a
reorganization on the following terms:
o The reorganization is scheduled to occur at 5:00 p.m., Eastern time,
on March 26, 1999, but may occur on any later date before October 31,
1999. V.A. World Bond Fund will transfer all of its assets to V.A.
Strategic Income Fund and V.A. Strategic Income Fund will assume all of
V.A. World Bond Fund's liabilities. This will result in the addition of
V.A. World Bond Fund's assets to V.A. Strategic Income Fund's
portfolio. The net asset value of both funds will be computed as of
5:00 p.m., Eastern time, on the reorganization date.
o V.A. Strategic Income Fund will issue to V.A. World Bond Fund shares
in an amount equal to the aggregate net asset value of V.A. World Bond
Fund's shares. As part of the liquidation of V.A. World Bond Fund,
these shares will be distributed immediately to shareholders of record
of V.A. World Bond Fund in proportion to their holdings on the
reorganization date. As a result, shareholders of V.A. World Bond Fund
will end up as shareholders of V.A. Strategic Income Fund.
o After the reorganization is over, the existence of V.A. World Bond
Fund will be terminated.
Reasons for the Proposed Reorganization
The Board of Trustees of V.A. World Bond Fund believes that the proposed
reorganization will be advantageous to the shareholders of V.A. World Bond Fund
for several reasons. The Board of Trustees considered the following matters,
among others, in approving the proposal.
First, shareholders may be better served by a fund offering more
diversification. V.A. Strategic Income Fund has a larger asset size than V.A.
World Bond Fund and may invest in a broader range of securities including
domestic high yield bonds and government bonds as well as foreign bonds and
government bonds. Combining the funds' assets into a single investment portfolio
may broaden diversification, making investors less vulnerable to weakness in any
single sector of the bond market.
<PAGE>
Second, V.A. Strategic Income Fund shares have performed better than V.A. World
Bond Fund over the past year and since inception on August 29, 1996. While past
performance cannot predict future results, the Trustees believe that V.A.
Strategic Income Fund is better positioned than V.A. World Bond Fund to continue
to generate strong returns because of its greater flexibility to choose from
among a broader range of investment opportunities.
Third, a combined fund may offer economies of scale that can lead to better
control over expenses than is possible for V.A. World Bond Fund alone. Both
funds incur substantial costs for accounting, legal, transfer agency services,
insurance, and custodial and administrative services.
Fourth, investor interest in multi-sector income funds has been larger than that
of funds focused on foreign bonds. Diminished investor demand could hinder V.A.
World Bond Fund's prospects for asset growth and expense reduction in the
future. Conversely, existing and anticipated demand for multi-sector bond funds
should increase the potential for asset growth and expense reduction for V.A.
Strategic Income Fund.
The Trustees believe that V.A. Strategic Income Fund shareholders will also
benefit from improved diversification as a result of the reorganization. Because
V.A. Strategic Income Fund is a larger fund than V.A. World Bond Fund, the
Trustees feel that the addition of V.A. World Bond Fund's assets may add to the
diversification of V.A. Strategic Income Fund's overall portfolio. This
opportunity provides an economic benefit to V.A. Strategic Income Fund and its
shareholders.
The Boards of Trustees of both funds also considered that the adviser will also
benefit from the reorganization. For example, the adviser might realize time
savings from a consolidated portfolio management effort and from the need to
prepare fewer reports and regulatory filings as well as prospectus disclosure
for one fund instead of two. The Trustees believe, however, that these savings
will not amount to a significant economic benefit to the adviser.
Comparative Fees and Expense Ratios. As discussed above in the Summary, the
advisory fee rate paid by V.A. World Bond Fund is higher than the rate paid by
V.A. Strategic Income Fund. V.A. Strategic Income Fund's management fee rate of
0.60% and its pro forma management fee rate of 0.60% are lower than V.A. World
Bond Fund's management fee rate of 0.75%.
<PAGE>
World Bond Fund's gross total annual operating expenses of 2.31% are
substantially higher that those of Strategic Income Fund which are 1.13%. Even
after the reduction of each fund's other expenses as a result of the adviser's
voluntary agreement to limit the funds' other expenses, World Bond Fund's total
annual operating expenses (1.00%) are higher than those of Strategic Income Fund
(0.85%). After the reorganization, Strategic Income Fund's pro forma total
annual operating expenses (0.85%) are less than those of World Bond Fund's gross
total annual operating expenses (2.31%) and net total annual operating expenses
(1.00%).
V.A. World Bond Fund has not increased its asset size. The Trustees do not
believe, given V.A. World Bond Fund's current size and historical growth rate,
that V.A. World Bond Fund will grow to an asset size that would allow V.A. World
Bond Fund to realize the benefits of economies of scale, including better
control over expenses. The Trustees also do not believe that V.A. World Bond
Fund will reach an asset size which will allow V.A. World Bond Fund to
significantly broaden the diversification of its investment portfolio.
Comparative Performance. The trustees also took into consideration the relative
performance of V.A. World Bond Fund and V.A. Strategic Income Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
---------------------------------------- ---------------------- ------------------------------
V.A. World Bond Fund V.A. Strategic Income Fund
Average Annual Total Return
---------------------------------------- ---------------------- ------------------------------
1 year ended 6/30/98 3.35% 10.50%
---------------------------------------- ---------------------- ------------------------------
Since inception on 8/29/96 3.90% 12.65%
---------------------------------------- ---------------------- ------------------------------
</TABLE>
V.A. World Bond Fund's performance has lagged behind the performance of V.A.
Strategic Income Fund for the periods shown above.
Tax Status of the Reorganization
The reorganization will be tax-free for federal income tax purposes and will not
take place unless both funds receive a satisfactory opinion from Hale and Dorr
LLP, counsel to the funds, substantially to the effect that:
o The reorganization described above will be a
"reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986 (the "Code"), and each fund will
be "a party to a reorganization" within the meaning of Section
368 of the Code;
<PAGE>
o No gain or loss will be recognized by V.A. World Bond Fund
upon (1) the transfer of all of its assets to V.A. Strategic
Income Fund as described above or (2) the distribution by
V.A. World Bond Fund of V.A. Strategic Income Fund shares to
V.A. World Bond Fund's shareholders;
o No gain or loss will be recognized by V.A. Strategic Income
Fund upon the receipt of V.A. World Bond Fund's assets solely
in exchange for the issuance of V.A. Strategic Income Fund
shares and the assumption of all of V.A. World Bond Fund's
liabilities by V.A. Strategic Income Fund;
o The basis of the assets of V.A. World Bond Fund acquired by
V.A. Strategic Income Fund will be the same as the basis of
those assets in the hands of V.A. World Bond Fund immediately
before the transfer;
o The tax holding period of the assets of V.A. World Bond Fund
in the hands of V.A. Strategic Income Fund will include V.A.
World Bond Fund's tax holding period for those assets;
o The shareholders of V.A. World Bond Fund will not recognize
gain or loss upon the exchange of all their shares of V.A.
World Bond Fund solely for V.A. Strategic Income Fund shares
as part of the reorganization;
o The basis of V.A. Strategic Income Fund shares received by
V.A. World Bond Fund's shareholders in the reorganization will
be the same as the basis of the shares of V.A. World Bond Fund
surrendered in exchange; and
o The tax holding period of the V.A. Strategic Income Fund
shares that V.A. World Bond Fund shareholders receive will
include the tax holding period of the shares of V.A. World
Bond Fund surrendered in the exchange, provided that the
shares of V.A. World Bond Fund were held as capital assets on
the reorganization date.
Additional Terms of Agreement and Plan of Reorganization
Conditions to Closing the Reorganization. The obligation of V.A. World Bond Fund
to consummate the reorganization is subject to the satisfaction of certain
conditions, including the performance by V.A. Strategic Income Fund of all its
obligations under the Agreement and the receipt of all consents, orders and
permits necessary to consummate the reorganization (see Agreement, paragraph 6).
<PAGE>
The obligation of V.A. Strategic Income Fund to consummate the reorganization is
subject to the satisfaction of certain conditions, including V.A. World Bond
Fund's performance of all of its obligations under the Agreement, the receipt of
certain documents and financial statements from V.A. World Bond Fund and the
receipt of all consents, orders and permits necessary to consummate the
reorganization (see Agreement, paragraph 7).
The obligations of both funds are subject to approval of the Agreement by the
necessary vote of the outstanding shares of V.A. World Bond Fund, in accordance
with the provisions of V.A. World Bond Fund's declaration of trust and by-laws.
The funds' obligations are also subject to the receipt of a favorable opinion of
Hale and Dorr LLP as to the federal income tax consequences of the
reorganization. (see Agreement, paragraph 8).
Termination of Agreement. The Board of Trustees of either V.A. World Bond Fund
or V.A. Strategic Income Fund may terminate the Agreement (even if the
shareholders of V.A. World Bond Fund have already approved it) at any time
before the reorganization date, if that board believes that proceeding with the
reorganization would no longer be advisable.
<PAGE>
Expenses of the Reorganization. The funds' adviser will be responsible for the
expenses incurred in connection with entering into and carrying out the
provisions of the Agreement, whether or not the reorganization occurs.
These expenses are estimated to be approximately $45,400 in total.
CAPITALIZATION
The following table sets forth the capitalization of each fund as of June 30,
1998, and the pro forma combined capitalization of both funds as if the
reorganization had occurred on that date. The table reflects pro forma exchange
ratios of approximately 0.9176 V.A. Strategic Income Fund shares being issued
for each share of V.A. World Bond Fund. If the reorganization is consummated,
the actual exchange ratios on the reorganization date may vary from the exchange
ratios indicated. This is due to changes in the market value of the portfolio
securities of both funds between June 30, 1998 and the reorganization date,
changes in the amount of undistributed net investment income and net realized
capital gains of both funds during that period resulting from income and
distributions, and changes in the accrued liabilities of both funds during the
same period.
June 30, 1998
V.A. V.A.
World Strategic
Bond Income Pro Forma
Net Assets $2,457,606 $10,844,333 $13,301,939
Net Asset Value Per Share $9.64 $10.51 $10.51
Shares Outstanding 254,904 1,032,151 1,266,051
It is impossible to predict how many shares of V.A. Strategic Income Fund will
actually be received and distributed by V.A. World Bond Fund on the
reorganization date. The table should not be relied upon to determine the amount
of V.A. Strategic Income Fund shares that will actually be received and
distributed.
ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES
The following table shows where in each fund's prospectus you can find
additional information about the business of each fund.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------- -----------------------------------------------------------------------
Type of Information Headings in Combined Prospectus for V.A. World Bond Fund and V.A.
Strategic Income Fund
- ------------------------------------------- -----------------------------------------------------------------------
Organization and operation Organization and Management of the Fund
- ------------------------------------------- -----------------------------------------------------------------------
Investment objective and policies Investment Policies and Strategies
- ------------------------------------------- -----------------------------------------------------------------------
Portfolio Management Organization and Management of the Fund
- ------------------------------------------- -----------------------------------------------------------------------
Investment adviser and distributor Organization and Management of the Fund
- ------------------------------------------- -----------------------------------------------------------------------
Expenses The Fund's Expenses
- ------------------------------------------- -----------------------------------------------------------------------
Custodian and transfer agent Organization and Management of the Fund
- ------------------------------------------- -----------------------------------------------------------------------
Dividends, distributions and taxes Dividends and Taxes
- ------------------------------------------- -----------------------------------------------------------------------
</TABLE>
BOARDS' EVALUATION AND RECOMMENDATION
For the reasons described above, the Board of Trustees of V.A. World Bond Fund,
including the Trustees who are not "interested persons" of either fund or the
adviser ("independent trustees"), approved the reorganization. In particular,
the Trustees determined that the reorganization was in the best interests of
V.A. World Bond Fund and that the interests of V.A. World Bond Fund's
shareholders would not be diluted as a result of the reorganization. Similarly,
the Board of Trustees of V.A. Strategic Income Fund, including the independent
trustees, approved the reorganization. They also determined that the
reorganization was in the best interests of V.A. Strategic Income Fund and that
the interests of V.A. Strategic Income Fund's shareholders would not be diluted
as a result of the reorganization.
--------------------------------------------------------
The trustees of V.A. World Bond Fund recommend that the
shareholders vote for the proposal to
approve the agreement and plan of reorganization.
--------------------------------------------------------
VOTING RIGHTS AND REQUIRED VOTE
Each share of V.A. World Bond Fund is entitled to one vote. Approval of the
above proposal requires the affirmative vote of a majority of the shares of V.A.
World Bond Fund outstanding and entitled to vote. For this purpose, a majority
of the outstanding shares of V.A. World Bond Fund means the vote of the lesser
of
<PAGE>
(1) 67% or more of the shares present at the meeting, if the holders of more
than 50% of the shares of the fund are present or represented by proxy, or
(2) more than 50% of the outstanding shares of the fund.
Shares of V.A. World Bond Fund represented in person or by proxy, including
shares that abstain or do not vote with respect to the proposal, will be counted
for purposes of determining whether there is a quorum at the meeting.
Accordingly, an abstention from voting has the same effect as a vote against the
proposal.
If the required approval of shareholders is not obtained, V.A. World Bond Fund
will continue to engage in business as a separate mutual fund and the Board of
Trustees will consider what further action may be appropriate.
INFORMATION CONCERNING THE MEETING
Voting at the Meeting
Contract owners use the voting instruction card as a ballot to give the
insurance company voting instructions for those shares attributable to the
variable contract as of the record date. When the contract owner completes the
voting instruction card and sends it to the insurance company, the insurance
company votes its proxy in accordance with the contract owner's instructions. If
the contract owner completes and signs the voting instruction card, the shares
attributable to the variable contract will be voted as instructed. If the
contract owner merely signs and returns the card, the life insurance company
will vote those shares in favor of the proposal. If the contract owner does not
return the card, the life insurance company will vote those shares in the same
proportion as shares for which instructions were received from other contract
owners.
Shares of V.A. World Bond Fund which are not attributable to variable contracts
will be represented and voted by one of the insurance companies in the same
proportion as the voting instructions received from contract owners. These
shares include shares purchased with contributions made as seed capital to the
fund by the adviser.
Solicitation of Proxies
In addition to the mailing of these proxy materials, proxies may be solicited by
telephone, by fax or in person by the trustees, officers and employees of V.A.
World Bond Fund and by personnel of V.A. World Bond Fund's investment adviser,
John Hancock Advisers, Inc. and its transfer agent, John Hancock Servicing
Center. The Servicing Center, together with a third party solicitation firm, has
agreed to provide proxy solicitation services to V.A. World Bond Fund at a cost
of approximately $1,000.
<PAGE>
Revoking Proxies
Each V.A. World Bond Fund shareholder signing and returning a proxy has the
power to revoke it at any time before it is exercised:
o By filing a written notice of revocation with V.A. World
Bond Fund's transfer agent, John Hancock Servicing Center,
P.O. Box 9298, Boston, Massachusetts 02210, or
o By returning a duly executed proxy with a later date before
the time of the meeting, or
o If a shareholder has executed a proxy but is present at the
meeting and wishes to vote in person, by notifying the
secretary of V.A. World Bond Fund (without complying with any
formalities) at any time before it is voted.
Being present at the meeting alone does not revoke a previously executed and
returned proxy.
Contract owners may revoke their voting instructions at any time before the
proxy is voted by the life insurance company by following the procedure outlined
above for revoking proxies.
Outstanding Shares and Quorum
As of January 22, 1999, _______ shares of beneficial interest of V.A. World Bond
Fund were outstanding. Only shareholders of record on January 22, 1999 (the
"record date") are entitled to notice of and to vote at the meeting. A majority
of the outstanding shares of V.A. World Bond Fund that are entitled to vote will
be considered a quorum for the transaction of business.
Other Business
V.A. World Bond Fund's Board of Trustees knows of no business to be presented
for consideration at the meeting other than the proposal. If other business is
properly brought before the meeting, proxies will be voted according to the best
judgment of the persons named as proxies.
<PAGE>
Adjournments
If a quorum is not present in person or by proxy at the time any session of the
meeting is called to order, the persons named as proxies may vote those proxies
that have been received to adjourn the meeting to a later date. If a quorum is
present but there are not sufficient votes in favor of the proposal, the persons
named as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies concerning the proposal. Any adjournment will
require the affirmative vote of a majority of V.A. World Bond Fund's shares at
the session of the meeting to be adjourned. If an adjournment of the meeting is
proposed because there are not sufficient votes in favor of the proposal, the
persons named as proxies will vote those proxies favoring the proposal in favor
of adjournment, and will vote those proxies against the reorganization against
adjournment.
OWNERSHIP OF SHARES OF THE FUNDS
As of January 31, 1999, outstanding shares of each fund were owned as follows:
- ------------------------------------------ -------------------------------------
V.A. World Bond Fund V.A. Strategic Income Fund
- ------------------------------------------- ------------------------------------
- ------------------------------------------- ------------------------------------
EXPERTS
The financial statements and the financial highlights of each fund as of
December 31, 1997 and for the periods then ended and the unaudited financial
statements and financial highlights of each fund as of June 30, 1998 are
incorporated by reference into this proxy statement and prospectus. The
financial statements and financial highlights as of December 31, 1997 have been
independently audited by Ernst & Young LLP as stated in their reports appearing
in the statement of additional information. These financial statements and
financial highlights have been included in reliance on their report given on
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
Each fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 and files reports,
proxy statements and other information with the SEC. These reports, proxy
statements and other information filed by the funds can be inspected and copied
(at prescribed rates) at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C., and at the following regional offices: Chicago
(500 West Madison Street, Suite 1400, Chicago, Illinois); and New York (7 World
Trade Center, Suite 1300, New York, New York). Copies of this material can also
be obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies
of these documents may be viewed on-screen or downloaded from the SEC's Internet
site at (http://www.sec.gov).
S:/corporate sec/proxy/vaworldbond3h&d
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 9th day
of December, 1998, by and between John Hancock V.A. Strategic Income Fund (the
"Acquiring Fund") and John Hancock V.A. World Bond Fund Fund (the "Acquired
Fund"), each a series of John Hancock Declaration Trust, a Massachusetts
business trust (the "Trust"), with their principal place of business at 101
Huntington Avenue, Boston, Massachusetts 02199. The Acquiring Fund and the
Acquired Fund are sometimes referred to collectively herein as the "Funds" and
individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization,"
as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization will consist of the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the
issuance of shares of beneficial interest of the Acquiring Fund (the "Acquiring
Fund Shares") to the Acquired Fund and the assumption by the Acquiring Fund of
all of the liabilities of the Acquired Fund, followed by the distribution by the
Acquired Fund, on or promptly after the Closing Date hereinafter referred to, of
the Acquiring Fund Shares to the shareholders of the Acquired Fund in
liquidation and termination of the Acquired Fund as provided herein, all upon
the terms and conditions set forth in this Agreement.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting,
without limitation, of portfolio securities and instruments, dividends
and interest receivables, cash and other assets), as set forth in the
statement of assets and liabilities referred to in Paragraph 5.5 hereof
(the "Statement of Assets and Liabilities"), to the Acquiring Fund free
and clear of all liens and encumbrances, except as otherwise provided
herein, in exchange for (i) the assumption by the Acquiring Fund of the
known and unknown liabilities of the Acquired Fund, including the
liabilities set forth in the Statement of Assets and Liabilities (the
"Acquired Fund Liabilities"), which shall be assigned and transferred
to the Acquiring Fund by the Acquired Fund and assumed by the Acquiring
Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund, for
distribution pro rata by the Acquired Fund to its shareholders in
proportion to their respective ownership of shares of beneficial
interest of the Acquired Fund, as of the close of business on March 26,
1999 (the "Closing Date"), of a number of the Acquiring Fund Shares
having an aggregate net asset value equal, to the value of the assets,
less such liabilities (herein referred to as the "net value of the
assets"), assumed, assigned and delivered, all determined as provided
in Paragraph 2.1 hereof and as of a date and time as specified therein.
Such transactions shall
<PAGE>
take place at the closing provided for in Paragraph 3.1 hereof (the
"Closing"). All computations with respect to the Acquiring Fund shall be
provided by Investors Bank & Trust Company (the "Acquiring Fund
Custodian"), as custodian and pricing agent for the Acquiring Fund and,
with respect to the Acquired Fund by State Street Bank and Trust Company
(the "Acquired Fund's Custodian").
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of
execution of this Agreement. The Acquired Fund reserves the right to sell
any of these securities (except to the extent sales may be limited by
representations made in connection with issuance of the tax opinion
provided for in paragraph 8.6 hereof) but will not, without the prior
approval of the Acquiring Fund, acquire any additional securities other
than securities of the type in which the Acquiring Fund is permitted to
invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses
in connection with the transactions contemplated by this Agreement
whether or not these transactions are consummated.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record (the "Acquired Fund shareholders"),
determined as of the close of regular trading on the New York Stock
Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund, to open accounts on the share records of the
Acquiring Fund in the names of the Acquired Fund shareholders and
representing the respective pro rata number of Acquiring Fund Shares
due such shareholders. The Acquiring Fund shall not issue
certificates representing Acquiring Fund Shares in connection with such
exchange.
1.5 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund Shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.6 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.7 Any reporting responsibility of the Acquired Fund, including, but not
limited to, the responsibility for filing of regulatory reports, tax
returns, or other documents with the Securities and Exchange Commission
(the "Commission"), any state securities commissions, and any federal,
state or local tax authorities or any other relevant regulatory
authority, is and shall remain the responsibility of the Acquired Fund.
<PAGE>
2. VALUATION
2.1 The net asset values of the Acquiring Fund Shares and the net values of
the assets and liabilities of the Acquired Fund to be transferred shall,
in each case, be determined as of the close of business (4:00 p.m. Boston
time) on the Closing Date. The net asset values of the Acquiring Fund
Shares shall be computed by the Acquiring Fund's Custodian in the manner
set forth in the Acquiring Fund's Declaration of Trust as amended and
restated (the "Declaration"), or By-Laws and the Acquiring Fund's
then-current prospectus and statement of additional information and shall
be computed in each case to not fewer than four decimal places. The net
values of the assets of the Acquired Fund to be transferred shall be
computed by the Acquired Fund's Custodian by calculating the value of the
assets transferred by the Acquired Fund and by subtracting therefrom the
amount of the liabilities assigned and transferred to and assumed by
the Acquiring Fund on the Closing Date, said assets and liabilities
to be valued in the manner set forth in the Acquired Fund's then current
prospectus and statement of additional information and shall be
computed in each case to not fewer than four decimal places.
2.2 The number of Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Acquired Fund's assets shall be
determined by dividing the value of the Acquired Fund's assets less the
liabilities assumed by the Acquiring Fund, by the Acquiring Fund's net
asset value per share, all as determined in accordance with Paragraph 2.1
hereof.
2.3 All computations of value shall be made by each Custodian in accordance
with its regular practice as pricing agent for its respective Fund.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be March 26, 1999 or such other date on or
before October 31, 1999 as the parties may agree. The Closing shall be
held as of 5:00 p.m. at the offices of the Trust, 101 Huntington Avenue,
Boston, Massachusetts 02199, or at such other time and/or place as the
parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name of
the Acquired Fund's Custodian as record holder for the Acquired Fund
shall be presented by the Acquired Fund to the Acquiring Fund's Custodian
for examination no later than five business days preceding the Closing
Date. Portfolio securities which are not held in book-entry form shall be
delivered by the Acquired Fund to the Acquiring Fund's Custodian for the
account of the Acquiring Fund on the Closing Date, duly endorsed in
proper form for transfer, in such condition as to constitute good
delivery thereof in accordance with the custom of brokers, and shall be
accompanied by all necessary federal and state stock transfer stamps or a
check for the appropriate purchase price thereof. Portfolio securities
held of record by the Acquired Fund's Custodian in book-entry form on
behalf of the Acquired Fund shall be delivered to the Acquiring Fund by
the Acquiring Fund's Custodian recording the transfer of beneficial
ownership on its records. The cash delivered shall be in the form of
currency or by the Acquiring Fund's Custodian crediting the Acquiring
Fund's account maintained with the Acquiring Fund's Custodian with
immediately available funds.
<PAGE>
3.3 In the event that on the Closing Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted or (b)
trading or the reporting of trading on said Exchange or elsewhere shall
be disrupted so that accurate appraisal of the value of the net assets of
the Acquiring Fund or the Acquired Fund is impracticable, the Closing
Date shall be postponed until the first business day after the day when
trading shall have been fully resumed and reporting shall have been
restored; provided that if trading shall not be fully resumed and
reporting restored on or before October 31, 1999, this Agreement may be
terminated by the Acquiring Fund or by the Acquired Fund upon the giving
of notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding
and nonresident alien withholding status of the Acquired Fund
shareholders and the number of outstanding shares of beneficial
interest of the Acquired Fund owned by each such shareholder, all as of
the close of business on the Closing Date, certified by its
Treasurer, Secretary or other authorized officer (the "Shareholder
List"). The Acquiring Fund shall issue and deliver to the Acquired Fund a
confirmation evidencing the Acquiring Fund Shares to be credited on the
Closing Date, or provide evidence satisfactory to the Acquired Fund that
such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party
shall deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of each Fund represents, warrants and covenants as
follows:
(a) The Trust is a business trust, duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the Trust nor
either Fund is required to qualify to do business in any jurisdiction in
which it is not so qualified or where failure to qualify would subject
it to any material liability or disability. The Trust has all necessary
federal, state and local authorizations to own all of its properties and
assets and to carry on its business as now being conducted;
(b) The Trust is a registered investment company classified as a management
company and its registration with the Commission as an investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"), is in full force and effect. Each Fund is a diversified series of
the Trust;
(c) The Trust and each Fund are not, and the execution, delivery and
performance of their obligations under this Agreement will not result,
in violation of any provision of the Trust's Declaration of Trust, as
amended and restated (the "Trust's Declaration") or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking
to which the Trust or either Fund is a party or by which it is bound;
<PAGE>
(d) Except as otherwise disclosed in writing and accepted by either Fund, no
material litigation or administrative proceeding or investigation of or
before any court or governmental body is currently pending or threatened
against the Trust or either Fund or any of either Fund's properties or
assets. The Trust knows of no facts which might form the basis for the
institution of such proceedings, and neither the Trust nor either Fund
is a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely affects either Fund's business or its ability to consummate
these transactions;
(e) Neither fund has any material contracts or other commitments (other than
this Agreement or agreements for the purchase of securities entered into
in the ordinary course of business and consistent with its obligations
under this Agreement) which will not be terminated without liability to
the respective Fund at or prior to the Closing Date;
(f) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquired Fund as of December 31, 1997 and the
related statement of operations as well as the Acquired Fund's unaudited
statements dated June 30, 1998 (copies of which have been furnished to
the Acquiring Fund) present fairly in all material respects the
financial condition of the Acquired Fund as of June 30, 1998 and the
results of its operations for the period then ended in accordance with
generally accepted accounting principles consistently applied, and there
were no known actual or contingent liabilities of the Acquired Fund as
of those dates not disclosed therein;
(g) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquiring Fund as of December 31, 1997 and the
related statement of operations as well as the Acquired Fund's unaudited
statements dated June 30, 1998 (copies of which have been furnished to
the Acquired Fund) present fairly in all material respects the financial
condition of the Acquiring Fund as of June 30, 1998 and the results of
its operations for the period then ended in accordance with generally
accepted accounting principles consistently applied, and there were no
known actual or contingent liabilities of the Acquiring Fund as of those
dates not disclosed therein;
(h) Since June 30, 1998, there has not been any material adverse change in
either Fund's financial condition, assets, liabilities, or business
other than changes occurring in the ordinary course of business, or any
incurrence by either Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the other Fund;
(i) At the date hereof and by the Closing Date, all federal, state and other
tax returns and reports, including information returns and payee
statements, of the Acquired Fund shall have been filed or furnished, and
all federal, state and other taxes, interest and penalties shall have
been paid so far as due, or provision shall have been made for the
payment thereof, and to the best of the Acquired Fund's knowledge no
such return is currently under audit and no assessment has been asserted
with respect to such returns or reports;
<PAGE>
(j)Each of the Funds and its predecessors has qualified as a regulated
investment company for each taxable year of its operation and will
qualify as such as of the Closing Date with respect to its taxable year
ending on the Closing Date;
(k)The authorized capital of each Fund consists of an unlimited number of
shares of beneficial interest, no par value. All issued and outstanding
shares of beneficial interest of each Fund are, and at the Closing Date
will be, duly and validly issued and outstanding, fully paid and
nonassessable by the other Fund. All of the issued and outstanding shares
of beneficial interest of the Acquired Fund will, at the time of Closing,
be held by the persons and in the amounts set forth in the
Shareholder List submitted to the Acquiring Fund pursuant to Paragraph
3.4 hereof. Neither Fund has outstanding any options, warrants or other
rights to subscribe for or purchase any of its shares of beneficial
interest, or any security convertible into any of its shares of
beneficial interest;
(l) At the Closing Date, the Acquired Fund will have good and marketable
title to the assets to be transferred to the Acquiring Fund pursuant to
Paragraph 1.1 hereof, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the Securities
Act of 1933, as amended (the "1933 Act");
(m)The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action on the part of the Trust on behalf of
each Fund, and this Agreement constitutes a valid and binding obligation
of the Trust and each Fund enforceable in accordance with its terms,
subject to the approval of the Acquired Fund's shareholders;
(n) The information to be furnished by each Fund for use in all necessary
documents will be accurate, complete and comply in all material
respects with all applicable laws and regulations;
(o) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in Paragraph 5.7
hereof, on the effective date of the Registration Statement, on the date
of the meeting of the Acquired Fund shareholders and on the Closing
Date, will not contain any untrue or misleading statement of a material
fact, or omit a required or necessary material fact.
(p) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for the Acquiring Fund, each dated May 1, 1998,
and any amendments or supplements thereto on or prior to the Closing
Date, and the Registration Statement on Form N-14 to be filed in
connection with this Agreement (the "Registration Statement") will
conform in all material respects to the applicable requirements of the
1933 Act and the 1940 Act and the rules and regulations of the
Commission thereunder. The Registration Statement will not include any
untrue or misleading statement of material fact, or omit a required or
necessary material fact.
<PAGE>
(q) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by either Fund
of the transactions contemplated by this Agreement, except for the
registration of the Acquiring Fund shares under the 1933 Act and the
1940 Act;
(r) All of the issued and outstanding shares of beneficial interest of the
Acquired Fund have been offered for sale and sold in conformity with all
applicable federal and state securities laws;
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly stated herein to the contrary, each Fund will operate
its respective businesses in the ordinary course between the date hereof
and the Closing Date, including customary dividends and any distributions
that may be advisable.
5.2 The Trust will call a meeting of the Acquired Fund shareholders to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution other than in accordance with the terms of this
Agreement.
5.4 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable
to consummate the transactions contemplated by this Agreement.
5.5 The Acquired Fund shall furnish to the Acquiring Fund on the Closing Date
the Statement of Assets and Liabilities of the Acquired Fund as of the
Closing Date, which statement shall be prepared in accordance with
generally accepted accounting principles consistently applied and shall
be certified by the Acquired Fund's Treasurer or Assistant Treasurer. As
promptly as practicable but in any case within 60 days after the Closing
Date, the Acquired Fund shall furnish to the Acquiring Fund, in such form
as is reasonably satisfactory to the Trust, a statement of the earnings
and profits of the Acquired Fund for federal income tax purposes and of
any capital loss carryovers and other items that will be carried over to
the Acquiring Fund as a result of Section 381 of the Code, and which
statement will be certified by the President or Treasurer of the Acquired
Fund.
5.6 The Trust on behalf of the Acquiring Fund will prepare and file with the
Commission the Registration Statement in compliance with the 1933 Act and
the 1940 Act in connection with the issuance of the Acquiring Fund
Shares.
<PAGE>
5.7 The Trust on behalf of the Acquired Fund will prepare a Proxy Statement,
to be included in the Registration Statement in compliance with the 1933
Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the 1940 Act and the rules and regulations thereunder (collectively,
the "Acts") in connection with the special meeting of shareholders of the
Acquired Fund to consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BOTH FUNDS
The obligations of each Fund to complete the transactions provided for herein
shall be subject to the performance by the other Fund of all the obligations to
be performed by it hereunder on or before the Closing Date, and, in addition,
the following conditions:
6.1 All representations and warranties of each Fund in this Agreement will be
true and correct in all material respects as of the date of the Agreement
and, unless affected by the transactions contemplated by the Agreement,
on the Closing Date; and each Fund will deliver to the other Fund a
certificate signed by its President or Vice President and its Treasurer
or Assistant Treasurer, dated as of the Closing Date to the effect that
the representations and warranties made in this Agreement are true and
correct as of the Closing Date, except as affected by the transactions
contemplated by this Agreement, and as to any other matters as either
Fund reasonably requests.
6.2 The Acquired Fund shall have delivered to the Acquiring Fund the
Statement of Assets and Liabilities of the Acquired Fund, together with a
list of its portfolio securities showing the federal income tax bases and
holding periods of such securities, as of the Closing Date, certified by
the Treasurer or Assistant Treasurer of the Acquired Fund;
6.3 At or prior to the Closing Date, the Acquired Fund's investment adviser,
or an affiliate thereof, shall have made all payments, or applied all
credits, to the Acquired Fund required by any applicable contractual
expense limitation.
7. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE FUNDS
The obligations hereunder of each Fund are subject to the further conditions
that on or before the Closing Date:
7.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares
of beneficial interest of the Acquired Fund in accordance with the
provisions of the Trust's Declaration and By-Laws, and certified copies
of the resolutions evidencing approval by the Acquired Fund's
shareholders shall have been delivered to the Acquiring Fund;
7.2 The Registration Statement shall have become effective under the 1933 Act
and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto,
no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act
or the 1940 Act;
<PAGE>
7.3 The Acquired Fund shall have distributed to its shareholders, in a
distribution or distributions qualifying for the deduction for dividends
paid under Section 561 of the Code, all of its investment company taxable
income (as defined in Section 852(b)(2) of the Code determined without
regard to Section 852(b)(2)(D) of the Code) for its taxable year ending
on the Closing Date, all of the excess of (i) its interest income
excludable from gross income under Section 103(a) of the Code over (ii)
its deductions disallowed under Sections 265 and 171(a)(2) of the Code
for its taxable year ending on the Closing Date, and all of its net
capital gain (as such term is used in Sections 852(b)(3)(A) and (C) of
the Code), after reduction by any available capital loss carryforward,
for its taxable year ending on the Closing Date; and
7.4 The parties shall have received an opinion of Hale and Dorr LLP,
satisfactory to the Trust on behalf of each Fund, substantially to the
effect that for federal income tax purposes:
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund
Shares to the Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by the Acquiring Fund, followed by the distribution by
the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring
Fund Shares to the shareholders of the Acquired Fund in exchange for
their shares of beneficial interest of the Acquired Fund and the
termination of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a) of the Code, and the Acquired Fund
and the Acquiring Fund will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon (i) the
transfer of all of its assets to the Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund; and (ii) the distribution by the Acquired Fund of such Acquiring
Fund Shares to the shareholders of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
issuance of the Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund;
(d) The basis of the assets of the Acquired Fund acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets in
the hands of the Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the Acquired Fund in the hands
of the Acquiring Fund will, in each instance, include the Acquired
Fund's tax holding period for those assets;
<PAGE>
(f) The shareholders of the Acquired Fund will not recognize gain or loss
upon the exchange of all of their shares of beneficial interest of the
Acquired Fund solely for Acquiring Fund Shares as part of the
transaction;
(g) The basis of the Acquiring Fund Shares received by the Acquired Fund
shareholders in the transaction will be the same as the basis of the
shares of beneficial interest of the Acquired Fund surrendered in
exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares received by the
Acquired Fund shareholders will include, for each shareholder, the tax
holding period for the shares of the Acquired Fund surrendered in
exchange therefor, provided that the Acquired Fund shares were held as
capital assets on the date of the exchange.
The Trust agrees to make and provide representations with respect to the
Acquiring Fund and the Acquired Fund, respectively, which are reasonably
necessary to enable Hale and Dorr LLP to deliver an opinion substantially as set
forth in this Paragraph 7.4. Notwithstanding anything herein to the contrary,
the Trust may not waive the conditions set forth in this Paragraph 7.4.
8. BROKERAGE FEES AND EXPENSES
8.1 The Trust on behalf of each Fund represents and warrants that there are
no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.
8.2 Each Fund shall bear its own expenses in connection with carrying out the
terms of this Agreement and if the Agreement is terminated no party will
be liable to another party for damages.
9. TERMINATION
9.1 This Agreement may be terminated by the mutual agreement of the Acquiring
Fund and the Acquired Fund. In addition, either party may terminate this
Agreement at or prior to the Closing Date by resolution of the Trust's
Board of Trustees if, in the good faith opinion of the Board, proceeding
with the Agreement is not in the best interests of the Trust or either
Fund's shareholders.
9.2 The representations, warranties and covenants in the Agreement and
related documents will survive the consummation of the transactions
contemplated by the Agreement.
10. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon by the authorized officers of each Fund. However, following
the meeting of the Acquired Fund shareholders held pursuant to Paragraph 5.2 of
this Agreement, no such amendment may have the effect of changing the provisions
for determining the number of Acquiring Fund Shares to be issued to the Acquired
Fund shareholders under this Agreement to the detriment of these shareholders
without their further approval; provided, however, that nothing contained in
this Article 10 shall be construed to prohibit the parties from amending this
Agreement to change the Closing Date.
<PAGE>
11. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
11.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
11.3 This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts.
11.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made
by any party without the prior written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm or corporation, other than the
parties hereto and their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
11.5 All persons dealing with the Trust must look solely to the property of
the Trust for the enforcement of any claims against the Trust as the
Trustees, officers, agents and shareholders of the Trust assume no
personal liability for obligations entered into on behalf of the Trust.
None of the other series of the Trust shall be responsible for any
obligations assumed by on or behalf of the Acquired Fund or the Acquiring
Fund under this Agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed as of the date first set forth above by its President or Vice President
and has caused its corporate seal to be affixed hereto.
JOHN HANCOCK DECLARATION TRUST on behalf of
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
By: /s/ Anne C. Hodsdon
-----------------------------------------
Anne C. Hodsdon
President
JOHN HANCOCK DECLARATION TRUST on behalf of
JOHN HANCOCK V.A. WORLD BOND FUND
By: /s/ Susan S. Newton
------------------------------------------
Susan S. Newton
Vice President and Secretary
<PAGE>
JOHN HANCOCK DECLARATION TRUST
Supplement to Prospectus and Statement of Additional Information dated May 1,
1998.
The name of John Hancock V.A. Sovereign Bond Fund has been changed to John
Hancock V.A. Bond Fund, effective October 1, 1998.
On pages 18 and 19, the "Organization and Management of the Funds" has been
changed as follows:
V.A. Emerging Growth Fund
Bernice S. Behar, CFA, leads the fund's portfolio management team. Other team
members are managers Laura Allen, CFA and Anurag Pandit, CFA. Ms. Behar, senior
vice president, has been in the investment business since 1986 and has managed
the fund since 1996. Ms. Allen, senior vice president has been in the investment
business since 1981 and joined the fund's management team in 1998. Mr. Pandit,
vice president, has been in the investment business since 1984 and a member of
the fund's team since 1996.
John Hancock V.A. Bond Fund
Mr. James K. Ho, CFA, leads the Fund's portfolio management team and has been
primarily responsible for the management of the Fund since its inception. Mr.
Ho, an executive vice president, has been associated with the Adviser since 1985
and in the investment business since 1977. Other team members since 1998 are Mr.
Anthony A. Goodchild and Mr. Benjamin A. Matthews, vice presidents, who have
been associated with the Adviser since 1994 and 1995, respectively, and have
been in the investment business for thirty and twenty-five years, respectively.
John Hancock V.A. World Bond Fund
Fred Cavanaugh, Jr., Anthony A. Goodchild and James K. Ho lead the fund's
portfolio management team. Mr. Cavanaugh and Mr. Ho have been members of the
team since 1998 and Mr. Goodchild since inception. Mr. Cavanaugh, senior vice
president, has been in the investment business since 1973 and joined the Adviser
in 1986. Mr. Goodchild, senior vice president, has been in the investment
business since 1968 and joined the Adviser in 1994. Mr. Ho, executive vice
president, has been in the investment business since 1977 and joined the Adviser
in 1985.
September 25, 1998
VA0PS 9/98
<PAGE>
Supplement to the John Hancock Declaration Trust Prospectus
for John Hancock V.A. World Bond Fund
On December 8, 1998, the Trustees of the John Hancock V. A. World Bond Fund (the
"Fund") voted to recommend that the shareholders approve a tax-free
reorganization of the Fund, as described below.
Under the terms of the reorganization, subject to shareholder approval at a
shareholder meeting scheduled for March 18, 1999, the Fund would transfer all of
its assets and liabilities to the John Hancock V.A. Strategic Income Fund ("V.A.
Strategic Income Fund") in a tax-free exchange for shares of equal value of V.A.
Strategic Income Fund. Further information regarding the proposed reorganization
will be contained in a proxy statement and prospectus, which is scheduled to be
mailed to shareholders on or about February 18, 1999.
Effective December 9, 1998, John Hancock V.A. World Bond Fund will be closed to
all new accounts.
December 9, 1998
<PAGE>
JOHN HANCOCK FUNDS
101 Huntington Avenue
Boston, Massachusetts 02199
JOHN HANCOCK DECLARATION TRUST
PROSPECTUS
May 1, 1998
The John Hancock Declaration Trust consists of fifteen mutual funds, each of
which is described in this Prospectus (each, a "Fund" and collectively, the
"Funds"):
JOHN HANCOCK V.A. INTERNATIONAL FUND
JOHN HANCOCK V.A. REGIONAL BANK FUND
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
JOHN HANCOCK V.A. EMERGING GROWTH FUND
JOHN HANCOCK V.A. SPECIAL OPPORTUNITIES FUND
JOHN HANCOCK V.A. GROWTH FUND
JOHN HANCOCK V.A. GROWTH AND INCOME FUND
JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND
JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND
JOHN HANCOCK V.A. 500 INDEX FUND
JOHN HANCOCK V.A. SOVEREIGN BOND FUND
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
JOHN HANCOCK V.A. HIGH YIELD BOND FUND
JOHN HANCOCK V.A. WORLD BOND FUND
JOHN HANCOCK V.A. MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
TABLE OF CONTENTS ----
<S> <C>
The Funds' Financial Highlights............................. 3
Investment Objective and Overview of Each Fund.............. 8
Investment Policies and Strategies.......................... 10
Purchase and Redemption of Shares........................... 16
Investments in Shares of the Funds..................... 16
Share Price............................................ 16
Redeeming Shares....................................... 16
Organization and Management of the Funds.................... 17
The Funds' Expenses......................................... 19
Dividends and Taxes......................................... 20
Performance................................................. 20
Risk Factors, Investments and Techniques.................... 21
Appendix.................................................... 30
</TABLE>
AN INVESTMENT IN JOHN HANCOCK V.A. MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
JOHN HANCOCK V.A. STRATEGIC INCOME FUND AND JOHN HANCOCK V.A. HIGH YIELD BOND
FUND MAY INVEST UP TO 100% OF THEIR RESPECTIVE TOTAL ASSETS IN LOWER RATED
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING. SEE "RISK FACTORS, INVESTMENTS
AND TECHNIQUES" AND THE APPENDIX.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
(continued on next page)
[RECYCLING ARROWS LOGO] Printed on Recycled Paper.
[JOHN HANCOCK FUNDS LOGO]
1
<PAGE>
(continued from prior page)
This Prospectus sets forth information about the Funds that you should know
before investing. Please read and retain it for future reference. The Funds are
designed primarily to provide investment vehicles for variable annuity and
variable life insurance contracts ("Variable Contracts") of various insurance
companies. This Prospectus should be read in conjunction with the separate
account Prospectus of the specific insurance product which accompanies this
Prospectus. Except for World Bond Fund, a non-diversified series, each Fund is a
diversified series of John Hancock Declaration Trust (the "Trust").
Additional information about the Trust and the Funds has been filed with the
Securities and Exchange Commission (the "SEC"). You can obtain a copy of the
Funds' Statement of Additional Information, dated May 1, 1998, which is
incorporated by reference into this Prospectus, free of charge by writing or
telephoning: John Hancock Servicing Center ("Servicing Center"), P.O. Box 9298,
Boston, Massachusetts 02205-9298, 1-800-824-0335. Shares of a Fund may not be
available in your state due to various insurance or other regulations. Please
check with your insurance company for Funds that are available in your state.
Inclusion of a Fund in this Prospectus which is not available in your state is
not to be considered a solicitation.
2
<PAGE>
THE FUNDS' FINANCIAL HIGHLIGHTS
The information in the following table of Financial Highlights has been audited
by Ernst & Young LLP, the Funds' independent auditor, whose report is included
in the Funds' 1997 Annual Report and is included in the Statement of Additional
Information. Further information about the performance of the Funds is contained
in the Funds' Annual Report to shareholders which may be obtained free of charge
by writing or telephoning John Hancock Servicing Center at the address or
telephone number listed on the front page of this Prospectus. V.A. Regional Bank
Fund, V.A. Special Opportunities Fund, V.A. Growth and Income Fund and V.A. High
Yield Bond Fund are newly organized series of the Trust and have no operating
history.
Selected data for a share outstanding throughout the period indicated is as
follows:
<TABLE>
<CAPTION>
V.A. FINANCIAL
V.A. INTERNATIONAL FUND INDUSTRIES FUND
------------------------------------------- --------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996(1) DECEMBER 31, 1997 DECEMBER 31, 1997(2)
-------------------- ----------------- --------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period....... $ 10.00 $ 11.23 $ 10.00
------- ------- -------
Net Investment Income (loss)(3)............ 0.07 0.05 0.11
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Transactions............................. 1.20 (0.13) 3.39
------- ------- -------
Total from Investment Operations....... 1.27 (0.08) 3.50
------- ------- -------
Less Distributions:
Dividends from Net Investment Income..... (0.04) (0.01) (0.05)
Distributions from Net Realized Gain on
Investments Sold....................... -- (0.64) (0.01)
------- ------- -------
Total Distributions.................... (0.04) (0.65) (0.06)
------- ------- -------
Net Asset Value, End of Period............. $ 11.23 $ 10.50 $ 13.44
======= ======= =======
Total Investment Return at Net Asset Value
(5)...................................... 12.75%(7) (0.54%) 35.05%(7)
Total Adjusted Investment Return at Net
Asset Value (5)(6)....................... 12.07%(7) (1.43%) 34.71%(7)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000s omitted)... $ 2,267 $ 3,792 $18,465
Ratio of Expenses to Average Net Assets.... 1.15%(8) 1.15% 1.05%(8)
Ratio of Adjusted Expenses to Average Net
Assets (9)............................... 3.13%(8) 2.04% 1.39%(8)
Ratio of Net Investment Income (loss)to
Average Net Assets....................... 2.03%(8) 0.43% 1.32%(8)
Ratio of Adjusted Net Investment Income
(loss) to Average Net Assets (9)......... 0.05%(8) (0.46%) 0.98%(8)
Portfolio Turnover Rate.................... 14% 273% 11%
Fee Reduction Per Share (3)................ $ 0.07 $ 0.10 $ 0.03
Average Brokerage Commission Rate (10)..... $0.0162 $0.0221 $0.0696
<CAPTION>
V.A. EMERGING GROWTH FUND
-------------------------------------------
PERIOD ENDED YEAR ENDED
DECEMBER 31, 1996(1) DECEMBER 31, 1997
-------------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period....... $ 10.00 $ 9.32
------- -------
Net Investment Income (loss)(3)............ 0.02 (0.02)
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Transactions............................. (0.68) 1.05
------- -------
Total from Investment Operations....... (0.66) 1.03
------- -------
Less Distributions:
Dividends from Net Investment Income..... (0.02) (0.00)(4)
Distributions from Net Realized Gain on
Investments Sold....................... -- --
------- -------
Total Distributions.................... (0.02) (0.00)
------- -------
Net Asset Value, End of Period............. $ 9.32 $ 10.35
======= =======
Total Investment Return at Net Asset Value
(5)...................................... (6.62%)(7) 11.06%
Total Adjusted Investment Return at Net
Asset Value (5)(6)....................... (8.05%)(7) 9.34%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000s omitted)... $ 975 $ 3,841
Ratio of Expenses to Average Net Assets.... 1.00%(8) 1.00%
Ratio of Adjusted Expenses to Average Net
Assets (9)............................... 5.19%(8) 2.72%
Ratio of Net Investment Income (loss)to
Average Net Assets....................... 0.62%(8) (0.16%)
Ratio of Adjusted Net Investment Income
(loss) to Average Net Assets (9)......... (3.57%)(8) (1.88%)
Portfolio Turnover Rate.................... 31% 79%
Fee Reduction Per Share (3)................ $ 0.14 $ 0.17
Average Brokerage Commission Rate (10)..... $0.0694 $0.0687
</TABLE>
(1) Commenced operations on August 29, 1996.
(2) Commenced operations on April 30, 1997.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Less than $0.01 per share.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(7) Not annualized.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Per portfolio share traded.
3
<PAGE>
THE FUNDS' FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
V.A. GROWTH FUND
(FORMERLY V.A. DISCOVERY FUND) V.A. INDEPENDENCE EQUITY FUND
------------------------------------------- -------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, 1996(1) DECEMBER 31, 1997 DECEMBER 31, 1996(1) DECEMBER 31, 1997
-------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period......................... $ 10.00 $ 9.39 $ 10.00 $ 11.11
------- ------- ------- -------
Net Investment Income (loss)
(2)............................ (0.01) (0.04) 0.06 0.16
Net Realized and Unrealized Gain
(Loss) on Investments.......... (0.60) 1.38 1.12 3.23
------- ------- ------- -------
Total from Investment
Operations................. (0.61) 1.34 1.18 3.39
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment
Income....................... -- -- (0.06) (0.14)
Distributions from Net Realized
Gain on Investments Sold..... -- -- (0.01) (0.25)
------- ------- ------- -------
Total Distributions.......... -- -- (0.07) (0.39)
------- ------- ------- -------
Net Asset Value, End of Period... $ 9.39 $ 10.73 $ 11.11 $ 14.11
======= ======= ======= =======
Total Investment Return at Net
Asset Value (3)................ (6.10%)(5) 14.27% 11.78%(5) 30.68%
Total Adjusted Investment Return
at Net Asset Value (3)(4)...... (7.39%)(5) 12.90% 10.66%(5) 30.04%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000s
omitted)....................... $ 994 $ 3,733 $ 1,149 $ 8,719
Ratio of Expenses to Average Net
Assets......................... 1.00%(6) 1.00% 0.95%(6) 0.95%
Ratio of Adjusted Expenses to
Average Net Assets (7)......... 4.76%(6) 2.37% 4.23%(6) 1.59%
Ratio of Net Investment Income to
Average Net Assets............. (0.23%)(6) (0.39%) 1.60%(6) 1.24%
Ratio of Adjusted Net Investment
Income to Average Net Assets
(7)............................ (3.99%)(6) (1.76%) (1.68%)(6) 0.60%
Portfolio Turnover Rate.......... 68% 136% 24% 53%
Fee Reduction Per Share (2)...... $ 0.13 $ 0.13 $ 0.12 $ 0.08
Average Brokerage Commission Rate
(8)............................ $0.0691 $0.0694 $0.0210 $0.0249
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded.
4
<PAGE>
THE FUNDS' FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
V.A. 500 INDEX FUND V.A. SOVEREIGN INVESTORS FUND
------------------------------------------- -------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, 1996(1) DECEMBER 31, 1997 DECEMBER 31, 1996(1) DECEMBER 31, 1997
-------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period......................... $ 10.00 $ 10.44 $ 10.00 $ 10.74
------- ------- ------- -------
Net Investment Income (2)........ 0.17 0.30 0.07 0.22
Net Realized and Unrealized Gain
(Loss) on Investments and
Financial Futures Contracts.... 0.98 2.72 0.76 2.82
------- ------- ------- -------
Total from Investment
Operations................. 1.15 3.02 0.83 3.04
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment
Income....................... (0.16) (0.30) (0.07) (0.18)
Distributions from Net Realized
Gain on Investments Sold..... (0.55) (0.54) (0.02) (0.01)
------- ------- ------- -------
Total Distributions.......... (0.71) (0.84) (0.09) (0.19)
------- ------- ------- -------
Net Asset Value, End of Period... $ 10.44 $ 12.62 $ 10.74 $ 13.59
======= ======= ======= =======
Total Investment Return at Net
Asset Value (3)................ 11.49%(5) 29.51% 8.30%(5) 28.43%
Total Adjusted Investment Return
at Net Asset Value (3)(4)...... 11.25%(5) 29.27% 7.30%(5) 28.12%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000s
omitted)....................... $ 4,049 $20,008 $ 1,111 $12,187
Ratio of Expenses to Average Net
Assets......................... 0.60%(6) 0.36% 0.85%(6) 0.85%
Ratio of Adjusted Expenses to
Average Net Assets (7)......... 1.31%(6) 0.60% 3.78%(6) 1.16%
Ratio of Net Investment Income to
Average Net Assets............. 4.57%(6) 2.45% 1.90%(6) 1.81%
Ratio of Adjusted Net Investment
Income (loss) to Average Net
Assets (7)..................... 3.86%(6) 2.21% (1.03%)(6) 1.50%
Portfolio Turnover Rate.......... -- 9% 17% 11%
Fee Reduction Per Share (2)...... $ 0.03 $ 0.03 $ 0.11 $ 0.04
Average Brokerage Commission Rate
(8)............................ $0.0500 $0.0357 $0.0235 $0.0700
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded.
5
<PAGE>
THE FUNDS' FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
V.A. WORLD BOND FUND V.A. STRATEGIC INCOME FUND
------------------------------------------- -------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, 1996(1) DECEMBER 31, 1997 DECEMBER 31, 1996(1) DECEMBER 31, 1997
-------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period......................... $10.00 $10.20 $10.00 $10.30
------ ------ ------ ------
Net Investment Income (2)........ 0.20 0.59 0.27 0.91
Net Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency
Transactions................... 0.20 (0.46) 0.36 0.26
------ ------ ------ ------
Total from Investment
Operations................. 0.40 0.13 0.63 1.17
------ ------ ------ ------
Less Distributions:
Dividends from Net Investment
Income....................... (0.20) (0.21) (0.27) (0.91)
Distributions in Excess of Net
Investment Income -- (0.09) -- --
Tax Return of Capital -- (0.29) -- --
Distributions from Net Realized
Gain on Investments Sold..... -- -- (0.06) (0.09)
------ ------ ------ ------
Total Distributions.......... (0.20) (0.59) (0.33) (1.00)
------ ------ ------ ------
Net Asset Value, End of Period... $10.20 $ 9.74 $10.30 $10.47
====== ====== ====== ======
Total Investment Return at Net
Asset Value (3)................ 4.05%(5) 1.37% 6.45%(5) 11.77%
Total Adjusted Investment Return
at Net Asset Value (3)(4)...... 3.30%(5) 0.07% 5.96%(5) 11.25%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000s
omitted)....................... $2,083 $2,303 $2,131 $5,540
Ratio of Expenses to Average Net
Assets......................... 1.00%(6) 1.00% 0.85%(6) 0.85%
Ratio of Adjusted Expenses to
Average Net Assets (7)......... 3.19%(6) 2.30% 2.28%(6) 1.37%
Ratio of Net Investment Income to
Average Net Assets............. 5.83%(6) 5.98% 7.89%(6) 8.77%
Ratio of Adjusted Net Investment
Income to Average Net Assets
(7)............................ 3.64%(6) 4.68% 6.46%(6) 8.25%
Portfolio Turnover Rate.......... 30% 176% 73% 110%
Fee Reduction Per Share (2)...... $ 0.08 $ 0.13 $ 0.05 $ 0.05
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
6
<PAGE>
THE FUNDS' FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
V.A. SOVEREIGN BOND FUND V.A. MONEY MARKET FUND
------------------------------------------- -------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, 1996(1) DECEMBER 31, 1997 DECEMBER 31, 1996(1) DECEMBER 31, 1997
-------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period......................... $10.00 $10.19 $ 1.00 $ 1.00
------ ------ ------ ------
Net Investment Income (2)........ 0.23 0.68 0.02 0.05
Net Realized and Unrealized Gain
on Investments................. 0.21 0.24 -- --
------ ------ ------ ------
Total from Investment
Operations................. 0.44 0.92 0.02 0.05
------ ------ ------ ------
Less Distributions:
Dividends from Net Investment
Income....................... (0.23) (0.68) (0.02) (0.05)
Distributions from Net Realized
Gain on Investments Sold..... (0.02) (0.07) -- --
------ ------ ------ ------
Total Distributions.......... (0.25) (0.75) (0.02) (0.05)
------ ------ ------ ------
Net Asset Value, End of Period... $10.19 $10.36 $ 1.00 $ 1.00
====== ====== ====== ======
Total Investment Return at Net
Asset Value (3)................ 4.42%(5) 9.30% 1.61%(5) 4.88%
Total Adjusted Investment Return
at Net Asset Value (3)(4)...... 3.25%(5) 7.52% (7.55%)(5) 4.36%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000s
omitted)....................... $1,056 $3,682 $ 207 $8,377
Ratio of Expenses to Average Net
Assets......................... 0.75%(6) 0.75% 0.75%(6) 0.75%
Ratio of Adjusted Expenses to
Average Net Assets (7)......... 4.15%(6) 2.53% 27.48%(6) 1.27%
Ratio of Net Investment Income to
Average Net Assets............. 6.69%(6) 6.57% 4.68%(6) 4.86%
Ratio of Adjusted Net Investment
Income (loss) to Average Net
Assets (7)..................... 3.29%(6) 4.79% (22.05%)(6) 4.34%
Portfolio Turnover Rate.......... 45% 193% -- --
Fee Reduction Per Share (2)...... $ 0.12 $ 0.18 $ 0.08 $0.00(8)
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
7
<PAGE>
INVESTMENT OBJECTIVE AND OVERVIEW OF EACH FUND
JOHN HANCOCK V.A. INTERNATIONAL FUND ("International Fund") seeks long-term
growth of capital. The Fund invests primarily in equity securities of foreign
companies and governments.
JOHN HANCOCK V.A. REGIONAL BANK FUND ("Regional Bank Fund") seeks long-term
capital appreciation. The Fund invests primarily in regional banks and lending
institutions, including: commercial and industrial banks, savings and loan
associations and bank holding companies.
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND ("Financial Industries Fund") seeks
capital appreciation primarily through investments in equity securities of
financial services companies throughout the world.
JOHN HANCOCK V.A. EMERGING GROWTH FUND ("Emerging Growth Fund") seeks long-term
growth of capital. The potential for growth of capital is the sole basis for
selection of portfolio securities. Current income is not a factor in this
selection.
JOHN HANCOCK V.A. SPECIAL OPPORTUNITIES FUND ("Special Opportunities Fund")
seeks long term capital appreciation. The Fund invests primarily in equity
securities of domestic and foreign issuers in various economic sectors, selected
according to both macroeconomic factors and the outlook for each sector.
JOHN HANCOCK V.A. GROWTH FUND ("Growth Fund") (formerly John Hancock V.A.
Discovery Fund) seeks long-term capital appreciation. The Fund invests
principally in common stocks (and in securities convertible into or with rights
to purchase common stocks) of companies which the Fund's management believes
offer outstanding growth potential over both the intermediate and long term.
JOHN HANCOCK V.A. GROWTH AND INCOME FUND ("Growth and Income Fund") seeks the
highest total return (capital appreciation plus current income) that is
consistent with reasonable safety of capital.
JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND ("Independence Equity Fund") seeks
above-average total return, consisting of capital appreciation and income. The
Fund will diversify its investments to create a portfolio focused on stocks of
companies that management believes are undervalued and have improving
fundamentals over both the intermediate and long term.
JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND ("Sovereign Investors Fund") seeks
long-term growth of capital and income without assuming undue market risks. At
times, however, because of market conditions, the Fund may find it advantageous
to invest primarily for current income. The Fund invests primarily in common
stocks of seasoned companies in sound financial condition with a long record of
paying increasing dividends.
JOHN HANCOCK V.A. 500 INDEX FUND ("500 Index Fund") seeks to provide investment
results that correspond to the total return performance of the Standard & Poor's
500 Stock Price Index (the "S&P 500 Index"). The 500 Index Fund normally invests
at least 80% of the Fund's assets in common stocks of companies that comprise
the S&P 500 Index in approximately the same proportions as they are represented
in the Index.
JOHN HANCOCK V.A. SOVEREIGN BOND FUND ("Sovereign Bond Fund") seeks a high level
of current income consistent with prudent investment risk. The Fund invests
primarily in a diversified portfolio of investment grade fixed income securities
of U.S. and foreign issuers, although the Fund may invest up to 25% of its total
assets in lower-rated high yield, high risk, fixed income securities.
JOHN HANCOCK V.A. STRATEGIC INCOME FUND ("Strategic Income Fund") seeks a high
level of current income. The Fund invests primarily in foreign government and
corporate fixed income securities, U.S. Government securities and lower-rated
high yield, high risk, fixed income securities of U.S. issuers.
JOHN HANCOCK HIGH YIELD BOND FUND ("High Yield Bond Fund") seeks to maximize
current income without assuming undue risk. The Fund invests primarily in junk
bonds, i.e., lower-rated, higher-yielding debt securities. The Fund also seeks
capital appreciation, but only when consistent with its primary goal.
JOHN HANCOCK V.A. WORLD BOND FUND ("World Bond Fund") seeks a high total
investment return, a combination of current income and capital appreciation. The
Fund invests primarily in a global portfolio of fixed income securities.
JOHN HANCOCK V.A. MONEY MARKET FUND ("Money Market Fund") seeks maximum current
income consistent with capital preservation and liquidity. The Fund invests only
in high-quality money market instruments.
There can be no assurance that the Funds will achieve their investment
objectives. See "RISK FACTORS, INVESTMENTS AND TECHNIQUES."
8
<PAGE>
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"), a wholly owned indirect subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"). The sub-adviser of the International
Fund is John Hancock Advisers International Limited ("JHAI"), a wholly owned
subsidiary of the Adviser. The sub-adviser of the Independence Equity Fund is
Independence Investment Associates, Inc. ("IIA"), a wholly owned indirect
subsidiary of the Life Company. The sub-adviser of the Sovereign Investors Fund
is Sovereign Asset Management Corporation ("SAMCorp" and, together with IIA and
JHAI, the "Sub-advisers"), also a wholly owned indirect subsidiary of the Life
Company.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Adviser. See "ORGANIZATION AND MANAGEMENT OF THE FUNDS" for a
description of the terms of the Adviser's license.
------------------------
9
<PAGE>
INVESTMENT POLICIES AND
STRATEGIES
THE EQUITY FUNDS
THE EQUITY FUNDS OFFER A RANGE OF INVESTMENT ALTERNATIVES FOCUSING ON
COMMON STOCKS.
The INTERNATIONAL FUND, REGIONAL BANK FUND, FINANCIAL INDUSTRIES FUND, EMERGING
GROWTH FUND, SPECIAL OPPORTUNITIES FUND, GROWTH FUND, GROWTH AND INCOME FUND,
INDEPENDENCE EQUITY FUND, SOVEREIGN INVESTORS FUND, AND 500 INDEX FUND
(collectively, the "Equity Funds") invest primarily in equity securities. Each
Equity Fund, other than the Growth and Income Fund, invests at least 65% of its
assets, and, in the case of the Emerging Growth Fund and 500 Index Fund, 80% of
its assets, in equity securities. However, under normal market conditions, the
Equity Funds (other than the Growth and Income Fund) are substantially fully
invested in common stocks. The Growth and Income Fund will allocate its assets
between equity and fixed income securities. Each Equity Fund, other than the 500
Index Fund, is managed according to traditional methods of "active" management,
which involves the buying and selling of securities based upon economic,
financial and market analysis and investment judgment. The Independence Equity
Fund is managed using model driven quantitative techniques. The 500 Index Fund
uses a "passive" or "indexing" investment approach and seeks to provide
investment results that correspond to rather than replicate the total return
performance of the S&P 500 Index by purchasing stocks for the Fund in proportion
to their weight in the S&P 500 Index. This indexing technique is achieved
through the use of stock optimization modeling.
In addition to common stocks, each Equity Fund (other than the 500 Index Fund)
may invest in preferred stock and securities convertible into common and
preferred stock. However, if deemed advisable by the Adviser or relevant
Sub-adviser, the Equity Funds may invest in cash and any other types of
securities including warrants, bonds, notes and other fixed income securities or
obligations of domestic governments and their political subdivisions or domestic
corporations. The International Fund, Regional Bank Fund, Financial Industries
Fund, Emerging Growth Fund, Special Opportunities Fund, Growth Fund and Growth
and Income Fund may also invest in obligations of foreign governments and their
political subdivisions or foreign corporations. Each Equity Fund other than
Regional Bank Fund, and Financial Industries Fund will diversify its investments
among a number of industry groups without concentrating more than 25% of its
assets in any particular industry.
THE INTERNATIONAL FUND INVESTS PRIMARILY IN EQUITY SECURITIES OF FOREIGN
COMPANIES AND GOVERNMENTS.
Under normal circumstances, at least 65% of the INTERNATIONAL FUND'S total
assets are invested in equity securities of issuers located in various countries
around the world. Generally, the Fund's portfolio contains securities of issuers
from at least three countries other than the United States. Although the Fund
may invest in both equity and fixed income securities, the Adviser and JHAI
expect that equity securities, such as common stock, preferred stock and
securities convertible into common and preferred stock, will ordinarily offer
the greatest potential for long-term growth of capital and will constitute
substantially all of the Fund's assets. However, if deemed advisable by the
Adviser and JHAI, the Fund may invest in any other types of securities that the
Adviser and JHAI believe offer long-term capital appreciation due to favorable
credit quality, interest rates or currency exchange rates. These securities
include warrants, bonds, notes and other debt securities (including Euro-dollar
securities) or obligations of domestic or foreign governments and their
political subdivisions, or domestic or foreign corporations. The Fund will
maintain a flexible investment policy and will invest in a diversified portfolio
of securities of companies and governments located throughout the world.
In choosing specific investments for the Fund, the Adviser and JHAI generally
look for companies whose earnings show a strong growth trend or companies whose
current market value per share is undervalued. The Fund will not restrict its
investments to any particular size company and, consequently, the portfolio may
include the securities of small and relatively less well-known companies. The
securities of small and, in some cases, medium sized companies may be subject to
more volatile market movements than the securities of larger, more established
companies or the stock market averages in general. See "SMALLER CAPITALIZATION
COMPANIES."
THE REGIONAL BANK FUND INVESTS PRIMARILY IN REGIONAL BANKS AND LENDING
INSTITUTIONS.
Under normal circumstances, the REGIONAL BANK FUND will invest at least 65% of
its total assets in equity securities, including common stock and securities
convertible to common stock (such as convertible bonds, convertible preferred
stock, and warrants), of regional commercial banks, industrial banks, consumer
banks, savings and loans and bank holding companies that receive a substantial
portion of their income from banks.
A regional bank is one that provides full service banking (i.e., savings
accounts, checking accounts, commercial lending and real estate lending), whose
assets are primarily of domestic origin, and which typically has a principal
office outside of New York City and Chicago. The Fund may invest in banks that
are not Federal Deposit Insurance Corporation (including any state or federally
chartered savings and loan association). Although the Adviser will primarily
seek opportunities for capital appreciation, many of the regional banks in which
the Fund may invest pay regular dividends. Accordingly, the Fund also expects to
receive moderate income.
The Fund may invest up to 35% of its assets in other financial services
companies, including companies with significant lending operations and "money
center" banks. A "money
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center" bank is one with a strong international banking business and a
significant percentage of international assets, which is typically located in
New York or Chicago. In seeking growth opportunities, the Fund's management team
may target banks with some or all of the following characteristics: (1) strong
market position in a region with a healthy economy, (2) undiscovered fundamental
strength evidenced by a low stock price relative earnings, (3) the potential to
benefit from a merger or acquisition and (4) leadership that has shown the
potential to generate profits without undue risk. For a description of the
investment characteristics of the Banking Industry, see the "BANKING INDUSTRY."
THE FINANCIAL INDUSTRIES FUND INVESTS PRIMARILY IN FINANCIAL SERVICES
COMPANIES LOCATED IN THE U.S. AND FOREIGN COUNTRIES.
Under ordinary circumstances, the FINANCIAL INDUSTRIES FUND invests at least 65%
of its total assets in equity securities of financial services companies. For
this purpose, equity securities include common and preferred stocks and their
equivalents (including warrants to purchase and securities convertible into such
stocks).
A financial services company is a firm that in its most recent fiscal year
either (i) derived at least 50% of its revenues or earnings from financial
services activities, or (ii) devoted at least 50% of its assets to such
activities. Financial services companies provide financial services to consumers
and businesses and include the following types of U.S. and foreign firms:
commercial banks, thrift institutions and their holding companies; consumer and
industrial finance companies; diversified financial services companies;
investment banks; securities brokerage and investment advisory firms; financial
technology companies; real estate-related firms; leasing firms; insurance
brokerages; and various firms in all segments of the insurance industry such as
multi-line, property and casualty, and life insurance companies and insurance
holding companies.
The Fund currently uses a strategy of investing in financial services companies
that are, in the opinion of the Fund's management team, currently underpriced in
consolidating or restructuring industries, or in a position to benefit from
regulatory changes. This strategy can be changed at any time. For a description
of the investment characteristics of the Financial Industries, see the
"FINANCIAL INDUSTRIES."
THE EMERGING GROWTH FUND INVESTS PRIMARILY IN SMALL-SIZED COMPANIES THAT
TEND TO BE AT A STAGE OF DEVELOPMENT ASSOCIATED WITH HIGHER THAN AVERAGE
GROWTH.
The EMERGING GROWTH FUND invests in common stocks and other equity securities of
domestic and foreign issuers (including convertible securities) of rapidly
growing, small-sized companies (with a total market capitalization of up to $1
billion). In normal circumstances, the Fund invests at least 80% of its total
assets in these companies. The Adviser selects investments that it believes
offer growth potential higher than average for all companies. The Adviser
expects that common stocks of rapidly growing smaller capitalization companies
in an emerging growth stage of development generally offer the most attractive
growth prospects. However, the Fund may also invest in equity securities of
larger, more established companies that the Adviser believes offer superior
growth potential. The Fund may invest without limitation in securities of
foreign issuers.
THE SPECIAL OPPORTUNITIES FUND INVESTS PRIMARILY IN COMMON STOCKS OF
U.S. AND FOREIGN ISSUERS SELECTED FROM VARIOUS INCOME SECTORS.
The SPECIAL OPPORTUNITIES FUND seeks to achieve its investment objective by
varying the relative weighting of its portfolio securities among various
economic sectors based upon both macroeconomic factors and the outlook for each
particular sector. The Adviser selects equity securities for the Fund from
various economic sectors, including, but not limited to, the following: basic
material, energy, capital equipment, technology, consumer cyclical, retail,
consumer staple, health care, transportation, financial and utility. Under
normal circumstances, at least 75% of the Fund's equity securities is invested
in five or fewer sectors. The Fund may modify these sectors if the Adviser
believes that they no longer represent appropriate investments for the Fund, or
if other sectors offer better opportunities for investment. Subject to the
Fund's policy of investing not more that 25% of its total assets in any one
industry, issuers in any one sector may represent all of the Fund's net assets.
In selecting securities for the Fund's portfolio, the Adviser will determine the
allocation of assets among equity securities, fixed-income securities and cash,
the sectors that will be emphasized at any given time, the distribution of
securities among the various sectors, the specific industries within each sector
and the specific securities within each industry. A sector is considered a
"sector opportunity" when, in the opinion of the Adviser, the issuers in that
sector have a high earnings potential. In selecting particular issuers, the
Adviser considers price/earnings ratios, ratios of market to book value,
earnings growth, product innovation, market share, management quality and
capitalization.
THE GROWTH FUND INVESTS PRINCIPALLY IN COMMON STOCKS OF COMPANIES WHICH
THE ADVISER BELIEVES OFFER OUTSTANDING GROWTH POTENTIAL OVER BOTH THE
INTERMEDIATE AND LONG TERM.
The GROWTH FUND invests principally in common stocks (and in securities
convertible into or with rights to purchase common stocks) of companies which
the Adviser believes offer outstanding growth potential over both the
intermediate and long term. The Adviser will pursue the strategy of investing in
common stocks of those companies whose five-year average operating earnings and
revenue growth are at least two times that of the economy, as measured by the
Gross Domestic Product. Companies selected will generally have positive
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operating earnings growth for five consecutive years, although companies without
a five-year record of positive earnings growth may also be selected if, in the
opinion of the Adviser, they have significant growth potential.
THE GROWTH AND INCOME FUND INVESTS IN A DIVERSIFIED PORTFOLIO OF STOCK,
BONDS AND MONEY MARKET INSTRUMENTS.
Under normal circumstances, the GROWTH AND INCOME FUND'S equity investments
consist of common and preferred stocks which have yielded their holders a
dividend return within the preceding 12 months and have the potential to
increase dividends in the future; however, non-income producing securities may
be held for anticipated increase in value. The Fund may invest in U.S.
Government securities and corporate bonds, notes and other debt securities of
any maturity.
In selecting equity securities for the Fund, the Adviser emphasizes issuers
whose equity securities trade at valuation ratios lower than comparable issuers
or the Standard & Poor's Composite Index. Some of the valuation tools used
include price to earnings, price to cash flow and price to sales ratios and
earnings discount models. The Fund's portfolio will also include securities that
the Adviser considers to have the potential for capital appreciation, due to
potential recognition of earnings power or asset value which is not fully
reflected in the securities' current market value. The Adviser attempts to
identify investments which possess characteristics, such as high relative value,
intrinsic value, going concern value, net asset value and replacement book
value, which are believed to limit sustained downside price risk, generally
referred to as the "margin of safety" concept. The Adviser also considers an
issuer's financial strength, competitive position, projected future earnings and
dividends and other investment criteria.
THE INDEPENDENCE EQUITY FUND INVESTS PRIMARILY IN COMMON STOCKS OF
COMPANIES THAT THE ADVISER AND IIA BELIEVE ARE UNDERVALUED AND HAVE
IMPROVING FUNDAMENTALS OVER BOTH THE INTERMEDIATE AND LONG TERM.
The INDEPENDENCE EQUITY FUND diversifies its investments to create a portfolio
with a risk profile and characteristics similar to those of the S&P 500 Index.
Consequently, the Fund invests in a number of industry groups without
concentrating in any particular industry. In determining what constitutes
"value," the Adviser and the Fund's Sub-adviser, IIA, seek stocks with the
following attributes: high growth relative to price/earnings ratio; rising
dividend stream; and high asset value. To determine whether a company's stock
exhibits improving fundamentals, the Adviser and IIA look for accelerating
earnings growth, positive earnings surprises when compared to the market's
expectations and favorable cyclical timing. The Fund may also invest in
securities of foreign issuers which are U.S. dollar denominated and traded on a
U.S. exchange, in the form of common stocks or American Depository Receipts.
SOVEREIGN INVESTORS FUND GENERALLY INVESTS IN SEASONED COMPANIES IN
SOUND FINANCIAL CONDITION WITH A LONG RECORD OF PAYING DIVIDENDS.
Under normal circumstances, the SOVEREIGN INVESTORS FUND invests at least 65% of
its total assets in dividend paying securities. The Adviser expects that common
stocks will ordinarily offer the greatest dividend paying potential and will
constitute a majority of the Fund's assets. The Fund may also invest a smaller
portion of its assets in corporate and U.S. Government fixed income securities.
For defensive purposes, however, the Fund may temporarily hold a larger
percentage of high grade liquid preferred stock or fixed income securities. The
Adviser and the Fund's Sub-adviser, SAMCorp, will select securities for the
Fund's portfolio mainly for their investment character based upon generally
accepted elements of intrinsic value, including industry position, management,
financial strength, earning power, marketability and prospects for future
growth. The distribution of the Fund's assets among various types of investments
is based on general market conditions, the level of interest rates, business and
economic conditions and the availability of investments in the equity or fixed
income markets. The amount of the Fund's assets that may be invested in either
equity or fixed income securities is not restricted and is based upon the
judgment of the Adviser or SAMCorp of what might best achieve the Fund's
investment objective.
While there is considerable flexibility in the investment grade and type of
security in which the Fund may invest, the Fund currently uses a strategy of
investing only in those common stocks which have a record of having increased
their dividend payout in each of the preceding ten or more years. This "dividend
performers" strategy can be changed at any time.
USING "PASSIVE" OR "INDEXING" INVESTMENT TECHNIQUES, THE 500 INDEX FUND
SEEKS TO PROVIDE INVESTMENT RESULTS THAT CORRESPOND TO THE TOTAL RETURN
PERFORMANCE OF THE S&P 500 INDEX.
The 500 INDEX FUND normally invests 80% of the Fund's total assets in common
stocks of the companies that comprise the S&P 500 Index. The Fund tries to
allocate the stocks held in its portfolio in approximately the same proportions
as they are represented in the S&P 500 Index, in an attempt to minimize the
degree to which the Fund's investment results (before Fund expenses) differ from
those of the Index ("tracking error"). This "indexing" technique is a passive
approach to investing and is designed for long-term investors seeking a
diversified portfolio of common stocks. Unlike other equity funds which seek to
"beat" stock market averages, the Fund attempts to "match" the total return
performance of the S&P Index and thus provide a predictable return relative to
the benchmark. The degree to which the Fund's performance correlates with that
of the S&P 500 Index will depend upon the size and cash flows of the Fund, the
liquidity of the securities represented in the Index and the Fund's expenses,
among other factors. There is no fixed number of component stocks in which the
Fund will invest, and there can be no assurance that the Fund's total return
will match
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that of the S&P 500 Index. For a description of the investment characteristics
of the S&P 500 Index, see "THE S&P 500 INDEX."
If extraordinary circumstances warrant, the Fund may exclude a stock held in the
S&P 500 Index and include a similar stock in its place if doing so will help the
Fund achieve its objective. Additionally, the Fund may invest in certain
short-term fixed income securities such as cash equivalents, although cash and
cash equivalents are normally expected to represent less than 1% of the Fund's
assets. The Fund may also enter into stock futures contracts and options in
order to invest uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to minimize trading costs. The Fund will not invest
in cash equivalents, futures contracts or options as part of a temporary
defensive strategy.
EACH EQUITY FUND (OTHER THAN THE 500 INDEX FUND) MAY INVEST A PORTION OF
ITS TOTAL ASSETS IN CORPORATE AND GOVERNMENTAL FIXED INCOME SECURITIES.
Although under normal market conditions each Equity Fund (other than the Growth
and Income Fund) intends to be substantially fully invested in common stocks,
each Equity Fund (other than the 500 Index Fund) may invest in fixed income
securities for purposes of managing its cash position and for temporary
defensive purposes. Fixed income investments of these Funds may include bonds,
notes, preferred stock and convertible fixed income securities issued by U.S.
corporations or the U.S. Government and its political subdivisions. The
International Fund, Regional Bank Fund, Financial Industries Fund, Emerging
Growth Fund, Special Opportunities Fund, Growth Fund and Growth and Income Fund
may also invest in fixed income securities issued by foreign corporations or
foreign governments and their political subdivisions (although no more than 25%
of Growth Fund's assets will be invested in foreign securities). The value of
fixed income securities varies inversely with interest rates. The value of
convertible issues, while influenced by the level of interest rates, will also
be affected by the changing value of the underlying common stocks into which
they are convertible.
The fixed income securities of International Fund, Emerging Growth Fund, Special
Opportunities Fund and Independence Equity Fund will be rated "investment grade"
(i.e., rated BBB or better by Standard & Poor's Ratings Group ("S&P") or Baa or
better by Moody's Investors Service, Inc. ("Moody's")) or, if unrated,
determined to be of investment grade quality by the Adviser or relevant
Sub-adviser. Growth and Income Fund may invest up to 15% of its net assets in
Junk Bonds including convertible securities, that may be rated as low as CC by
S&P, Ca by Moody's or their unrated equivalents. Fixed income securities held by
Sovereign Investors Fund and the Growth Fund may be rated as low as C by S&P or
Moody's. No more than 5% of the Sovereign Investors Fund's and the Growth Fund's
assets will be invested in fixed income securities rated lower than BBB by S&P
or Baa by Moody's or, if unrated, determined to be of comparable quality by the
Adviser.
The Regional Bank Fund may invest up to 5% of its net assets in below-investment
grade debt securities of Banks rated as low as CCC by S&P or Caa by Moody's or,
if unrated, determined to be of comparable quality by the Adviser.
The Financial Industries Fund may invest in debt securities of financial
services companies and in debt and equity securities of companies outside of the
financial services sector. The Fund may invest up to 5% of its net assets in
below-investment grade debt securities, rated as low as CCC by S&P or Caa by
Moody's or, if unrated, determined to be of comparable quality by the Adviser.
Fixed income securities rated BBB or Baa or higher normally exhibit adequate
protection parameters. However, fixed income securities rated BBB or Baa or
lower have speculative characteristics, and adverse changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than with higher grade bonds. Fixed
income securities rated lower than BBB or Baa are high risk securities commonly
known as "junk bonds." See "LOWER RATED SECURITIES" and the APPENDIX to this
Prospectus for a description of the risks and characteristics of various ratings
categories. Each Equity Fund (other than the Sovereign Investors Fund) may
retain fixed income securities whose ratings are downgraded below the minimum
ratings described above until the Adviser or relevant Sub-adviser determines
that disposing of such securities is in the best interests of the affected Fund.
If any security in Sovereign Investors Fund's portfolio falls below the Fund's
minimum credit quality standards, as a result of a rating downgrade or the
Adviser's or Sub-adviser's determination, the Fund will dispose of the security
as promptly as possible while attempting to minimize any loss.
THE FIXED INCOME FUNDS
THE FIXED INCOME FUNDS OFFER A RANGE OF INVESTMENT ALTERNATIVES FOCUSING
PRIMARILY ON CORPORATE AND GOVERNMENTAL FIXED INCOME SECURITIES.
Under normal circumstances, the SOVEREIGN BOND FUND, STRATEGIC INCOME FUND, HIGH
YIELD BOND FUND AND WORLD BOND FUND (collectively, the "Fixed Income Funds")
each invests at least 65% of its total assets in fixed income securities. Each
Fixed Income Fund invests in a broad range of fixed income securities, including
bonds, notes, preferred stock and convertible debt securities issued by U.S.
corporations or the U.S. Government and its political subdivisions. The Funds
may invest in mortgage-backed securities and the Sovereign Bond, Strategic
Income and High Yield Bond Funds may invest in asset-backed securities. The
Fixed Income Funds may also invest in fixed income securities issued by foreign
corporations or governments and their political subdivisions. The fixed income
securities in which the Funds may invest are subject to
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varying credit quality criteria. The Fixed Income Funds are not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the minimum ratings noted below.
The value of fixed income securities generally varies inversely with interest
rates. The longer the maturity of the fixed income security, the more volatile
will be changes in its value resulting from changes in interest rates. The value
of fixed income securities with conversion features, however, will also be
affected by changes in the value of the common stocks into which such fixed
income securities are convertible.
THE SOVEREIGN BOND FUND INVESTS PRIMARILY IN A DIVERSIFIED PORTFOLIO OF
FREELY MARKETABLE INVESTMENT GRADE FIXED INCOME SECURITIES OF U.S. AND
FOREIGN ISSUERS.
Under normal market conditions, the SOVEREIGN BOND FUND invests at least 65% of
its total assets in bonds and/or debentures. In addition, at least 75% of the
Fund's total assets will be invested in fixed income securities which have, at
the time of purchase, a rating within the four highest grades as determined by
S&P (AAA, AA, A, or BBB) or Moody's (Aaa, Aa, A or Baa) or their respective
equivalent ratings; fixed income securities of banks, the U.S. Government and
its agencies or instrumentalities and other issuers which, although not rated as
a matter of policy by either S&P or Moody's, are considered by the Adviser to
have investment quality comparable to securities receiving ratings within the
four highest grades; and cash and cash-equivalents. Fixed income securities
rated BBB or Baa and unrated debt securities of comparable credit quality are
subject to certain risks. See "INVESTMENT GRADE SECURITIES."
The Fund may also invest up to 25% of its total assets in fixed income
securities rated below BBB by S&P or below Baa by Moody's or their respective
equivalent ratings or in securities which are unrated. The Fund may invest in
securities rated as low as CC or Ca and unrated securities of comparable credit
quality as determined by the Adviser. These ratings indicate obligations that
are highly speculative and often in default. Securities rated lower than Baa or
BBB are high risk securities generally referred to as "junk bonds." See "Lower
Rated Securities" and the APPENDIX to this Prospectus for a description of the
risks and characteristics of the various ratings categories.
The Fund may acquire individual securities of any maturity and is not subject to
any limits as to the average maturity of its overall portfolio.
The Fund may invest in securities of United States and foreign issuers. It is
anticipated that under normal conditions, the Fund will not invest more than 25%
of its total assets in foreign securities (excluding U.S. dollar-denominated
Canadian securities).
THE STRATEGIC INCOME FUND SEEKS A HIGH LEVEL OF CURRENT INCOME BY
INVESTING PRIMARILY IN FIXED INCOME SECURITIES OF U.S. AND FOREIGN
ISSUERS.
The STRATEGIC INCOME FUND invests in all types of fixed income securities
including foreign government and foreign corporate securities, U.S. Government
securities and lower-rated high yield, high risk, fixed income securities of
U.S. issuers. Under normal circumstances, the Fund's assets are invested in each
of the foregoing three sectors. However, from time to time the Fund may invest
up to 100% of its total assets in any one sector. The Fund may invest up to 10%
of its net assets in common stocks and similar equity securities of U.S. and
foreign companies. No more than 25% of the Fund's total assets, at the time of
purchase, will be invested in government securities of any one foreign country.
The fixed income securities in which the Fund may invest include bonds,
debentures, notes (including variable and floating rate instruments), preferred
and preference stock, zero coupon bonds, payment-in-kind securities, increasing
rate note securities, participation interests, multiple class passthrough
securities, collateralized mortgage obligations, stripped debt securities, other
mortgage-backed securities, asset-backed securities and other derivative debt
securities. Variable and floating rate instruments, mortgage-backed securities
and asset-backed securities are derivative instruments that derive their value
from an underlying security. Derivative securities are subject to additional
risks. See "DERIVATIVE INSTRUMENTS."
The higher yields and the high income sought by the Fund are generally
obtainable from investments in the lower rating categories. The Fund may invest
up to 100% of its total assets in fixed income securities rated below Baa by
Moody's, or below BBB by S&P, or in securities which are unrated. The Fund may
invest in securities rated as low as Ca or CC, which may indicate that the
obligations are highly speculative and in default. Fixed income securities rated
below Baa or BBB are commonly called "junk bonds." See "LOWER RATED SECURITIES"
and the APPENDIX to this Prospectus for a description of the risks and
characteristics of the various ratings categories.
THE HIGH YIELD BOND FUND INVESTS PRIMARILY IN LOWER-RATED, HIGH-YIELDING,
FIXED INCOME SECURITIES.
Under normal market conditions, the HIGH YIELD BOND FUND invests at least 65% of
its total assets in bonds rated below Baa by Moody's or below BBB by S&P or in
unrated securities of comparable quality as determined by the Adviser. Up to 30%
of the fund's total assets may be invested in bonds rated Ca by Moody's or CC by
S&P or in unrated securities of comparable quality as determined by the adviser.
See "LOWER RATED SECURITIES" and the APPENDIX to this Prospectus for a
description of the risks and characteristics of the various ratings categories.
Up to 40% of the Fund's total assets may be invested in the securities of
issuers in the electric utility and telephone industries. For all other
industries, the limitation is
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25% of assets. The Fund may also invest up to 20% of its net assets in U.S. or
foreign equities.
The types of debt securities in which the Fund may invest include, but are not
limited to, domestic and foreign corporate bonds, debentures, notes, convertible
securities, preferred stocks, municipal obligations and government obligations.
For liquidity and flexibility, the Fund may place up to 35% of its total assets
in investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The Fund also may
invest in certain higher-risk investments, including options, futures and
restricted securities. See "RISK FACTORS, INVESTMENTS AND TECHNIQUES."
THE WORLD BOND FUND INVESTS PRIMARILY IN A GLOBAL PORTFOLIO OF FIXED
INCOME SECURITIES.
Normally, the WORLD BOND FUND invests in fixed income securities denominated in
at least three currencies or multi-currency units, including the U.S. Dollar.
Under normal circumstances, the Fund invests primarily (at least 65% of total
assets) in U.S. Government, municipal and foreign governmental securities;
obligations of supranational organizations (e.g., the International Bank for
Reconstruction and Development (the "World Bank"), the European Investment Bank,
the Asian Development Bank and the European Coal and Steel Community); and
foreign corporations or financial institutions. The Fund is "non-diversified"
and may invest more than 5% of its assets in obligations of a single foreign
government or other issuer. The Fund will not invest more than 25% of its total
assets in securities issued by any one foreign government. See "SECURITIES OF
FOREIGN ISSUERS."
The Fund may invest in fixed income securities denominated in any currency or a
multi-national currency unit. The European Currency Unit ("ECU") is a composite
currency consisting of specified amounts of each of the currencies of the member
countries of the European Economic Community. The Fund may also invest in fixed
income securities denominated in the currency of one country although issued by
a governmental entity, corporation or financial institution of another country.
For example, the Fund may invest in a Japanese yen-denominated fixed income
security issued by a U.S. corporation. This type of investment involves credit
risks associated with the issuer and currency risks associated with the currency
in which the obligation is denominated. The Fund maintains a flexible investment
policy and its portfolio assets may be shifted among fixed income securities
denominated in various foreign currencies that the Adviser expects to provide
relatively high yields or potential capital appreciation in U.S. Dollars.
The Fund will invest primarily in fixed income securities which are rated A or
better by S&P or Moody's or securities that the Adviser has determined to be of
similar credit quality. The Fund may, however, invest less than 35% of its total
assets in fixed income securities rated, at the time of investment, as low as
CCC by S&P or Caa by Moody's or their respective equivalent ratings and unrated
securities of comparable credit quality. These securities are commonly referred
to as "emerging market" or "junk" bonds. These bonds are considered speculative
and entail greater risks, including default risks, than those found in higher
rated securities. See "LOWER RATED SECURITIES" and the APPENDIX to this
Prospectus for a description of the risks and characteristics of the various
ratings categories.
The average maturity of the Fund's portfolio securities may vary based upon the
Adviser's assessment of economic and market conditions.
THE MONEY MARKET FUND
THE MONEY MARKET FUND INVESTS ONLY IN HIGH-QUALITY MONEY MARKET
INSTRUMENTS.
The MONEY MARKET FUND invests in money market instruments including, but not
limited to, U.S. Government, municipal and foreign government securities;
obligations of supranational organizations (e.g., the World Bank and the
International Monetary Fund); obligations of U.S. and foreign banks and other
lending institutions; corporate obligations; repurchase agreements and reverse
repurchase agreements. All of the Fund's investments are denominated in U.S.
dollars.
At the time the Money Market Fund acquires its investments, they will be rated
(or issued by an issuer that is rated with respect to a comparable class of
short-term debt obligations) in one of the two highest rating categories for
short-term debt obligations assigned by at least two nationally recognized
rating organizations (or one rating organization if the obligation was rated by
only one such organization). These high quality securities are divided into
"first tier" and "second tier" securities. First tier securities have received
the highest rating from at least two rating organizations while second tier
securities have received ratings within the two highest categories from at least
two rating agencies, but do not qualify as first tier securities. The Fund may
also purchase obligations that are not rated, but are determined by the Adviser,
based on procedures adopted by the Trust's Board of Trustees, to be of
comparable quality to rated first or second tier securities. The Fund may not
purchase any second tier security if, as a result of its purchase (a) more than
5% of its total assets would be invested in second tier securities or (b) more
than 1% of its total assets or $1 million (whichever is greater) would be
invested in the second tier securities of a single issuer.
The Fund seeks to maintain a constant $1.00 share price although there can be no
assurance it will do so. All of the Fund's investments will mature in 397 days
or less. The Fund will maintain an average dollar-weighted portfolio maturity of
90 days or less.
EACH FUND MAY EMPLOY CERTAIN INVESTMENT STRATEGIES AND TECHNIQUES TO
HELP ACHIEVE ITS INVESTMENT OBJECTIVE.
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Each Fund (other than the Independence Equity Fund, Sovereign Investors Fund,
500 Index Fund and Money Market Fund) may invest in the securities of foreign
issuers, including American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). The Independence Equity Fund, Sovereign Investors Fund, 500
Index Fund and Money Market Fund may invest in U.S. Dollar denominated
securities of foreign issuers. Each Fund may purchase securities on a forward
commitment or when-issued basis and invest up to 15% (10% for the Money Market
Fund) of its net assets in illiquid securities. In addition, each Fund may lend
portfolio securities and may make temporary investments in short-term
securities, including repurchase agreements and other money market instruments,
in order to receive a return on uninvested cash. To avoid the need to sell
equity securities to meet redemption requests, and to provide flexibility to
take advantage of investment opportunities, Regional Bank Fund and Financial
Industries Fund may invest up to 15% of its net assets in cash or in investment
grade short-term securities. Each Fund may enter into reverse repurchase
agreements. See "RISK FACTORS, INVESTMENTS AND TECHNIQUES" for more information
on each Fund's investments.
When, in the opinion of the Adviser or relevant Sub-adviser, extraordinary
market or economic conditions warrant, each Fund (other than the 500 Index Fund)
may, for temporary defensive purposes, hold cash, cash equivalents or fixed
income securities without limitation. The Financial Industries Fund may hold up
to 80% of its total assets in cash, cash equivalents or fixed income securities.
Each Fund has adopted investment restrictions detailed in the Statement of
Additional Information. Some of these restrictions may help to reduce investment
risk. Those restrictions designated as fundamental may not be changed without
shareholder approval. Each Fund's investment objective, investment policies and
non-fundamental restrictions, however, may be changed by a vote of the Trustees
without shareholder approval. If there is a change in a Fund's investment
objective, investors should consider whether the Fund remains an appropriate
investment in light of their current financial position and needs.
BROKERS ARE CHOSEN FOR FUND TRANSACTIONS ON THE BASIS OF BEST PRICE AND
EXECUTION.
The primary consideration in choosing brokerage firms to carry out a Fund's
transactions is execution at the most favorable prices, taking into account the
broker's professional ability and quality of service. Pursuant to procedures
determined by the Trustees, the Adviser may place securities transactions with a
broker affiliated with the Adviser or a Sub-adviser. This broker is John Hancock
Distributors, Inc., which is indirectly owned by the Life Company, which in turn
indirectly owns the Adviser and certain Sub-advisers. Fixed income securities
are generally purchased and sold in transactions with dealers acting as
principal and involve a "spread" rather than a commission. Commission rates on
many foreign securities exchanges are fixed and are generally higher than U.S.
commission rates, which are negotiable.
PURCHASE AND REDEMPTION
OF SHARES
INVESTMENTS IN SHARES OF THE FUNDS
Each Fund sells its shares at net asset value ("NAV") directly to separate
accounts established and maintained by insurance companies for the purpose of
funding Variable Contracts. Variable Contract separate accounts may or may not
make investments in all the Funds described in this Prospectus. Investments in a
Fund (other than certain automatic investments described below under "Redeeming
Shares") are credited to an insurance company's separate account immediately
upon acceptance of the investment by the Fund. The offering of shares of any
Fund may be suspended for a period of time and each Fund reserves the right to
reject any specific purchase order. Purchase orders may be refused if, in the
Adviser's opinion, they are of a size that would disrupt the management of a
Fund.
SHARE PRICE
Shares of each Fund are offered at the NAV per share of that Fund. The NAV per
share is the value of one share and is calculated by dividing a Fund's net
assets by the number of outstanding shares of that Fund.
Securities in a Fund's portfolio are valued on the basis of market quotations
and valuations provided by independent pricing services, or at fair value as
determined in good faith according to procedures approved by the Trustees.
Short-term fixed income investments maturing within 60 days are valued at
amortized cost, which the Board of Trustees has determined approximates market
value. Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency into
U.S. dollars using current exchange rates. If quotations are not readily
available, or the value has been materially affected by events occurring after
the closing of a foreign market, assets are valued by a method that the Trustees
believe accurately reflects fair value. The NAV is calculated once daily as of
the close of regular trading on the New York Stock Exchange (generally at 4:00
p.m., New York time) on each day the Exchange is open. On any day an
international market is closed and the New York Stock Exchange is open, the
foreign securities will be valued at the prior day's close with the current
day's exchange rate.
REDEEMING SHARES
Shares of a Fund may be redeemed on any business day. Redemptions (other than
certain automatic redemptions described below) are effected at the per share NAV
next determined after receipt and acceptance of the redemption request by a
Fund. Redemption proceeds will normally be forwarded by bank wire to the
redeeming insurance company on
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<PAGE>
the next business day after receipt of the redemption instructions by a Fund.
Under unusual circumstances, a Fund may suspend redemptions or postpone payment
for up to seven (7) days or longer, as permitted by Federal securities
laws.
Purchases and redemptions arising out of an automatic transaction under an
insurance contract (such as investment of net premiums, death of insureds,
deduction of fees and charges, transfers, surrenders, loans, loan repayments,
deductions of interest on loans, lapses, reinstatements and similar automatic
transactions) are effected at the net asset value per share computed as of the
close of business on the day as of which the automatic transaction is effected,
even though the order for purchase or redemption of Fund shares is not received
until after close of business.
ORGANIZATION AND
MANAGEMENT OF THE FUNDS
THE TRUSTEES ELECT OFFICERS AND RETAIN THE ADVISER AND THE SUB-ADVISERS,
WHO ARE RESPONSIBLE FOR THE DAY-TO-DAY OPERATIONS OF THE FUNDS, SUBJECT
TO THE TRUSTEES' POLICIES AND SUPERVISION.
Each Fund is a separate portfolio of the Trust, which is an open-end, investment
management company organized as a Massachusetts business trust in 1995. The
Trust has an unlimited number of authorized shares, and currently has fifteen
distinct funds.
Each Fund currently has one class of shares with equal rights as to voting,
redemption, dividends and liquidation within that Fund. The Trustees have the
authority, without further shareholder approval, to establish additional funds
within the Trust and to classify and reclassify the shares of the Funds, or any
new fund of the Trust, into one or more classes. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for
such purposes as electing or removing Trustees, changing fundamental
restrictions or approving a management contract. An insurance company issuing a
Variable Contract that participates in the Trust will vote shares of the Funds
held by the insurance company's separate accounts as required by law. In
accordance with current law and interpretations thereof, participating insurance
companies are required to request voting instructions from policy owners and
must vote shares of the Funds in proportion to the voting instructions received.
For a further discussion of voting rights, please refer to your insurance
company's separate account Prospectus.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Funds. However, each Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of a Fund's
assets for all losses and expenses of any shareholder held personally liable by
reason of being or having been a shareholder. Liability is, therefore, limited
to circumstances in which a Fund itself would be unable to meet its obligations,
and the possibility of this occurrence is remote. Liabilities attributable to
one Fund are not charged against the assets of any other Fund.
JOHN HANCOCK ADVISERS, INC. ADVISES INVESTMENT COMPANIES HAVING A TOTAL
ASSET VALUE OF MORE THAN $30 BILLION.
The Adviser was organized in 1968 and is a indirect wholly-owned subsidiary of
the Life Company, a financial services company. It provides the Funds, and other
investment companies in the John Hancock group of Funds, with investment
research and portfolio management services. John Hancock Funds, Inc. ("John
Hancock Funds") distributes shares of the Funds. Certain officers of the Trust
are also officers of the Adviser, the Sub-advisers and John Hancock Funds.
Pursuant to an order granted by the SEC, the Trust has adopted a deferred
compensation plan for its independent Trustees which allows Trustees' fees to be
invested by the Funds in other John Hancock funds.
John Hancock Advisers International Limited ("JHAI") serves as the sub-adviser
to the International Fund pursuant to a sub-advisory agreement among the Fund,
the Adviser and JHAI. JHAI was formed in 1987 and is a wholly owned subsidiary
of the Adviser. JHAI provides international investment research and advisory
services to investment companies and institutional clients.
Independence Investment Associates, Inc. ("IIA") serves as the sub-adviser to
the Independence Equity Fund pursuant to a separate sub-advisory agreement among
the Fund, the Adviser and IIA. IIA was organized in 1982 and is a wholly owned
indirect subsidiary of the Life Company. IIA provides investment advice and
advisory services to investment companies and institutional accounts.
Sovereign Asset Management Corporation ("SAMCorp") serves as the sub-adviser to
the Sovereign Investors Fund pursuant to a sub-advisory agreement among the
Fund, the Adviser and SAMCorp. SAMCorp was organized in 1992 and is a wholly
owned indirect subsidiary of the Life Company. SAMCorp provides investment
advice and advisory services to investment companies and private and
institutional accounts.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Adviser. The 500 Index Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's. Standard & Poor's makes no
17
<PAGE>
representation or warranty, express or implied, to the purchasers of the Fund or
any member of the public regarding the advisability of investing in securities
generally or in the 500 Index Fund particularly or the ability of the S&P 500
Index to track general stock market performance. Standard & Poor's only
relationship to the Adviser is the licensing of certain trademarks and trade
names of Standard & Poor's and of the S&P 500 Index, which is determined,
composed and calculated by Standard & Poor's without regard to the Adviser or
the 500 Index Fund. Standard & Poor's has no obligation to take the needs of the
Adviser or the purchasers of the 500 Index Fund into consideration in
determining, composing or calculating the S&P 500 Index. Standard & Poor's is
not responsible for and has not participated in the determination of the prices
and amount of the 500 Index Fund, the timing of the issuance or sale of the 500
Index Fund or in the determination or calculation of the equation by which the
500 Index Fund is to be converted into cash. Standard & Poor's has no obligation
or liability in connection with the administration, marketing or trading of the
500 Index Fund.
STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
ADVISER, THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
The person or persons primarily responsible for the day-to-day management of
each Fund (other than the Money Market Fund) are listed below:
INTERNATIONAL FUND
Miren Etcheverry, John L.F. Wills and Gerardo J. Espinoza lead the portfolio
management team. Ms. Etcheverry and Mr. Espinoza are senior vice presidents and
have helped lead the management team since they joined John Hancock Funds in
December 1996. They have been in the investment business since 1978 and 1979,
respectively. Mr. Wills is a senior vice president of the Adviser and managing
director of the subadviser, John Hancock Advisers International. He joined John
Hancock in 1987, has helped lead the management team since the Fund's inception,
Mr. Wills has been in the investment business since 1969.
REGIONAL BANK FUND
James K. Schmidt, CFA, has led the fund's management team since the Fund's
inception. Mr. Schmidt, executive vice president, has been in the investment
business since 1979. Other portfolio managers on the team since the Fund's
inception are Thomas Finucane and Thomas Goggins. Mr. Finucane, vice president,
has been in the investment business since joining the Adviser in 1990. Mr.
Goggins, senior vice president, has been in the investment business since 1986.
FINANCIAL INDUSTRIES FUND
James K. Schmidt, CFA, has led the fund's management team since the fund's
inception. Mr. Schmidt, executive vice president, has been in the investment
business since 1979. Other portfolio managers on the team are Thomas Finucane
and Thomas Goggins. Mr. Finucane, vice president, has been in the investment
business since joining the Adviser in 1990 and has been a member of the
management team since the fund's inception. Mr. Goggins, senior vice president,
has been in the investment business since 1986 and joined the team in 1998.
EMERGING GROWTH FUND
Bernice S. Behar, CFA, leads the fund's portfolio management team. Other team
members are managers Laura Allen, CFA, Anurag Pandit, CFA and Andrew Slabin. Ms.
Behar, senior vice president, has been in the investment business since 1986 and
has managed the fund since 1996. Ms. Allen, senior vice president has been in
the investment business since 1991 and joined the fund's management team in
1998. Mr. Pandit, vice president, has been in the investment business since 1984
and a member of the fund's team since 1996. Mr. Slabin has been with John
Hancock Funds since 1993 and joined the team in 1996.
SPECIAL OPPORTUNITIES FUND
Barbara C. Friedman, CFA, has led the fund's portfolio management team since
joining John Hancock Funds in January 1998. A senior vice president of the
Adviser, Ms. Friedman has been in the investment business since 1973.
GROWTH FUND
Benjamin A. Hock, Jr., CFA, has led the Fund's portfolio management team since
May 1998. A senior vice president of the adviser since 1994, Mr. Hock has been
in the investment business for over 25 years.
GROWTH AND INCOME FUND
Timothy E. Keefe, CFA, has led the Fund's portfolio management team since the
Fund's inception. Mr. Keefe, a senior vice president of the Adviser, has been
with the Adviser
18
<PAGE>
since July 1996. He has been in the investment business since 1987.
INDEPENDENCE EQUITY FUND
All investment decisions for the Independence Equity Fund are made by a
portfolio management team of investment professionals employed by Independence
Investment Associates, Inc., the Fund's Sub-Adviser, and no single person is
primarily responsible for making recommendations for the team.
SOVEREIGN INVESTORS FUND
John F. Snyder, III and Barry H. Evans, CFA, have led the Fund's portfolio
management team since the Fund's inception. Mr. Snyder, an investment manager
since 1971, is an executive vice president of Sovereign Asset Management Corp.,
the Fund's Sub-adviser, and a wholly owned subsidiary of John Hancock Funds. Mr.
Evans, a senior vice president of the Adviser, joined John Hancock Funds in
1986.
500 INDEX FUND
The 500 Index Fund is "passively" managed by a portfolio management team using
computerized, quantitative techniques. The team has been led by Barry H. Evans,
CFA and Roger C. Hamilton, CFA since 1997. Mr. Evans, a senior vice president of
the Adviser, joined John Hancock Funds in 1986. Mr. Hamilton, a vice president
of the Adviser, joined John Hancock Funds in December 1994 and has been in the
investment business since 1980.
SOVEREIGN BOND FUND
James K. Ho, CFA, has led the Fund's portfolio management team since the fund's
inception and is an executive vice president of the Adviser. Mr. Ho joined the
Adviser in 1985 and has been in the investment business since 1977.
STRATEGIC INCOME FUND
Frederick L. Cavanaugh and Arthur Calavritinos have led the fund's portfolio
management team since the fund's inception. Mr. Cavanaugh, senior vice
president, has been in the investment business since 1973. Mr. Calavritinos,
vice president, has been in the investment business since 1987 and joined the
Adviser in 1988.
HIGH YIELD BOND FUND
Arthur Calavritinos and Fred Cavanaugh have led the fund's portfolio management
team since the Fund's inception. Mr. Calavritinos, vice president, joined the
Adviser in 1988. Mr. Cavanaugh, senior vice president, has been in the
investment business since 1973 and joined the Adviser in 1986.
WORLD BOND FUND
Anthony A. Goodchild and Lawrence J. Daly have lead the Fund's portfolio
management team since the Fund's inception. Messrs. Goodchild and Daly are
senior vice presidents of the Adviser and joined John Hancock Funds in 1994,
having been in the investment business since 1968 and 1972, respectively.
In order to avoid any conflict with portfolio trades for the Funds, the Adviser,
the Sub-advisers and the Funds have adopted extensive restrictions on personal
securities trading by personnel of the Adviser, the Sub-advisers and their
affiliates. In the case of the Adviser, some of these restrictions are: pre-
clearance for all personal trades and a ban on the purchase of initial public
offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. The Sub-advisers have adopted similar
restrictions which may differ where appropriate as long as they have similar
intent. These restrictions are a continuation of the basic principle that the
interests of the Funds and their shareholders come before those of management.
YEAR 2000 COMPLIANCE
The Adviser has addressed the Year 2000 issue by taking steps that it believes
are reasonably designed to address the potential failure of computer programs
used by the Adviser and the Funds' service providers. There can be no assurance
that these steps will be sufficient to avoid any adverse impact to the Funds.
THE FUNDS' EXPENSES
Each Fund pays a monthly fee to the Adviser for managing the Fund's investment
and business affairs, which is equal on an annual basis to a percentage of the
Fund's average daily net assets. These fees are as follows:
<TABLE>
<CAPTION>
FUND RATE
---- ----
<S> <C>
International Fund 0.90%
Regional Bank Fund 0.80%
Financial Industries Fund 0.80%
Emerging Growth Fund 0.75%
Special Opportunities Fund 0.75%
Growth Fund 0.75%
Growth and Income Fund 0.60%
Independence Equity Fund 0.70%
Sovereign Investors Fund 0.60%
500 Index Fund* 0.10%
Sovereign Bond Fund 0.50%
Strategic Income Fund 0.60%
High Yield Bond Fund 0.60%
World Bond Fund 0.75%
Money Market Fund 0.50%
</TABLE>
*Reflects the Adviser's Agreement to limit the management fee. Without this
limitation the management fee would be 0.35%. The Adviser may terminate this
limitation in the future.
The Adviser pays sub-advisory fees out of its own assets and no Fund is
responsible for paying a fee to its respective Sub-adviser.
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<PAGE>
The Adviser pays a portion of its advisory fee from the International Fund to
JHAI at the following rate: 70% of the advisory fee payable by the Fund.
The Adviser pays a portion of its advisory fee from the Independence Equity Fund
to IIA at the following rate: 55% of the advisory fee payable by the Fund.
The Adviser pays a portion of its fee from the Sovereign Investors Fund to
SAMCorp at the following rate: 40% of the advisory fee payable by the Fund.
The Funds also compensate the Adviser for performing tax and financial
management services. Compensation by each fund is not expected to exceed 0.02%
of its average net assets on an annual basis.
EACH FUND PAYS CERTAIN ADDITIONAL EXPENSES.
Each Fund pays fees to the Independent Trustees of the Trust, the expenses of
the continuing registration and qualification of its shares for sale, the
charges of custodians and transfer agents, and auditing and legal expenses. The
Adviser may, from time to time, agree that all or a portion of its fee will not
be imposed for specific periods or make other arrangements to limit the Funds'
expenses to not more than a specified percentage of average net assets
(currently 0.25% excluding advisory fees). The Adviser retains the right to
reimpose the fee and recover any other payments to the extent annual expenses
fall below the limit at the end of the fiscal year.
DIVIDENDS AND TAXES
Dividends from net investment income are declared and paid as follows:
<TABLE>
<CAPTION>
FUND DECLARED PAID
---- -------- ----
<S> <C> <C>
International Fund......................... Annually Annually
Regional Bank Fund......................... Quarterly Quarterly
Financial Industries Fund.................. Annually Annually
Emerging Growth Fund....................... Annually Annually
Special Opportunities Fund................. Annually Annually
Growth Fund................................ Annually Annually
Growth and Income Fund..................... Quarterly Quarterly
Independence Equity Fund................... Quarterly Quarterly
Sovereign Investors Fund................... Quarterly Quarterly
500 Index Fund............................. Quarterly Quarterly
Sovereign Bond Fund........................ Daily Monthly
Strategic Income Fund...................... Daily Monthly
High Yield Bond Fund....................... Daily Monthly
World Bond Fund............................ Daily Monthly
Money Market Fund.......................... Daily Monthly
</TABLE>
Capital gains distributions are generally declared annually. Dividends are
automatically reinvested in additional shares of the Funds.
TAXATION. For a discussion of the tax status of your Variable Contract,
including the tax consequences of withdrawals or other payments, refer to the
Prospectus of your insurance company's separate account. It is suggested you
keep all statements you receive to assist in your personal record keeping.
Each Fund is treated as a separate entity for tax purposes and intends to
qualify and be treated each year as a separate regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company, a Fund must satisfy
certain requirements in Subchapter M of the Code relating to the sources of its
income, the diversification of its assets, and the distribution of its income to
shareholders. As a regulated investment company, each Fund will not be subject
to Federal income taxes on any net investment income and net realized capital
gains that are distributed to its shareholders in accordance with the timing
requirements of the Code. Each Fund expects to distribute to the life insurance
company separate accounts owning its shares all or substantially all of its net
investment income and net realized capital gains, if any, for each taxable year.
Distributions from a Fund's net investment income, certain net foreign exchange
gains, and any excess of net short-term capital gain over net long-term capital
loss will be treated as ordinary income, and distributions from any excess of
net long-term capital gain over net short-term capital loss so designated by a
Fund will be treated as capital gain by the investing insurance companies. Such
companies should consult their own tax advisers regarding whether such
distributions are subject to federal income tax if they are properly added to
reserves for the applicable variable contracts.
In addition to the above, each Fund also follows certain portfolio
diversification requirements imposed under the Code on separate accounts of
insurance companies that are used to fund Variable Contracts. More specific
information on these diversification requirements is contained in the Trust's
Statement of Additional Information.
If a Fund does not both qualify as a regulated investment company and satisfy
the additional diversification requirements referred to above, the holders of
Variable Contracts based on a separate account that invested in that Fund might
become subject to taxation of all income on such contracts unless the failure is
permitted to be corrected by the Internal Revenue Service.
PERFORMANCE
EACH FUND MAY ADVERTISE ITS TOTAL RETURN.
Total return is based on the overall change in value of a hypothetical
investment in a Fund. A Fund's total return shows the overall dollar or
percentage change in value, assuming the reinvestment of all dividends.
Cumulative total return shows a Fund's performance over a period of time.
Average annual total return shows the cumulative return divided over the number
of years included in the period. Because average annual total return tends to
smooth out variations in a Fund's performance, you
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<PAGE>
should recognize that it is not the same as actual year-to-year results.
Total return calculations are at net asset value because no sales charges are
incurred by Variable Contract separate accounts.
EACH FUND MAY ALSO ADVERTISE YIELD.
Yield reflects a Fund's rate of income on portfolio investments as a percentage
of its share price. Yield is computed by annualizing the result of dividing the
net investment income per share over a 30-day period by the net asset value per
share on the last day of that period.
Money Market Fund's yield refers to the income generated by an investment in the
Fund over a specified seven-day period, expressed as an annual percentage rate.
Money Market Fund's effective yield is calculated similarly, but assumes that
the income earned from investments is reinvested in shares of the Fund. Money
Market Fund's effective yield will tend to be slightly higher than its yield
because of the compounding effect of this reinvestment.
Yield is calculated according to accounting methods that are standardized for
all mutual funds. Because yield accounting methods differ from the methods used
for other accounting purposes, a Fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements.
The value of a Fund's shares when redeemed may be more or less than their
original cost. Total return and yield are historical calculations and are not
indications of future performance.
RISK FACTORS, INVESTMENTS
AND TECHNIQUES
COMMON STOCKS. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
including holders of such entity's preferred stock and other senior equity.
Ownership of common stock usually carries with it the right to vote and,
frequently, an exclusive right to do so. Each Fund will diversify its
investments in common stocks of companies in a number of industry groups. Common
stocks have the potential to outperform fixed income securities over the long
term. Common stocks provide the most potential for growth, yet are the more
volatile of the two asset classes.
THE S&P 500 INDEX. The S&P 500 Index is comprised of 500 industrial, utility,
transportation and financial companies in the United States markets. Most of
these companies are listed on the New York Stock Exchange (the "Exchange").
Companies included in the S&P 500 Index represent about 73% of the Exchange's
market capitalization and 16% of the Exchange's issuers. The S&P 500 Index is a
capitalization weighted index calculated on a total return basis with dividends
reinvested. The inclusion of a stock in the S&P 500 Index in no way implies that
Standard & Poor's believes the stock to be an attractive investment.
Because of the market-value weighting, the 50 largest companies in the S&P 500
Index currently account for approximately 50.2% of the Index. Typically,
companies included in the S&P 500 Index are the largest and most dominant firms
in their respective industries. As of March 31, 1998, the five largest companies
in the Index were: General Electric (3.3%), Microsoft (2.5%), Coca-Cola (2.2%),
Exxon Corporation (1.9%) and Merck & Co, Inc. (1.8%). The largest industry
categories were: international oil companies (5.5%), pharmaceutical companies
(5.0%), major regional banks (4.8%), telephone (4.4%) and health care companies
(4.3%).
BANKING INDUSTRY. Since the Fund's investments will be concentrated in the
banking industry, it will be subject to risks in addition to those that apply to
the general equity market. Events may occur which significantly affect the
entire banking industry. Thus, the Fund's share value may at times increase or
decrease at a faster rate than the share value of a mutual fund with investments
in many industries. In addition, despite some measure of deregulation, banks and
other lending institutions are still subject to extensive governmental
regulation which limits their activities. The availability and cost of funds to
these entities is crucial to their profitability. Consequently, volatile
interest rates and general economic conditions can adversely affect their
financial performance and condition. The market value of the debt securities in
the Fund's portfolio will also tend to vary in an inverse relationship with
changes in interest rates. For example, as interest rates rise, the market value
of debt securities tends to decline. The Fund is not a complete investment
program. Because the Fund's investments are concentrated in the banking
industry, an investment in the Fund may be subject to greater market
fluctuations than a fund that does not concentrate in a particular industry.
Thus, it is recommended that an investment in the Fund be considered only one
portion of your overall investment portfolio.
Banks, finance companies and other financial services organizations are subject
to extensive governmental regulations which may limit both the amounts and types
of loans and other financial commitments which may be made and the interest
rates and fees which may be charged. The profitability of these concerns is
largely dependent upon the availability and cost of capital funds, and has shown
significant recent fluctuation as a result of volatile interest rate levels.
Volatile interest rates will also affect the market value of debt securities
held by the Fund. In addition, general economic conditions are important to the
operations of these concerns, with exposure to credit losses resulting from
possible financial difficulties of borrowers potentially having an adverse
effect.
FINANCIAL INDUSTRIES. Since the Financial Industries Fund's investments will be
concentrated in the financial services sector, it will be subject to risks in
addition to those that apply to the general equity and debt markets. Events may
occur which significantly affect the sector as a whole or a particular segment
in which the Fund invests. Accordingly, the Fund may be subject
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<PAGE>
to greater market volatility than a fund that does not concentrate in a
particular economic sector or industry. Thus, it is recommended that an
investment in the Fund be only a portion of your overall investment portfolio.
In addition, most financial services companies are subject to extensive
governmental regulation which limits their activities and may (as with insurance
rate regulation) affect the ability to earn a profit from a given line of
business. Certain financial services businesses are subject to intense
competitive pressures, including market share and price competition. The removal
of regulatory barriers to participation in certain segments of the financial
services sector may also increase competitive pressures on different types of
firms. For example, legislative proposals to remove traditional barriers between
banking and investment banking activities would allow large commercial banks to
compete for business that previously was the exclusive domain of securities
firms. Similarly, the removal of regional barriers in the banking industry has
intensified competition within the industry.
The availability and cost of funds to financial services firms is crucial to
their profitability. Consequently, volatile interest rates and general economic
conditions can adversely affect their financial performance.
Financial services companies in foreign countries are subject to similar
regulatory and interest rate concerns. In particular, government regulation in
certain foreign countries may include controls on interest rates, credit
availability, prices and currency movements. In some cases, foreign governments
have taken steps to nationalize the operations of banks and other financial
services companies. See "Foreign Issuers."
The market value of debt securities in the Fund's portfolio will tend to vary in
an inverse relationship with changes in interest rates. For example, as interest
rates rise, the market value of debt securities tends to decline.
FIXED INCOME SECURITIES. Fixed income securities of corporate and governmental
issuers are subject to the risk of an issuer's inability to meet principal and
interest payments on the obligations (credit risk) and may also be subject to
price volatility due to factors such as interest rate sensitivity, market
perception of the issuer's creditworthiness and general market liquidity (market
risk). Debt securities will be selected based upon credit risk analysis of
issuers, the characteristics of the security and interest rate sensitivity of
the various debt issues available from a particular issuer as well as analysis
of the anticipated volatility and liquidity of the fixed income instruments. The
longer a Fund's average portfolio maturity, the more the value of the portfolio
and the net asset value of the Fund's shares will fluctuate in response to
changes in interest rates. An increase in rates will generally decrease the
value of the Fund's securities, while a decline in interest rates will generally
increase their value.
PREFERRED STOCKS. Preferred stock generally has a preference as to dividends
and upon liquidation over an issuer's common stock but ranks junior to debt
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may be subject to optional or mandatory
redemption provisions.
INVESTMENT GRADE SECURITIES. Each Fund other than the 500 Index Fund and Money
Market Fund may invest in securities that are rated in the lowest category of
"investment grade" (BBB by S&P or Baa by Moody's) or unrated securities
determined by the Adviser or relevant Sub-adviser to be of comparable quality.
Securities in the lowest category of investment grade are considered medium
grade obligations and normally exhibit adequate protection parameters. However,
these securities also have speculative characteristics. Adverse changes in
economic conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than in the case of higher
grade obligations.
LOWER RATED SECURITIES. The Regional Bank Fund, Financial Industries Fund,
Growth and Income Fund, Sovereign Investors Fund, Growth Fund, Sovereign Bond
Fund, Strategic Income Fund, High Yield Bond Fund and World Bond Fund may invest
in securities rated below investment grade, commonly referred to as junk bonds.
Debt obligations rated in the lower rating categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The market price and liquidity of high yield, high risk,
fixed income securities generally respond to short-term economic, corporate and
market developments to a greater extent than do the price and liquidity of
higher rated securities, because these developments are perceived to have a more
direct relationship to the ability of an issuer of lower rated securities to
meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately the assets of the Financial Industries Fund,
Growth and Income Fund, Sovereign Investors Fund, Growth Fund, Sovereign Bond
Fund, Strategic Income Fund, High Yield Bond Fund and World Bond Fund. The
reduced availability of reliable objective data may increase these Funds'
reliance on management's judgment in valuing the high yield, high risk bonds. To
the extent that these Funds invest in high yield, high risk securities,
achieving the Funds' objectives will depend more on the Adviser's or relevant
Sub-adviser's judgment and analysis than would otherwise be the case. In
addition, these Funds' investments in high yield, high risk securities may be
susceptible to adverse publicity and investor perceptions, whether or not
justified by
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fundamental factors. In the past, economic downturns and increases in interest
rates have caused a higher incidence of default by the issuers of these
securities and may do so in the future, particularly with respect to highly
leveraged issuers. The market prices of zero coupon and payment-in-kind bonds
are affected to a greater extent by interest rate changes and therefore tend to
be more volatile than securities which pay cash interest periodically.
Increasing rate note securities are typically refinanced by the issuers within a
short period of time. A Fund accrues income on these securities for tax and
accounting purposes, and this income is required to be distributed to
shareholders. Because no cash is received at the time income accrues on these
securities, the Fund may be forced to liquidate other investments to make
distributions.
WARRANTS. Warrants entitle the holder to buy equity securities at a specific
price for a specific period of time. Warrants tend to be more volatile than
their underlying securities. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date.
CONVERTIBLE SECURITIES. Each Fund (other than the 500 Index Fund and the Money
Market Fund) may invest in convertible securities, which may include corporate
notes or preferred stock but are ordinarily long-term debt obligations of the
issuer convertible at a stated exchange rate into common stock of the same or
another issuer. As with all debt securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. The market value of convertible securities
can also be heavily dependent upon the changing value of the equity securities
into which these securities are convertible depending on whether the market
price of the underlying security exceeds the conversion price. Convertible
securities generally rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock.
However, the extent of such risk reduction depends upon the degree to which the
convertible security sells above its value as a fixed income security. In
evaluating a convertible security, the Adviser or relevant Sub-adviser will give
primary emphasis to the attractiveness of the underlying common stock.
SECURITIES OF FOREIGN ISSUERS. Each Fund, except for the Independence Equity
Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund, may invest
in U.S. dollar and foreign denominated securities of foreign issuers. The
Independence Equity Fund, Sovereign Investors Fund, 500 Index Fund and Money
Market Fund may only invest in U.S. dollar denominated securities, including
those of foreign issuers which are traded on a U.S. exchange. In making the
allocation of assets for the Funds among various countries and geographic
regions, the Adviser and relevant Sub-adviser ordinarily consider factors such
as the investment attractiveness of the issuer; the strengths and weaknesses of
the currencies in which the securities are denominated; expected levels of
inflation and interest rates; government policies influencing business
conditions; the financial condition of the issuer and other pertinent financial,
tax, social, political, currency and national factors.
Investments in foreign securities may involve a greater degree of risk than
those in domestic securities due to exchange controls, less publicly available
information, more volatile or less liquid securities markets, and the
possibility of expropriation, confiscatory taxation or political, economic or
social instability. There may be difficulty in enforcing legal rights outside
the United States. Some foreign companies are not generally subject to the same
uniform accounting, auditing and financial reporting requirements as domestic
companies; also foreign regulation may differ considerably from domestic
regulation of stock exchanges, brokers and securities. Security trading
practices abroad may offer less protection to investors such as the Funds.
Additionally, because foreign securities may be denominated in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect the
Funds' net asset values, the value of dividends and interest earned, gains and
losses realized on the sale of securities, and net investment income and gains,
if any, that the Funds distribute. Securities transactions undertaken in some
foreign markets may not be settled promptly. Therefore, the Funds' investments
in foreign securities may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement. The expense ratios of Funds with
significant investments in foreign securities can be expected to be higher than
those of mutual funds investing solely in domestic securities since the expenses
of these Funds, such as the cost of maintaining custody of foreign securities
and advisory fees, are usually higher.
The risks of foreign investing may be intensified in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions of foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. Securities of issuers located in these countries may have
limited marketability and may be subject to more abrupt or erratic price
movements.
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Certain realized gains or losses on the sale of foreign currency denominated
debt obligations held by a Fund, to the extent attributable to fluctuations in
foreign currency exchange rates, as well as certain other gains or losses
attributable to exchange rate fluctuations, e.g., from transactions in foreign
currencies or currency forward contracts, may be treated as ordinary income or
loss. Such income or loss may increase or decrease (or possibly eliminate) the
Fund's income available for distribution.
DEPOSITARY RECEIPTS. Each Fund (other than the 500 Index Fund and Money Market
Fund) may also invest in securities of foreign issuers in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or other
securities convertible into securities of corporations in which the Fund is
permitted to invest. ADRs (sponsored and unsponsored) are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation and are designed for
trading in United States securities markets. Issuers of the shares underlying
unsponsored ADRs are not contractually obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the unsponsored ADR.
FOREIGN CURRENCY TRANSACTIONS. Each of the Funds, except the Independence
Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund, may
purchase securities denominated in foreign currencies. The value of investments
in these securities and the value of dividends and interest earned may be
significantly affected by changes in currency exchange rates. Some foreign
currency values may be volatile, and there is the possibility of governmental
controls on currency exchange or governmental intervention in currency markets,
which could adversely affect a Fund. As a result, these Funds may enter into
forward foreign currency exchange contracts to protect against changes in
foreign currency exchange rates. These Funds will not speculate in foreign
currencies or in forward foreign currency exchange contracts, but will enter
into these transactions only in connection with their hedging strategies. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date at a price set at the time of the
contract. Although certain strategies could minimize the risk of loss due to a
decline in the value of the hedged foreign currency, they could also limit any
potential gain which might result from an increase in the value of the currency.
GOVERNMENT SECURITIES. Each Fund may invest in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. The 500 Index Fund,
however, may only invest temporarily in short-term U.S. Government securities
for liquidity purposes. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds and Government National Mortgage Association
certificates ("Ginnie Maes"), are supported by the full faith and credit of the
United States. Certain other U.S. Government securities, issued or guaranteed by
federal agencies or government sponsored enterprises, are not supported by the
full faith and credit of the United States, but may be supported by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of the Federal Home Loan Mortgage Corporation ("Freddie Macs") and
Federal National Mortgage Association ("Fannie Maes"), and obligations supported
by the credit of the instrumentality, such as Student Loan Marketing Association
bonds ("Sallie Maes").
Each Fund may invest in mortgage-backed securities. A mortgage-backed security
may be an obligation of the issuer backed by a mortgage or pool of mortgages or
a direct interest in an underlying pool of mortgages. Some mortgage-backed
securities, such as collateralized mortgage obligations (CMOs), make payments of
both principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond). Mortgage-backed securities are based on different types of
mortgages including those on commercial real estate or residential properties.
Mortgage-backed securities often have stated maturities of up to thirty years
when they are issued, depending upon the length of the mortgages underlying the
securities. In practice, however, unscheduled or early payments of principal and
interest on the underlying mortgages may make the securities' effective maturity
shorter than this, and the prevailing interest rates may be higher or lower than
the current yield of a Fund's portfolio at the time the Fund receives the
payments for reinvestment. Mortgage-backed securities may have less potential
for capital appreciation than comparable fixed income securities, due to the
likelihood of increased prepayments of mortgages as interest rates decline. If a
Fund buys mortgage-backed securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Fund's principal investment to the
extent of the premium paid.
The value of mortgage-backed securities may also change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities markets as a whole. Non-governmental
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
governmental issues.
"Stripped" mortgage-backed securities are created when a U.S. Government agency
or a financial institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The holder of
the "principal-only" security ("PO") receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security ("IO") receives interest payments from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly affected
by changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect. Although the market for these
securities is increasingly liquid, the Adviser or relevant Sub-adviser may, in
accordance with guidelines adopted by the Board of Trustees, determine that
certain stripped mortgage-backed securities
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issued by the U.S. Government, its agencies or instrumentalities are not readily
marketable. If so, these securities, together with privately-issued stripped
mortgage-backed securities, will be considered illiquid for purposes of the
Funds' limitation on investments in illiquid securities.
Other types of mortgage-backed securities may be developed in the future, and a
Fund may invest in them if the Adviser or relevant Sub-adviser determines they
are consistent with the Fund's investment objectives and policies.
ASSET-BACKED SECURITIES. Sovereign Bond Fund, Strategic Income Fund and High
Yield Bond Fund may invest in securities that represent individual interests in
pools of consumer loans and trade receivables similar in structure to
mortgage-backed securities. The assets are securitized either in a pass-through
structure or in a multiple class CMO-type structure. Although the collateral
supporting asset-backed securities generally is of a shorter maturity than
mortgage loans and historically has been less likely to experience substantial
prepayments, no assurance can be given as to the actual maturity of an
asset-backed security because prepayments of principal may be made at any time.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type of
security interest in the related collateral. Credit card receivables are
generally unsecured and a number of state and Federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in typical issuance, and technical requirements
under state laws. Therefore, recoveries on repossessed collateral may not always
be available to support payments on these securities.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. The Sovereign Bond Fund, Strategic Income
Fund and High Yield Bond Fund may enter into mortgage "dollar roll" transactions
with selected banks and broker-dealers. In a dollar roll, the Fund sells
mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. A Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash or cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. Covered rolls are not treated as a
borrowing or other senior security and will be excluded from the calculation of
a Fund's borrowings and other senior securities. For financial reporting and tax
purposes, a Fund treats mortgage dollar rolls as two separate transactions: one
involving the purchase of a security and a separate transaction involving a
sale. The Funds do not currently intend to enter into mortgage dollar roll
transactions that are accounted for as a financing.
SHORT-TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. The International Fund, Emerging Growth Fund,
Special Opportunities Fund, Growth Fund, Growth and Income Fund, Sovereign Bond
Fund, Strategic Income Fund, High Yield Bond Fund and World Bond Fund engage in
short-term trading in response to stock market conditions, changes in interest
rates or other economic trends and developments, or to take advantage of yield
disparities between various fixed income securities in order to realize capital
gains or improve income. Short term trading may have the effect of increasing
portfolio turnover rate.
The remaining Funds do not intend to invest for the purpose of seeking
short-term profits. These Funds' particular portfolio securities may be changed,
however, without regard to the holding period of these securities when the
Adviser or relevant Sub-adviser deems that this action will help achieve the
Fund's objective given a change in an issuer's operations or in general market
conditions.
The portfolio turnover rate for the Funds is shown in the section captioned "The
Funds' Financial Highlights." In the future, the estimated portfolio turnover
rate of each Equity Fund is expected to be less than 100%. The estimated
portfolio turnover rates of the remaining Funds are as follows: Sovereign Bond
Fund and High Yield Bond Fund: 100%; Strategic Income Fund: 200%; and World Bond
Fund: 300%. A high rate of portfolio turnover (100% or greater) involves
corresponding higher transaction expenses and may make it more difficult for a
Fund to qualify as a regulated investment company for Federal income tax
purposes.
OPTIONS AND FUTURES TRANSACTIONS. Each Fund (other than the Money Market Fund)
may buy and sell options contracts, financial futures contracts and options on
futures contracts. Options and futures contracts are bought and sold to manage a
Fund's exposure to changing interest rates, security prices, and currency
exchange rates. Some options and futures strategies, including selling futures,
buying puts, and writing calls, tend to hedge a Fund's investment against price
fluctuations. Other strategies, including buying futures, writing puts, and
buying calls, tend to increase market exposure. Options and futures may be
combined with each other or with forward contracts in order to adjust the risk
and return characteristics of the overall strategy. These Funds may purchase and
sell options and futures based on securities, indices, or currencies, including
options and futures traded on foreign exchanges and options not traded on any
exchange.
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower a Fund's return. A Fund
can also experience losses if the prices of its options and futures positions
are poorly correlated with those of its other investments, or if it cannot close
out its positions because of an
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illiquid secondary market. Options and futures do not pay interest, but may
produce income, gains or losses.
A Fund will not engage in a transaction in futures or options on futures for
nonhedging purposes if, immediately thereafter, the sum of initial margin
deposits and premiums required to establish nonhedging positions in futures
contracts and options on futures would exceed 5% of the Fund's net assets. The
loss incurred by a Fund investing in futures contracts and in writing options on
futures is potentially unlimited and may exceed the amount of any premium
received. The Funds' transactions in options and futures contracts may be
limited by the requirements of the Code for qualification as a regulated
investment company.
SWAP AGREEMENTS. As one way of managing exposure to different types of
investments, Sovereign Bond Fund, Strategic Income Fund, High Yield Bond Fund
and World Bond Fund may enter into interest rate swaps and other types of swap
agreements such as caps, collars and floors. Each of these Funds may also enter
into currency swaps. In a typical interest rate swap, one party agrees to make
regular payments equal to a floating interest rate times a "notional principal
amount," in return for payments equal to a fixed rate times the same amount, for
a specified period of time. If a swap agreement provides for payments in
different currencies, the parties might agree to exchange the notional principal
amount as well. Swaps may also depend on other prices or rates, such as the
value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. For example, if a Fund agrees to exchange payments in
dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to the risk of a counterparty's
failure to perform, and may decline in value if the counterparty's
creditworthiness deteriorates. A Fund may also suffer losses if it is unable to
terminate outstanding swap agreements or reduce its exposure through offsetting
transactions. A Fund will maintain in a segregated account with its custodian,
cash or liquid debt securities equal to the net amount, if any, of the excess of
the Fund's obligations over its entitlements with respect to swap, cap, collar
or floor transactions.
DERIVATIVE INVESTMENTS. Consistent with its investment objective, each Fund may
purchase or enter into derivative investments to enhance return, to hedge
against fluctuations in interest rates, securities prices or currency exchange
rates, to change the duration of the Fund's fixed income portfolio or as a
substitute for the purchase or sale of securities or currency. A Fund's
investments in derivative securities may include certain mortgage-backed and
indexed securities. A Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities, indices or currency;
options on futures contracts; options on securities, indices or options on
futures contracts; options on securities, indices or currency; forward contracts
to purchase or sell securities or currency; currency, mortgage and interest rate
swaps; and interest rate caps, floors and collars. All of the Funds'
transactions in derivative instruments involve a risk of loss of principal due
to unanticipated adverse changes in interest rates, securities prices or
currency exchange rates. The loss on derivative contracts (other than purchased
options, caps, floors and collars) may exceed a Fund's initial investment in
these contracts. In addition, a Fund may lose the entire premium paid for
purchased options, caps, floors and collars that expire before they can be
profitably exercised by the Fund.
STRUCTURED SECURITIES. The Sovereign Bond Fund, Strategic Income Fund, High
Yield Bond Fund and World Bond Fund may invest in structured notes, bonds or
debentures, the value of the principal of and/or interest on which is to be
determined by reference to changes in the value of specific currencies, interest
rates, commodities, indices and other financial indicators (the "Reference") or
the relative change in two or more References. The interest rate or the
principal amount payable upon maturity or redemption may be increased or
decreased depending upon changes in the applicable reference. The terms of the
structured securities may provide that in certain circumstances no principal is
due at maturity and, therefore, may result in the loss of the Fund's investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in the yield
or value of the security at maturity. In addition, the change in the yield or
the value of the security at maturity may be a multiple of the change in the
value of the Reference. Consequently, structured securities entail a greater
degree of market risk than other types of debt securities. Structured securities
may also be more volatile, less liquid and more difficult to price accurately
than less complex fixed income investments.
PARTICIPATION INTERESTS. The Sovereign Bond Fund, Strategic Income Fund and
High Yield Bond Fund may invest in participation interests. Participation
interests, which may take the form of interests in or assignments of certain
loans, are
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acquired from banks who have made these loans or are members of a lending
syndicate. A Fund's investments in participation interests are subject to its
15% limitation on investments in illiquid securities.
SMALLER CAPITALIZATION COMPANIES. Each Equity Fund may invest in smaller
capitalization companies. These companies may have limited product lines, market
and financial resources, or they may be dependent on smaller or less experienced
management groups. In addition, trading volume for these securities may be
limited. Historically, the market price for these securities has been more
volatile than for securities of companies with greater capitalization. However,
securities of companies with smaller capitalization may offer greater potential
for capital appreciation since they may be overlooked and thus undervalued by
investors.
NON-DIVERSIFIED STATUS. The World Bond Fund has elected to be "non-diversified"
in order to permit it to invest more than 5% of its total assets in the
obligations of any one issuer. Since a relatively high percentage of this Fund's
assets may be invested in the obligations of a limited number of issuers, the
value of this Fund's shares may be more susceptible to any single economic,
political or regulatory event, and to the credit and market risks associated
with a single issuer, than would the shares of a diversified fund. However, this
Fund, like each of the other Funds, must satisfy certain tax diversification
requirements. See "Taxation" above.
SHORT SALES. Each Fund (other than the 500 Index Fund and Money Market Fund)
may engage in short sales "against the box," as well as short sales for hedging
purposes. The International Fund, Financial Industries Fund, Growth Fund,
Emerging Growth Fund and Special Opportunities Fund may engage in short sales to
profit from an anticipated decline in a security's value. When a Fund engages in
a short sale other than "against the box," it will place cash or liquid
securities in a segregated account and mark them to market daily in accordance
with applicable regulatory requirements. Except for short sales against the box,
a Fund is limited in the amount of the Fund's net assets that may be committed
to short sales and the securities in which short sales are made must be listed
on a national securities exchange. A short sale is "against the box" to the
extent that the Fund contemporaneously owns or has the right to obtain, at no
added cost, securities identical to those sold short. Short sales other than
"against the box" may involve an unlimited exposure to loss. SEE THE STATEMENT
OF ADDITIONAL INFORMATION.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to 15% (10% for
Money Market Fund) of its net assets in illiquid investments, which include
repurchase agreements maturing in more than seven days, certain over-the-counter
options, privately-issued stripped mortgage-backed securities, certain interest
rate swaps, caps, collars and floors, certain restricted securities and
securities that are not readily marketable. Each Fund may also invest without
limitation in restricted securities eligible for resale to certain institutional
investors pursuant to Rule 144A under the Securities Act of 1933 and, to the
extent consistent with its investment policies, foreign securities acquired in
accordance with Regulation S under the Securities Act of 1933.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional income and as a matter of fundamental policy, each Fund may lend
portfolio securities amounting to not more than 33 1/3% of its respective total
assets taken at current value. Securities loaned by a Fund will remain subject
to fluctuations in market value. Each Fund may also enter into repurchase
agreements. In a repurchase agreement, the Fund buys a security subject to the
right and obligation to sell it back to the issuer at the same price plus
accrued interest. These transactions must be fully collateralized at all times.
However, they may involve credit risk to a Fund if the other party should
default on its obligation and that Fund is delayed in or prevented from
recovering the collateral.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements, which involve the sale of a security by the Fund to a bank or
securities firm and its agreement to repurchase the instrument at a specified
time and price plus an agreed amount of interest. A Fund will use the proceeds
to purchase other investments. Reverse repurchase agreements are considered to
be borrowings by a Fund and as an investment practice may be considered to be
speculative. A Fund will enter into a reverse repurchase agreement only when the
Adviser determines that the return to be earned from the investment of the
proceeds is likely to be greater than the interest expense of the transaction. A
Fund will enter into reverse repurchase agreements only with selected registered
broker/dealers or with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Board of Trustees.
Under procedures established by the Board of Trustees, the Adviser will monitor
the creditworthiness of the firms involved.
The use of reverse repurchase agreements involves leverage. Leverage allows any
investment gains made with the additional monies received (in excess of the
costs of the reverse repurchase agreement) to increase the net asset value of a
Fund's shares faster than would otherwise be the case. On the other hand, if the
additional monies received by a Fund are invested in ways that do not fully
recover the costs of such transactions, the net asset value of the Fund would
fall faster than would otherwise be the case.
WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a forward or "when
issued" basis. When a Fund engages in when-issued transactions, it relies on the
seller or the buyer, as the case may be, to consummate the transaction. Failure
to consummate the transaction may result in the Fund's losing the opportunity to
obtain an advantageous price and yield.
MUNICIPAL OBLIGATIONS. The High Yield Bond Fund may invest in a variety of
municipal obligations which consist of municipal bonds, municipal notes and
municipal commercial paper.
Municipal Bonds. Municipal bonds are issued to obtain funds for various public
purposes including the construction of a wide
27
<PAGE>
range of public facilities such as airports, highways, bridges, schools,
hospitals, housing, mass transportation, streets and water and sewer works.
Other public purposes for which municipal bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to lend to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds for many types of local, privately
operated facilities. Such debt instruments are considered municipal obligations
if the interest paid on them is exempt from federal income tax. The payment of
principal and interest by issuers of certain obligations purchased by the Fund
may be guaranteed by a letter of credit, note repurchase agreement, insurance or
other credit facility agreement offered by a bank or other financial
institution. Such guarantees and the creditworthiness of guarantors will be
considered by the Adviser in determining whether a municipal obligation meets
the Fund's investment quality requirements. No assurance can be given that a
municipality or guarantor will be able to satisfy the payment of principal or
interest on a municipal obligation.
Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued and meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power of ability of any one or more issuers to pay when due
the principal of and interest on their municipal obligations may be affected.
The yields of municipal bonds depend upon, among other things, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of S&P, Moody's and Fitch Investors Service ("Fitch") represent their
respective opinions on the quality of the municipal bonds they undertake to
rate. It should be emphasized, however, that ratings are general and not
absolute standards of quality. Consequently, municipal bonds with the same
maturity, coupon and rating may have different yields and municipal bonds of the
same maturity and coupon with different ratings may have the same yield. Many
issuers of securities chose not to have their obligations rated. Although
unrated securities eligible for purchase by the Fund must be determined to be
comparable in quality to securities having certain specified ratings, the market
for unrated securities may not be as broad for rated securities since many
investors rely on rating organizations for credit appraisal.
PAY-IN-KIND, DELAYED AND ZERO COUPON BONDS. The Sovereign Bond Fund, Strategic
Income Fund and High Yield Bond Fund may invest in pay-in-kind, delayed and zero
coupon bonds. These are securities issued at a discount from their face value
because interest payments are typically postponed until maturity. The amount of
the discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. These securities also may take the form of debt securities that
have been stripped of their interest payments. The market prices of pay-in-kind,
delayed and zero coupon bonds generally are more volatile than the market prices
of interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. Because no cash is received at the time income
accrues on these securities, the Fund may be forced to liquidate other
investments to make distributions. At times when the Fund invests in
pay-in-kind, delayed and zero coupon bonds, it will not be pursuing its primary
objective of maximizing current income.
INDEXED SECURITIES. High Yield Bond Fund may invest in indexed securities,
including floating rate securities that are subject to a maximum interest rate
("capped floaters") and leveraged inverse floating rate securities ("inverse
floaters") (up to 10% of the Fund's total assets). The interest rate or, in some
cases, the principal payable at the maturity of an indexed security may change
positively or inversely in relation to one or more interest rates, financial
indices or other financial indicators ("reference prices"). An indexed security
may be leveraged to the extent that the magnitude of any change in the interest
rate or principal payable on an indexed security is a multiple of the change in
the reference price. Thus, indexed securities may decline in value due to
adverse market changes in interest rates or other reference prices.
BRADY BONDS. The Sovereign Bond Fund, Strategic Income Fund and High Yield Bond
Fund may invest in Brady Bonds and other sovereign debt securities of countries
that have restructured or are in the process of restructuring sovereign debt
pursuant to the Brady Plan. Brady Bonds are debt securities described as part of
a restructuring plan created by U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding external
indebtedness (generally, commercial bank debt). In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as multilateral institutions such as the World
Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates
the exchange of commercial bank debt for newly
28
<PAGE>
issued debt (known as Brady Bonds). The World Bank and the IMF provide funds
pursuant to loan agreements or other arrangements which enable the debtor nation
to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements IMF debtor nations are required to implement
domestic monetary and fiscal reforms. These reforms have included the
liberalization of trade and foreign investment, the privatization of stateowned
enterprises and the setting of targets for public spending and borrowing. These
policies and programs promote its economic growth and development. The Brady
Plan only sets forth general guiding principles for economic reform and debt
reduction, emphasizing that solutions must be negotiated on a case-by-case basis
between debtor nations and their creditors.
SEE THE STATEMENT OF ADDITIONAL INFORMATION FOR FURTHER DISCUSSION OF THE USES
AND RISKS OF THE INVESTMENTS DESCRIBED ABOVE.
29
<PAGE>
APPENDIX
As described in the Prospectus, the fixed income securities offering the high
current income sought by certain of the Funds are ordinarily in the lower rating
categories (that is, rated Baa or lower by Moody's or BBB or lower by S&P or are
unrated).
Moody's describes its lower ratings for corporate bonds as follows:
Bonds that are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other market shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
S&P describes its lower ratings for corporate bonds as follows:
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated BB, B, CCC, CC or C is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
30
<PAGE>
QUALITY DISTRIBUTION. The average weighted quality distribution of the
securities in the portfolio for the year ended December 31, 1997.
<TABLE>
<CAPTION>
JOHN HANCOCK VA WORLD BOND FUND Y-T-D RATING RATING
AVERAGE % OF ASSIGNED % OF ASSIGNED % OF
YIELD PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA.......................................... $1,505,281 71.3% 0 0.0% $1,505,281 71.3%
AA........................................... 0 0.0% 0 0.0% 0 0.0%
A............................................ 0 0.0% 0 0.0% 0 0.0%
BAA.......................................... 22,997 1.1% 0 0.0% 22,997 1.1%
BA........................................... 382,684 18.1% 0 0.0% 382,684 18.1%
B............................................ 98,933 4.7% $32,221 1.5% 66,712 3.2%
CAA.......................................... 0 0.0% 0 0.0% 0 0.0%
CA........................................... 0 0.0% 0 0.0% 0 0.0%
C............................................ 0 0.0% 0 0.0% 0 0.0%
D............................................ 0 0.0% 0 0.0% 0 0.0%
---------- ------- ----------
0
DEBT SECURITIES.............................. 2,009,895 95.2% $32,221 1.5% $1,977,674 93.7%
0
EQUITY SECURITIES............................ 0 0.0%
0
SHORT-TERM SECURITIES........................ 102,077 4.8%
----------
0
TOTAL PORTFOLIO.............................. 2,111,972 100.0%
0
OTHER ASSETS -- NET.......................... 40,509
----------
0
NET ASSETS................................... $2,152,481
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK VA SOVEREIGN BOND FUND Y-T-D RATING RATING
AVERAGE % OF ASSIGNED % OF ASSIGNED % OF
YIELD PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA.......................................... $1,229,436 67.3% 0 0.0% $1,229,436 67.3%
AA........................................... 27,890 1.5% 0 0.0% 27,890 1.5%
A............................................ 87,767 4.8% 0 0.0% 87,767 4.8%
BAA.......................................... 120,139 6.6% $ 2,291 0.1% 117,848 6.4%
BA........................................... 85,797 4.7% 0 0.0% 85,797 4.7%
B............................................ 58,052 3.2% 9,544 0.5% 48,508 2.7%
CAA.......................................... 2,321 0.1% 0 0.0% 2,321 0.1%
CA........................................... 0 0.0% 0 0.0% 0 0.0%
C............................................ 0 0.0% 0 0.0% 0 0.0%
D............................................ 0 0.0% 0 0.0% 0 0.0%
---------- ------- ----------
DEBT SECURITIES.............................. 1,611,402 88.2% $11,835 0.6% $1,599,567 87.5%
EQUITY SECURITIES............................ 0 0.0%
SHORT-TERM SECURITIES........................ 216,077 11.8%
----------
TOTAL PORTFOLIO.............................. 1,827,479 100.0%
OTHER ASSETS -- NET.......................... (8,435)
----------
NET ASSETS................................... $1,819,044
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK VA STRATEGIC INCOME FUND Y-T-D RATING RATING
AVERAGE % OF ASSIGNED % OF ASSIGNED % OF
YIELD PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA.......................................... $ 909,853 27.9% 0 0.0% $ 909,853 27.9%
AA........................................... 113,334 3.5% 0 0.0% 113,334 3.5%
A............................................ 0 0.0% 0 0.0% 0 0.0%
BAA.......................................... 0 0.0% 0 0.0% 0 0.0%
BA........................................... 121,891 3.7% 0 0.0% 121,891 3.7%
B............................................ 1,677,265 51.6% $190,667 5.9% 1,486,599 45.6%
CAA.......................................... 52,711 1.6% 0 0.0% 52,711 1.6%
CA........................................... 0 0.0% 0 0.0% 0 0.0%
C............................................ 0 0.0% 0 0.0% 0 0.0%
D............................................ 0 0.0% 0 0.0% 0 0.0%
---------- -------- ----------
0
DEBT SECURITIES.............................. 2,875,054 88.3% $190,667 5.9% $2,684,388 82.3%
0
EQUITY SECURITIES............................ 114,843 3.5%
0
SHORT-TERM SECURITIES........................ 268,538 8.2%
----------
0
TOTAL PORTFOLIO.............................. 3,258,435 100.0%
0
OTHER ASSETS -- NET.......................... 15,803
----------
0
NET ASSETS................................... $3,274,238
==========
</TABLE>
<PAGE>
JOHN HANCOCK DECLARATION TRUST
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
SUB-INVESTMENT ADVISERS
John Hancock Advisers International Limited
(International Fund)
34 Dover Street
London, England WIX3RA
Independence Investment Associates, Inc.
(Independence Equity Fund)
53 State Street
Boston, Massachusetts 02109
Sovereign Asset Management Corp. (Sovereign
Investors Fund)
1235 Westlakes Drive
Berwyn, Pennsylvania 19312
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIANS
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02117
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICING AGENT
John Hancock Servicing Center
P.O. Box 9298
Boston, Massachusetts 02205-9298
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUNDS
For Service Information
Telephone 1-800-824-0335
VAOOP 5/98
Printed on Recycled Paper.
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Declaration Trust
Growth V.A. International Fund
V.A. Financial Industries Fund
V.A. Emerging Growth Fund
V.A. Growth Fund (formerly V.A. Discovery Fund)
----------------------------------------------------------
Growth V.A. Independence Equity Fund
& Income V.A. 500 Index Fund
V.A. Sovereign Investors Fund
----------------------------------------------------------
Income V.A. World Bond Fund
V.A. Strategic Income Fund
V.A. Sovereign Bond Fund
V.A. Money Market Fund
DECEMBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
================================Table of Contents===============================
John Hancock Funds - Declaration Trust
Page
1) Chairman's Message..................................................... 3
2) Portfolio Manager Commentary
This commentary reflects the views of the portfolio manager(s) or portfolio
management team through the end of the Fund's period discussed in this report.
Of course, the manager's or team's views are subject to change as market and
other conditions warrant.
Growth
V.A. International Fund................................................ 4
V.A. Financial Industries Fund......................................... 7
V.A. Emerging Growth Fund.............................................. 10
V.A. Growth Fund (formerly V.A. Discovery Fund)........................ 13
Growth & Income
V.A. Independence Equity Fund.......................................... 16
V.A. 500 Index Fund.................................................... 19
V.A. Sovereign Investors Fund.......................................... 22
Income
V.A. World Bond Fund................................................... 25
V.A. Strategic Income Fund............................................. 28
V.A. Sovereign Bond Fund............................................... 31
V.A. Money Market Fund................................................. 34
3) Financial Statements................................................... 36
4) Notes To Financial Statements.......................................... 85
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
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
CUSTODIANS
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
V.A. Emerging Growth Fund
V.A. Growth Fund
V.A. Financial Industries Fund
V.A. Independence Equity Fund
V.A. Sovereign Investors Fund
V.A. Strategic Income Fund
V.A. Sovereign Bond Fund
STATE STREET BANK AND TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
V.A. International Fund
V.A. 500 Index Fund
V.A. World Bond Fund
V.A. Money Market Fund
TRANSFER AGENT
JOHN HANCOCK SERVICING CENTER
P.O. BOX 9298
BOSTON, MASSACHUSETTS 02205-9298
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
SUB-INVESTMENT ADVISERS
JOHN HANCOCK ADVISERS INTERNATIONAL LIMITED
34 DOVER STREET
LONDON, ENGLAND W1X3RA
V.A. International Fund
INDEPENDENCE INVESTMENT ASSOCIATES, INC.
53 STATE STREET
BOSTON, MASSACHUSETTS 02109
V.A. Independence Equity Fund
SOVEREIGN ASSET MANAGEMENT CORP.
1235 WESTLAKES DRIVE
BERWYN, PENNSYLVANIA 19312
V.A. Sovereign Investors Fund
ISSUER
JOHN HANCOCK MUTUAL
LIFE INSURANCE COMPANY
JOHN HANCOCK VARIABLE
LIFE INSURANCE COMPANY*
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02117
*Not Licensed in New York
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5702
2
<PAGE>
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 were anything but dull. Bond investors enjoyed the
benefits of a strong economy with no inflation. Stock investors were treated to
record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances with relatively
minor swings, the stock market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round began in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had bounced back, yet it and many markets remained edgy and more
volatile as investors sorted out the Asian turmoil and its implications on
economic growth, interest rates and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1 1/2" by 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.]
3
<PAGE>
================================================================================
BY MIREN ETCHEVERRY, JOHN L.F. WILLS AND
GERARDO J. ESPINOZA, CO-PORTFOLIO MANAGERS
John Hancock
V.A. International Fund
Chaos in Asia curtails overseas markets' advances
"...we continued to up our stake in more stable, established markets."
It was a gut-wrenching year for international investors, who watched their
double-digit gains in the first half dwindle as turmoil in Asia shook world
markets. Starting in late summer, Southeast Asian nations were hit with a wave
of currency devaluations and growing financial ills. The crisis had a ripple
effect on Latin America, then spread to the rest of the world in late October
and has kept overseas markets in turmoil ever since. The developed worlds of
Europe and North America managed to recover and many countries in Europe posted
solid gains for the year. Even though the Asian chaos served to rein in the
booming performance of the emerging markets of Latin America, many of them still
advanced strongly. On the other hand, almost every Asian market, including Hong
Kong and Japan, ended the year in negative territory for U.S. dollar investors,
from Hong Kong's 24% fall to Thailand's 75% plunge.
Overall, international fund investors ended the year eking out only small
advances on average. John Hancock V.A. International Fund shared in the world's
woes. Despite the Fund's better-than-average first-half performance, we later
lost ground when the Asian contagion dealt blows to our strong weightings in
Hong Kong, Singapore and Brazil, particularly in October. That was the height of
the emerging-market turmoil, when several of these focus markets had drops in
the 20% to 30% range. Indeed, the Fund fell 12% in the month of October alone,
wiping out its previous gains. For the year ended December 31, 1997, the Fund
posted a total return of -0.54% at net asset value, compared with the 5.17%
return of the average variable annuity international fund, according to Lipper
Analytical Services, Inc. Longer-term performance information can be found on
page six.
[A 1 3/4" by 3" photo of Fund management team. Caption reads "V.A. International
Fund co-portfolio managers (l - r) Gerardo J. Espinoza, Miren Etcheverry and
John L.F. Wills."]
4
<PAGE>
================================================================================
JOHN HANCOCK V.A. INTERNATIONAL FUND
"In the near term, world markets will continue to be volatile..."
Asia shrinks; safe havens grow
We avoided the most vulnerable Asian markets, including Thailand, Indonesia and
Malaysia, during the year, but the magnitude of the region's downfall was
greater than expected, especially in fundamentally sound Hong Kong and
traditionally stalwart Singapore. In the second half, we cut our stake in the
Pacific Rim to 20% of net assets, down from 44%. Our underweighted 9% stake in
Japan by the year's end remained focused on exporters, which did well during the
year, but which could also feel the effects of the regional slowdown. In Hong
Kong, Australia and Singapore, we still own several of each market's blue-chip
stocks.
With heightened turbulence elsewhere, we continued to up our stake in more
stable, established markets. We added a 7% position in Canada and increased our
stake in Europe from 28% to 49% of the Fund's net assets, with the U.K. the top
weighting. Within each country, we focused on only the top-quality names, such
as Carrefour in France, Royal & Sun Alliance Insurance in the U.K. and Royal
Bank of Canada in Canada.
With our 12% stake in Latin America, we stayed focused on companies that
are prime candidates for privatization, such as utilities and
telecommunications. They are also the least likely to feel the effects of
economic slowdowns. Our largest bet there remains Brazil, at 8%, because of its
continuing strides toward liberalization and privatization -- a process that may
well accelerate as an indirect, and silver-lining, result of the Asian tumult.
Looking ahead
In the near term, world markets will continue to be volatile as investors
wrestle with the implications of the Asian fallout. Until the dust settles, we
will keep our emphasis on the more established markets of Europe, but will also
stay with our reduced stake in emerging markets, most notably Hong Kong and
Singapore. We believe they are among the best quality, and with the greatest
potential for rebound, barring any further blow-ups. As for the rest of Asia,
the risks remain too great until we see how serious those countries are about
making needed reforms. We'll closely monitor developments there, and also keep a
light stake in Japan, since its long economic slump and banking problems
persist.
- --------------------------------------------------------------------------------
International investing involves special risks such as political, economic and
currency risks and differences in accounting standards and financial reporting.
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote "For the year ended December 31, 1997." The chart is
scaled in increments of 2% from top to bottom with 6% at the top and -6% at the
bottom. Within the chart, there are two solid bars. The first represents the
- -0.54% total return for John Hancock V.A. International Fund. The second
represents the 5.17% total return for the Average variable annuity international
fund. Footnote below reads: "The total return for John Hancock V.A.
International Fund is at net asset value with all distributions reinvested. The
average variable annuity international fund is tracked by Lipper Analytical
Services, Inc. See the following page for historical performance information."]
5
<PAGE>
================================================================================
JOHN HANCOCK V.A. INTERNATIONAL FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns (0.54%) 12.14%
Average Annual Total Returns(1) (0.54%) 8.93%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been (1.43%) and 7.76%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
International Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Morgan Stanley EAFE Index--an unmanaged index that measures
the performance of stock markets in Europe, Australia and the Far East. In
addition, the Fund is compared to the Morgan Stanley All Country World-Ex U.S.
Free Index, which measures the performance of a broad range of developed and
emerging stock markets, and represents freely traded securities. The Adviser has
chosen to remove the Morgan Stanley EAFE Index from future reports, but will
continue comparing the Fund to the Morgan Stanley All Country World-Ex U.S. Free
Index, which more closely represents the investment strategy of the Fund.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. International Fund, 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 Morgan Stanley All Country World-Ex
U.S. Index and is equal to $12,582 as of December 31, 1997. The second line
represents the hypothetical $10,000 investment made in the V.A. International
Fund on August 29, 1996, before sales charge, and is equal to $11,214 as of
December 31, 1997. The third line represents the value of the Morgan Stanley
EAFE Index and is equal to $10,680 as of December 31, 1997.]
6
<PAGE>
================================================================================
BY JAMES K. SCHMIDT, CFA AND THOMAS FINUCANE,
CO-PORTFOLIO MANAGERS
John Hancock
V.A. Financial Industries Fund
Tame inflation, falling interest rates boost
financial stocks in 1997
"...earnings results for most of the financial stocks have exceeded
expectations."
Financial stocks were among the leaders in 1997, as the stock market persisted
in its bull market charge. The economy remained strong, while interest rates
mostly fell after a spike in the spring, and inflation was nowhere to be seen.
It was an ideal environment in which to launch John Hancock V.A. Financial
Industries Fund on April 30, 1997. From inception through the year's end, the
Fund posted a total return of 35.05% at net asset value. That compared to the
20.20% return of the average variable annuity specialty fund, and the 35.10%
return of the average open-end financial services fund during the same period,
according to Lipper Analytical Services, Inc. Longer-term performance can be
found on page nine.
Leaders and laggards
Leading the pack over the last year have been the brokerage stocks. They were
propelled by buoyant markets that boosted trading volume and new offerings, as
well as by continued merger activity, most notably between Morgan Stanley and
Dean Witter; Alex Brown and Bankers Trust and Montgomery Securities and
NationsBank. Also climbing to new highs were the stocks of asset managers,
driven by strong markets and robust mutual fund sales.
Banks, insurance and REIT stocks also posted healthy 1997 returns in
response to in-line earnings and continued consolidation activity. Nonetheless,
their performance was overshadowed by the skyrocketing brokers and asset
managers. In 1998, with the more market-sensitive brokers and asset managers
trading at higher price to earnings multiples, we look to the more predictable
and stable earnings streams in banking, insurance and REITs to spell any
weakness in the more high-flying sectors.
[A 2" by 3" photo of Fund management team. Caption reads "Fund
management team members: (l - r) Jay McKelvey, Jim Schmidt, Tom
Finucane and Patricia Ouimet."]
7
<PAGE>
================================================================================
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
"We expect the consolidation among and across the various financial services
industries to continue..."
Earnings and consolidations trend upward
In 1997, earnings results for most of the financial stocks have exceeded
expectations. Current macro-economic conditions are ideal for financial stocks:
moderate growth, low inflation and stable to declining interest rates. Across
the financial spectrum, loan/asset quality is excellent, margins remain
adequate, management's attention to overhead levels and efficiency is paramount
and stock buybacks counter excess capital build-up. In this environment,
companies have reported 12% to 14% year-over-year earnings growth. As long as
the climate doesn't change, our 1998 earnings models call for 10% increases over
1997.
Even in the Fund's short eight-month existence, already one of its
holdings announced their intent to be acquired. In general, financial deals have
been spread across several industry combinations, including banks buying
thrifts; banks buying brokers and life insurers buying each other. We expect the
consolidation among and across the various financial services industries to
continue and perhaps accelerate in the future.
Portfolio strategy and outlook
The Fund invests in relatively inexpensive financial stocks that have solid
earnings fundamentals and may be in the path of consolidation. We feel that the
economic and regulatory environment currently in place will provide many
opportunities for us to make rewarding investments. In the United States, rules
promulgated by the Federal Reserve and the Controller of the Currency have
blurred the lines between banking, insurance, and securities brokerage. Repeal
of the Glass-Steagall Act, which we expect within the next three years, will
further this process and give new impetus to mergers among financial companies.
We also feel that the advent of the European Community will result in
restructuring activity among financial services providers in that continent.
Many of the nations in eastern Asia have recently experienced weakness in
their economies and currencies. This will result in slightly lower growth on a
global basis than would otherwise have been the case. Nevertheless, we are
anticipating increased economic activity in the countries in which we are
invested and expect this to translate into higher earnings for well managed
financial companies.
- --------------------------------------------------------------------------------
Sector investing is subject to different, and sometimes greater, risks than the
market as a whole.
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote "From April 30, 1997 to December 31, 1997." The chart is
scaled in increments of 10% from top to bottom with 40% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
35.05% total return for the John Hancock V.A. Financial Industries Fund. The
second represents the 20.20% total return for the Average variable annuity
specialty fund. The third represents the 35.10% total return for the Average
open-end financial services fund. Footnote below reads: "The total return for
John Hancock V.A. Financial Industries Fund is at net asset value with all
distributions reinvested. The average variable annuity specialty fund and
open-end financial services fund are tracked by Lipper Analytical Services, Inc.
See the following page for historical performance information."]
8
<PAGE>
================================================================================
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
INCEPTION
(4/30/97)
---------
Cumulative Total Returns 35.05%
Average Annual Total Returns(1) 35.05%(2)
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses the total return since inception would have
been 34.71%.
(2) Not Annualized.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Financial Industries Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Financial Industries Fund, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the V.A. Financial Industries Fund on April 30, 1997, before sales charge,
and is equal to $13,505 as of December 31, 1997. The second line represents the
value of the S&P 500 Stock Index and is equal to $12,255 as of December 31,
1997.]
9
<PAGE>
================================================================================
BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Emerging Growth Fund
Stock market charges ahead; small stocks advance less
than their larger brethren
"Some of our best performers...were energy and semiconductor stocks..."
Thanks to steady U.S. economic growth and rising corporate profits,
small-company stocks posted strong returns for 1997. However, their gains
couldn't match the surprisingly good performance of their large-company
counterparts. After getting off to a weak start, the onset of spring marked a
turning point, as small companies, bolstered by a number of developments, began
to knock large-company stocks off the leader board. Not only were many
large-company stocks expensive in the eyes of many observers, but their earnings
were curtailed by a strong U.S. dollar. That, coupled with the reduction in the
capital gains tax made small caps -- which create most of their value through
capital gains -- more appealing in the eyes of many investors. The tables turned
again in the final three months of the year, when the uncertainty surrounding
the Asian crisis incited a flight to safety. Large, well-known companies resumed
their leadership and left their smaller counterparts -- typically a more
volatile group -- languishing in their wake.
Strategy and performance review
For the 12-month period ended December 31, 1997, John Hancock V.A. Emerging
Growth Fund had a total return of 11.06% at net asset value, compared to the
average variable annuity small company fund's return of 18.95%, according to
Lipper Analytical Services, Inc. Longer-term performance information can be
found on page 12. The primary reason why the Fund lagged its counterparts was
our emphasis on small-company growth stocks, which have above-average increases
in revenues and earnings. With investors concerned about earnings growth at
small companies, these stocks fell out of favor and small-company value stocks
- -- which are sold on the basis of the value of a firm's assets -- led the
small-cap pack.
[A 2" x 3" photo of V.A. Emerging Growth Fund at bottom right. Caption below
reads: "Bernice Behar (center) and Fund management team members Ben Hock (l) and
Andrew Slabin (r)."]
10
<PAGE>
================================================================================
JOHN HANCOCK V.A. EMERGING GROWTH FUND
"Small-company stocks are currently priced more attractively..."
Some of our best performers during the year were energy and semiconductor
stocks, which did extremely well in the second and third quarters. In the energy
group, some of our biggest winners were oil service holdings -- including
Maverick Tube, Lonestar Steel and National-Oilwell -- and energy driller
Precision Drilling. Our best-performing semiconductor company was Semtech. By
the fourth quarter, we thought it prudent to lock in some of our profits and we
pared back or sold several of these holdings. That helped us sidestep the
subsequent Asian currency and economic crisis that put pressure on both groups,
although we didn't completely dodge the downturn.
In our view, technology stocks will continue to offer some of the
fastest-growing opportunities in the marketplace, so we maintained a relatively
high weighting in the sector. We did, however, switch focus, concentrating less
on hardware companies and more on software companies such as Symantec, CBT
Group, Visio and Aspect Development.
In the fourth quarter, our advertising and broadcasting holdings performed
well. Lamar Advertising and Universal Outdoor Holdings benefited from price
increases for their billboard space. The stocks of broadcasting companies
serving the U.S. Spanish-speaking population -- such as radio company Heftel and
television company Univision Communications -- saw impressive gains as
advertisers agreed to pay higher prices to reach this fast-growing demographic.
Given our concerns about a potential slowdown in global economic growth,
we increased our stake in more domestically-oriented companies, including
retailers that serve small-town America, such as Stage Stores and Hibbett
Sporting Goods. We also increased our stake in environmental stocks such as
American Disposal Services and Superior Services.
Outlook
Uncertainty surrounding the Asian crisis and its implications for the U.S.
economy may cause continued stock volatility. In any case, we believe that
small-company stocks stand a good chance to overtake their larger-company
counterparts. Their recent lag has nothing to do with business fundamentals, but
rather stems from the Southeast Asian contagion that sent investors fleeing
toward more liquid, larger company stocks. When those fears are calmed, we would
expect investors to once again focus on company fundamentals, a shift that we
think will benefit the small-company sector. Small-company stocks are currently
priced more attractively and are also posting faster growth rates.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 5%, with 20% at the top and 0% at the bottom. Within the
chart there are two solid bars. The first represents the 11.06% total return for
John Hancock V.A. Emerging Growth Fund. The second represents the 18.95% total
return for the Average variable annuity small company fund. A footnote below
states: "The total return for John Hancock V.A. Emerging Growth Fund is at net
asset value with all distributions reinvested. The average variable annuity
small company fund is tracked by Lipper Analytical Services, Inc. See the
following page for historical performance information."]
11
<PAGE>
================================================================================
JOHN HANCOCK V.A. EMERGING GROWTH FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 11.06% 3.71%
Average Annual Total Returns(1) 11.06% 2.76%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 9.34% and (0.41%),
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Emerging Growth Fund would be worth, assuming all distributions were reinvested
for the period indicated. 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 to measure stock market
performance. In addition, the Fund is compared to both the Russell 2000 Index
and the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged
small-cap index that is comprised of 2,000 U.S. stocks. The Russell 2000 Growth
Index is an unmanaged index that contains Russell 2000 Index stocks with a
greater-than-average growth orientation. The Adviser has chosen to remove the
Standard & Poor's 500 Stock Index from future reports, but will continue to
compare the Fund's performance to the broad-based Russell 2000 Index as well as
the Russell 2000 Growth Index, which more closely represent the investment
strategy of the Fund.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Emerging Growth Fund, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are four lines.
The first line represents the value of the S&P 500 Stock Index and is equal to
$15,580 as of December 31, 1997. The second line represents the value of the
Russell 2000 Growth Index and is equal to $14,153 as of December 31, 1997. The
third line represents the value of the Russell 2000 Index and is equal to
$12,779 as of December 31, 1997. The fourth line represents the value of a
hypothetical $10,000 investment made in the V.A. Emerging Growth Fund on August
29, 1996, before sales charge, and is equal to $10,371 as of December 31, 1997.]
12
<PAGE>
================================================================================
BY ANURAG PANDIT, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Growth Fund
Stock market moves in new territory,
dominated by largest companies
"We continued to maintain a relatively high weighting in the technology
sector..."
Effective January 2, 1998, John Hancock V.A. Discovery Fund was re-named John
Hancock V.A. Growth Fund, and leadership of the management team changed from the
team's small-company specialist, Bernice Behar, to the team's large-company
specialist, Anurag Pandit, CFA. These changes were made to reflect the Fund's
shift in investment focus to stocks of larger, more established companies. Mr.
Pandit has more than 13 years of investment management experience and has been a
member of the team since the Fund's inception.
The U.S. stock market surprised many observers by posting 1997 gains in excess
of 20% for an unprecedented third straight year. The market's rise was fueled by
a heady combination of strong corporate earnings, moderate inflation, healthy
economic growth and relatively low and stable interest rates. But those
impressive returns masked what was largely a two-tier market. The brand-name,
diversified, large-company stocks were the leaders, leaving the majority of
their smaller counterparts to post less impressive gains. Although stocks
charged ahead for the majority of the year, currency and economic problems in
Southeast Asia created a more volatile environment in the final quarter.
Performance and strategy review
For the 12 months that ended December 31, 1997, John Hancock V.A. Growth Fund
had a total return of 14.27% at net asset value, compared to the 25.36% return
of the average variable annuity growth fund, according to Lipper Analytical
Services, Inc. Longer-term performance information can be found on page 15. The
Fund's performance lag occurred mostly in the first and final quarters of the
year, when large-company growth stocks far outpaced the performance of
small-company stocks, which the Fund had emphasized during those periods.
Furthermore, our relatively small stake in
[A 2" x 3" photo of V.A. Emerging Growth Fund team at bottom right. Caption
below reads: "Fund management team members (l - r) Rob Hallisey, Bernice Behar,
Anurag Pandit and Andrew T. Slabin."]
13
<PAGE>
================================================================================
JOHN HANCOCK V.A. GROWTH FUND
"We enter fiscal 1998 with cautious optimism..."
good-performing financial stocks -- most of which didn't meet our high growth
targets -- curtailed our performance in the first quarter of the year.
During the second and third quarters, the Fund gained a lot of ground and
outperformed the majority of its peers, thanks in part to strong performance in
our energy service company holdings including Maverick Tube, Lonestar Steel,
National-Oilwell and EVI. After their success had pushed prices to what we
believed were expensive valuations, we pared back or sold some of these
holdings. Subsequently, the Asian currency crisis and uncertainty surrounding
OPEC production quotas put pressure on this sector. While our reduced stake
helped us sidestep their fourth-quarter woes, we weren't able to completely
dodge them and that hurt our performance in the last quarter.
We continued to maintain a relatively high weighting in the technology
sector, although we made some alterations in our holdings as the year wore on.
Semiconductor stocks posted impressive gains during much of the year. However,
these stocks are considered most vulnerable to a slump in Asian demand for
high-tech goods and as a result, suffered badly in October, November and
December. Fortunately, we had taken some profits and reduced our stake in these
companies, although not enough to completely insulate the Fund from their fall.
More recently, we've shifted our focus away from computer hardware stocks into
more software names including Symantec, which makes the popular Norton
anti-virus program.
Cautious optimism
The most recent turbulence has not convinced us to change our strategy of
focusing on high-growth companies. However, in keeping with Fund's recent shift
in investment focus, we plan to place more emphasis on mid-to-large company
stocks. We believe the quality, fundamentals, and long-term growth opportunities
presented by many larger companies best suit the Fund's growth objectives. By
focusing on larger companies, the Fund will continue to seek long-term
appreciation, but with the lower volatility that is typically associated with
large-capitalization stocks. Furthermore, we will continue to seek out companies
that offer defensible niches -- such as a differentiated product or service --
and that exhibit above-average growth potential for any environment. We'll
likely continue to focus on companies that are not unduly exposed to foreign
currency risk. We enter fiscal 1998 with cautious optimism, viewing the ongoing
market gyrations as a potential positive for growth-stock investing.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 10%, with 30% at the top and 0% at the bottom. Within
the chart there are two solid bars. The first represents the 14.27% total return
for the John Hancock V.A. Growth Fund. The second represents the 25.36% total
return for the Average variable annuity growth fund. A footnote below states:
"The total return for John Hancock V.A. Growth Fund is at net asset value with
all distributions reinvested. The average variable annuity growth fund is
tracked by Lipper Analytical Services, Inc. See the following page for
historical performance information."]
14
<PAGE>
================================================================================
JOHN HANCOCK V.A. GROWTH FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 14.27% 7.30%
Average Annual Total Returns(1) 14.27% 5.40%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 12.90% and 3.42%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Growth Fund would be worth, assuming all distributions were reinvested for the
period indicated. For comparison, we've shown the same $10,000 investment in the
Standard & Poor's 500 Stock Index--an unmanaged index that includes 500 widely
traded common stocks and is often used as a measure of stock market performance.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Growth Fund, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $15,580 as of
December 31, 1997. The second line represents the value of the V.A. Growth Fund,
before sales charge, and is equal to $10,730 as of December 31, 1997.]
15
<PAGE>
================================================================================
BY STEPHEN LANZENDORF, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock V.A. Independence Equity Fund
Large companies dominate small ones
in 1997 stock-market surge
"Financial stocks were among the biggest contributors to the Fund's
performance."
With the economy buoyant, and interest rates and inflation low, stocks continued
their long bull-market run throughout 1997. Just as in 1996, the charge was led
for much of the year by the well-known mega-cap stocks, which lured investors
with their strong and stable earnings growth. Despite heightened volatility
beginning in August due to worries of earnings slowdowns and economic turmoil in
Asia, the market still managed to turn in an amazingly strong showing for a
third straight year.
For the year ended December 31, 1997, the Standard & Poor's 500 Stock
Index, a broad measure of market performance, returned 33.36%, including
reinvested dividends. John Hancock V.A. Independence Equity Fund also produced
very strong results on both an absolute and relative basis. For calendar year
1997, the Fund posted a total return of 30.68% at net asset value, compared to
the 27.21% return of the average variable annuity growth and income fund,
according to Lipper Analytical Services, Inc. Longer-term performance
information can be found on page 18.
Finance, specialty retailers outperform
Financial stocks were among the biggest contributors to the Fund's performance.
The combination of falling interest rates, growing profits and heightened
industry consolidations propelled such Fund holdings as insurance companies
Travelers Group and General Re. We have continued to overweight the finance
sector since the fundamentals remain attractive. Within the sector, we continued
to emphasize insurance companies, since their prices remain relatively
[A 2" x 3" photo of V.A. Independence Equity Fund management team at bottom
right. Caption below reads: "V.A. Independence Equity Fund management team
members: (l-r) Coreen Kraysler, David Canavan, Jane Shigley, Jeff Saef and
Stephen Lanzendorf."]
16
<PAGE>
================================================================================
JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND
"Investors would do well to scale back their expectations..."
attractive, while many bank stocks have risen to a point that they currently
reflect the value of any potential mergers. Within the banking sector, we look
for high-quality regional names such as Norwest Corporation, as well as money
center banks. For example, BankAmerica currently presents a good opportunity
since its stock has recently been penalized disproportionately to its Asian
exposure.
Another good group was our specialty retail holdings, especially industry
leader Home Depot, whose stock rose by 76% during the year as it maintained its
clear market dominance and dependable growth.
During the year, we sold or cut our positions in some stocks whose prices
we felt had either gotten ahead of earnings expectations, such as Minnesota
Mining, or had reached full valuation levels given their prospects for growth,
such as Disney. With the cash, we added to our positions in companies whose
prices we believed were too low for their earnings prospects. That included
PepsiCo. whose sale of its restaurant divisions and return to its core bottling
business bodes well for its stock. We also increased our stake in
telecommunications equipment maker Lucent Technologies because of its strong
competitive position and prospects for earnings growth. Finally, we added Bell
Atlantic, a regional phone company which should benefit from cost savings
following its merger with Nynex.
Outlook
As long as the economic picture of moderate growth and low interest rates
doesn't change, we're keeping our outlook positive for 1998. That said, we do
not believe it is reasonable to expect the market to produce a fourth straight
year of 20% plus returns. Investors would do well to scale back their
expectations for 1998. Historically, the market has produced results in the 8%
to 10% range. The market should also remain more volatile as the Asian crisis
plays out.
No matter what happens next, we will stick to our disciplined strategy of
buying companies with attractive stock prices and improving earnings prospects.
We remain focused on providing shareholders with above-average total returns by
investing in a diversified stock portfolio that has a risk level comparable to
that of the S&P 500.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 10%, with 40% at the top and 0% at the bottom. Within
the chart there are two solid bars. The first represents the 30.68% total return
for the John Hancock V.A. Independence Equity Fund. The second represents the
27.21% total return for the Average variable annuity growth and income fund. A
footnote below states: "The total return for John Hancock V.A. Independence
Equity Fund is at net asset value with all distributions reinvested. The average
variable annuity growth and income fund is tracked by Lipper Analytical
Services, Inc. See the following page for historical performance information."]
17
<PAGE>
================================================================================
JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 30.68% 46.07%
Average Annual Total Returns(1) 30.68% 32.69%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 30.04% and 31.38%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Independence Equity Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Independence Equity Fund, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $15,580 as of
December 31, 1997. The second line represents the value of the V.A. Independence
Equity Fund, before sales charge, and is equal to $14,607 as of December 31,
1997.]
18
<PAGE>
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BY BARRY EVANS, CFA, AND ROGER HAMILTON,
FOR THE RISK MANAGEMENT GROUP
John Hancock
V.A. 500 Index Fund
S&P 500 Index shows its muscle for third straight year
Financial stocks boost Fund performance.
1997 was an extremely good year for the S&P 500 Index. In what was often
described as a "Goldilocks" economy characterized by low and falling interest
rates, moderate inflation and decent economic growth, corporate earnings
strengthened as productivity rose. But the index's gains weren't parceled out in
equal measure. Big companies posted stellar returns and contributed most to the
capitalization-weighted index's rise, while smaller companies posted only
moderate gains.
Strategy and performance review
For the 12 months ended December 31, 1997, John Hancock V.A. 500 Index Fund had
a total return of 29.51%. By comparison, the average variable annuity S&P 500
index objective fund had a total return of 32.55%, according to Lipper
Analytical Services, Inc. Longer-term performance information can be found on
page 21.
The Fund normally invests at least 80% of its total assets in common
stocks of the companies that comprise the Standard & Poor's 500 Stock Index. Our
aim is to allocate the stocks held in the portfolio in approximately the same
proportions as they are represented in the S&P 500 Stock Index. By pursuing that
strategy, we are able to minimize the degree to which the Fund's investment
results (before Fund expenses) differ from those of the index. The degree to
which the Fund's performance correlates with that of the S&P 500 Stock Index
depend upon the size and cash flows of the Fund, the liquidity of the securities
represented in the index and the Fund's expenses, among other factors.
In the early months of the period and of the Fund's existence, we bought
S&P 500 Stock Index futures as a proxy for the stocks in the index. We did that
because the futures allowed us to participate in the S&P 500's advance without
incurring the high transaction costs associated with buying individual stocks
with limited assets. To buy stocks -- specially in odd lots of less than 100
shares -- when the Fund's total
[A 2" x 2 1/2" photo of Barry Evans and Roger Hamilton. Caption reads "Barry
Evans (l) and Roger Hamilton (r)".]
19
<PAGE>
================================================================================
JOHN HANCOCK V.A. 500 INDEX FUND
"...we wouldn't be surprised if the market paused to catch its breath in
1998..."
assets were still small would have been more expensive and would have
compromised its total return. But in mid-June, the Fund's total assets had grown
to a level that allowed us to purchase individual stocks at reasonable costs.
Keeping more fully invested in the second half of the year helped our
performance more closely track that of the index. Using a strategy known as
sampling, we assembled a portfolio of stocks that replicates the characteristics
- -- including industry classification, volatility, earnings per share, and others
- -- of the S&P 500 Stock Index. By the end of the period, the Fund held roughly
380 stocks.
Financial service companies dominate; gold lags
"Merger mania," falling interest rates and declining loan losses propelled bank
stocks -- such as Fifth Third Bancorp, Norwest Corp. and State Street -- in
1997, making them some of the best performers for both the S&P 500 Index and the
Fund. But it wasn't just banks that made the financial stocks the market's
best-performing group of the year. Securities brokers also soared thanks to the
quickening pace of acquisition activity as well as the strength of the stock
market itself. In the broker category, the Fund's two performers were Charles
Schwab and Merrill Lynch. Technology stocks made lots of news during the year,
with the larger companies posting record gains, while smaller concerns were in a
bear market for most of the year. While the Fund enjoyed gains from Dell
Computer, Compaq Computer and Microsoft, companies such as Silicon Graphics and
Novell proved to be laggards. One of the market's worst performing groups was
gold stocks, which suffered as the price of the precious metal slumped. Our
holdings in Barrick Gold and Newmont Mining detracted from our performance.
Outlook
We'll continue to choose stocks that will help us closely track the performance
of the S&P Index. After posting gains in excess of 20% for an unprecedented
third consecutive year, we wouldn't be surprised if the market paused to catch
its breath in 1998, and investors would be wise to lower their expectations. Of
course, given the Fund's strategy and objectives, its returns should track the
performance of the S&P Index, whether it posts gains or incurs losses in 1998.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 10%, with 40% at the top and 0% at the bottom. Within
the chart there are two solid bars. The first represents the 29.51% total return
for the John Hancock V.A. 500 Index Fund. The second represents the 32.55% total
return for the Average variable annuity S&P 500 index objective fund. A footnote
below states: "The total return for John Hancock V.A. 500 Index Fund is at net
asset value with all distributions reinvested. The average variable annuity S&P
500 Index objective fund is tracked by Lipper Analytical Services, Inc. See the
following page for historical performance information."]
20
<PAGE>
================================================================================
JOHN HANCOCK V.A. 500 INDEX FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 29.51% 44.39%
Average Annual Total Returns(1) 29.51% 31.55%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 29.27% and 31.19%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A. 500
Index Fund would be worth, assuming all distributions were reinvested for the
period indicated. For comparison, we've shown the same $10,000 investment in the
Standard & Poor's 500 Stock Index--an unmanaged index that includes 500 widely
traded common stocks and is often used as a measure of stock market performance.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. 500 Index Fund, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $15,580 as of
December 31, 1997. The second line represents the value of the the V.A. 500
Index Fund, before sales charge, and is equal to $14,439 as of December 31,
1997.]
21
<PAGE>
================================================================================
BY JOHN F. SNYDER III AND BARRY EVANS, CFA
CO-PORTFOLIO MANAGERS
John Hancock
V.A. Sovereign Investors Fund
Stocks rack up yet another great year of returns
Retailers and banks contributed significantly to the Fund's performance.
1997 was yet another spectacular year for stock investors. The Dow Jones
Industrial Average -- one of the most commonly-watched market indices -- ended
the year up a healthy 22.64%. Following gains of 33% in 1995 and 26% gain in
1996, this year marked a record third-straight year in which stocks rose more
than 20%. It also marked the seventh-consecutive year of market advances, making
the current bull market the longest in the history.
It wasn't, however, all smooth sailing for investors. Much of the market's
gains came in the first half of the year. Then, as worries about corporate
profits and Asia's financial woes heightened, investors become more nervous and
the market traded in a volatile range for most of the second half. The big
winners in this year's market advance were the large stocks. In a
"flight-to-quality," investors sought out those large companies with reliable
earnings and clear market leadership. Aside from a short-lived rally in the
third quarter, small stocks lagged behind their larger brethren.
Fund performance
Our focus on "dividend performer" stocks -- those large stocks with consistent
dividends and reliable earnings -- paid off in 1997. For the year ended December
31, 1997, the John Hancock V.A. Sovereign Investors Fund had a total return of
28.43% at net asset value. By comparison, the average equity income fund
returned 29.13%, according to Lipper Analytical Services, Inc. Longer-term
performance information can be found on page 24.
Within Sovereign's investment universe, two important sectors contributed
significantly to the Fund's performance: retailers and banks. Retail giants
Wal-Mart and Home Depot rose more than 60% in 1997, thanks to market share gains
and strong consumer confidence levels. A favorable interest-rate environment and
strong loan demand helped banks' underlying fundamentals. Also, a sharp increase
in merger activity has
[A 2" x 3" photo of V.A. Sovereign Investors Fund management team at bottom
right. Caption below reads: "V.A. Sovereign Investors Fund management team
members: (l - r) John Snyder, Barry Evans, Jere Estes."]
22
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND
"...we believe consistency will be rewarded."
lifted the group. First Tennessee National Corp. was among our strongest
performers, buoyed by a healthy balance sheet and increasing takeover
speculation.
Shift to growth cyclicals
After strong gains, we felt that many of our consumer stocks were ripe for
profit taking. We sold several core holdings -- such as Sara Lee -- in favor of
companies that offered better growth potential and valuations. A perfect example
is Grainger (W.W.) Inc, which is the leading distributor of electrical
equipment. Market leadership is critical in this industry, as customers strive
to limit the number of vendors they use. With its most recent acquisition of
Ackland, Grainger has been able to strengthen its market position.
Outlook
A change from the generally ebullient stock market may be at hand. The expected
slowdown in the Asian economies may slow the world economy. At first glance, the
effect on the U.S. economy appears to be minimal, but the U.S. will not be
immune. Furthermore, we believe that the impact will extend beyond those
companies with direct exposure to Asia such as semiconductor manufacturers.
Companies with extensive retailing operations in the Far East -- such as
McDonald's and Coca-Cola -- are also likely to experience weaker demand. U.S.
companies that are vulnerable to imports -- such as steel manufacturers and auto
makers -- will face stiffer competition as Asian companies attempt to export
their way out of trouble.
In general, we believe top line revenue growth will be harder to come by,
and that 1998 will be a more difficult year for earnings growth than any of the
past five years. Pricing power is non-existent. Indeed, a number of economists
believe prices could go down in 1998. While lower prices will benefit consumers,
deflation is a difficult environment for corporate profitability.
If an economic slowdown materializes, this will be the sweet spot of the
market cycle for the Fund's "dividend performers" universe of companies. At a
time when earnings disappointments are dealt with severely by the market, we
believe consistency will be rewarded. Superior management and market dominance
become even more critical for success. If the past is any guide, it will be a
time when investors are likely to fully appreciate the investment quality of
these stable growth companies and be willing to pay premium prices for them.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 10%, with 30% at the top and 0% at the bottom. Within
the chart there are two solid bars. The first represents the 28.43% total return
for the John Hancock V.A. Sovereign Investors Fund. The second represents the
29.13% total return for the Average variable annuity equity income fund. A
footnote below states: "The total return for John Hancock V.A. Sovereign
Investors Fund is at net asset value with all distributions reinvested. The
average variable annuity equity income fund is tracked by Lipper Analytical
Services, Inc. See the following page for historical performance information."]
23
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 28.43% 39.08%
Average Annual Total Returns(1) 28.43% 27.92%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 28.12% and 26.94%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Sovereign Investors Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Sovereign Investors Fund, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $15,580 as of
December 31, 1997. The second line represents the value of the V.A. Sovereign
Investors Fund, before sales charge, and is equal to $13,908 as of December 31,
1997.]
24
<PAGE>
================================================================================
BY LAWRENCE J. DALY, ANTHONY A. GOODCHILD AND
JANET L. CLAY, CO-PORTFOLIO MANAGERS
John Hancock
V.A. World Bond Fund
Flight to quality drives world bond markets
following Asian financial crisis
"...we shifted our focus toward U.S. government bonds..."
Global bond investors struggled during 1997 through the cross-currents of U.S.
interest rate fears early in the year and major volatility spikes later caused
by Asian financial woes. The outcome was modest returns, but relief that
results remained positive. Regionally, bond market results varied widely. The
United States was one of the best-performing markets. After early interest-rate
and inflation fears hurt U.S. bond prices and reverberated in other countries,
the summer brought moderating growth and tame inflation. That sent U.S. Treasury
bonds rallying right through the year's end. The boost in U.S. bonds was most
dramatic at the end of the year, after market turmoil in Asia sent investors
scurrying to safe havens. Starting in August and culminating in late October, a
wave of currency devaluations swept through Southeast Asia and Korea, causing
their financial pictures to darken and some countries' bonds to be downgraded to
junk status. A mass exodus from all emerging Asian markets followed, hurting
bond prices as far away as Latin America and putting an end to the banner year
that emerging markets, especially in Latin America, had enjoyed until then. In
Europe, bonds outperformed the U.S. earlier in the year, but then fears of
rising European rates and the lure of more attractive U.S. yields caused their
rally to stall.
Performance and strategy review
Despite this upheaval, the J.P. Morgan Global Government Bond Index -- a
benchmark for global bond performance -- managed to close up 1.4% for the year
ended December 31, 1997. In the same period, John Hancock V.A. World Bond Fund
posted a total return of 1.37% at net asset value, compared to the 4.31% return
of the average variable annuity global income fund,
[A 2" x 3" photo of V.A. World Bond Fund team members. Caption reads: "Fund
co-portfolio managers (l - r) Tony Goodchild, Janet Clay and Larry Daly."]
25
<PAGE>
================================================================================
JOHN HANCOCK V.A. WORLD BOND FUND
"We expect continued fallout from the Southeast Asian crisis..."
according to Lipper Analytical Services, Inc. Longer-term performance
information can be found on page 27.
The Fund benefited from investing in the United States, avoiding Asia and
downplaying Europe and foreign currencies. The difference in performance was due
to our exposure to emerging markets, which rose to about 30% of assets at
several points during the year -- close to our 35% limit. That level was less
than average, which held us back when those markets were performing well, yet
was still enough to hurt us in October's tumult.
During the year, as bond yields fell worldwide, the difference in yields
between other countries and the United States narrowed to minimal levels. Many
foreign bonds, therefore, no longer offered a significant yield advantage over
U.S. Treasuries. With little prospect that overseas bond prices would rise, and
with Asia's ills looming large, we shifted our focus toward U.S. government
bonds in the five-year maturity horizon. These bonds benefited as investors
increasingly chose high quality. By the end of the year, U.S. Treasury and
government agency bonds accounted for three quarters of the Fund's net assets,
up from 44% six months ago.
At the same time, we opportunistically trimmed our emerging-market stake
to 13% of assets, down from 31% six months ago. We've kept our focus on U.S.
dollar-denominated government bonds from Latin America, including Ecuador,
Mexico, Brazil, Panama and Venezuela. We also continued to pare our Europe
holdings to 7%, keeping only our U.K. bonds because their yields were higher
than the rest of Europe.
A look ahead
We expect continued fallout from the Southeast Asian crisis until we see more
signs of government resolve to make needed structural changes, and until there's
a clearer picture of how Asia's slowing economies will impact worldwide growth.
In this environment, we plan to stick with our more conservative strategy of
focusing on high-quality U.S. government bonds. In our view, they offer solid
prospects, especially given the instability elsewhere. When the Asian crisis
passes, we believe there will be significant upside potential in high-quality
Latin American bonds. But for now, the highly unusual combination of economic
and world circumstances compels us to keep the bulk of our global bond assets
close to home.
- --------------------------------------------------------------------------------
International investing involves special risks such as political, economic and
currency risks and differences in accounting standards and financial reporting.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 1%, with 5% at the top and 0% at the bottom. Within the
chart there are two solid bars. The first represents the 1.37% total return for
the John Hancock V.A. World Bond Fund. The second represents the 4.31% total
return for the Average variable annuity global income fund. A footnote below
states: "The total return for John Hancock V.A. World Bond Fund is at net asset
value with all distributions reinvested. The average variable annuity global
income fund is tracked by Lipper Analytical Services, Inc. See the following
page for historical performance information."]
26
<PAGE>
================================================================================
JOHN HANCOCK V.A. WORLD BOND FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 1.37% 5.47%
Average Annual Total Returns(1) 1.37% 4.04%
YIELD
For the period ended December 31, 1997
SEC 30-DAY
YIELD
----------
John Hancock V.A. World Bond Fund 5.48%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 0.07% and 2.52%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
World Bond Fund would be worth, assuming all distributions were reinvested for
the period indicated. For comparison, we've shown the same $10,000 investment in
the Salomon Brothers World Government Bond Index--an unmanaged index that
provides a benchmark for bond market performance on a worldwide basis.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. World Bond Fund, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the V.A. World Bond Fund, before sales charge, and is equal to $10,547 as of
December 31, 1997. The second line represents the value of the Salomon Brothers
World Government Bond Index on August 29, 1996, and is equal to $10,344 as of
December 31, 1997.]
27
<PAGE>
================================================================================
BY FREDERICK CAVANAUGH, PORTFOLIO MANAGER
John Hancock
V.A. Strategic Income Fund
U.S. Treasuries, high-yield corporate bonds
show strength amid global uncertainty
"Our outperformance came from our relatively large stake in U.S. high-yield
corporate bonds..."
The past 12 months will go down as a good year for U.S. bonds, thanks primarily
to low inflation and stable interest rates. U.S. Treasury yields -- which move
in the opposite direction of bond prices -- fell to levels not seen in four
years. Meanwhile, the U.S. high-yield corporate market, which is made up of
companies with below-investment-grade credit ratings, also performed well. The
continued strength of the nation's economy translated into improving earnings
and cash flows for many high-yield companies and the demand for their bonds was
exceptionally strong. Outside the U.S., the news was mixed. Emerging-market
bonds posted good returns for the year, despite a fourth quarter sell-off that
was triggered by economic and currency problems in Southeast Asia. Intermediate-
and long-term government bonds issued by "dollar bloc" countries -- including
Canada and New Zealand -- enjoyed gains as their interest rates declined,
mirroring the fall in U.S. interest rates. However, many European bonds remained
unattractive relative to other areas of the world as the continent struggled to
meet the economic and fiscal conditions mandated by its progress toward a
unified currency.
Performance and strategy review
For the year ended December 31, 1997, John Hancock V.A. Strategic Income Fund
posted a total return of 11.77% at net asset value, surpassing the 9.53% return
of the average variable annuity general bond fund, according to Lipper
Analytical Services, Inc. For longer-term performance information, please see
page 31. Our outperformance came from our relatively large stake in U.S.
high-yield corporate bonds, which performed well. Among the Fund's top
high-yield performers were telecommunications leader Nextel Communications,
which continued to benefit from rising subscriber growth, and Casino
[A 2" x 3" photo of V.A. Strategic Income Fund team members. Caption reads:
"Frederick Cavanaugh (left) and Fund management team members (l - r) Linda
Carter, Jamie Kellogg and Arthur Calavritinos."]
28
<PAGE>
================================================================================
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
"...we'll keep our stake in emerging-market bonds relatively low for now..."
America which was boosted by growing revenues. Some of our high-yield corporate
holdings from offshore companies proved disappointing. With the cloud of
uncertainty hanging over emerging markets, high-yield bonds issued by Brazilian
telecommunications concern Globo Communicaoes faltered.
Early in the fourth quarter, we began to reduce our foreign exposure by
selling some emerging-market holdings, which had enjoyed strong gains in the
prior nine months of the year. We sold them out of concern that Thailand's
currency problems in mid-summer would bode ominously for other emerging markets.
As a result, we had significantly reduced our emerging markets positions by late
October. We were not, however, able to sell all the emerging-market bonds we
would have liked and some of our remaining holdings detracted from the Fund's
performance.
We maintained our position in U.S. Treasury bonds, ending the year at 14%
of the Fund's net assets. In addition to U.S. bonds' offering "safe haven"
status, U.S. interest rates remain high compared to the rest of the world. With
possible slower economic growth in this country, bonds could rally if interest
rates fall further. When interest rates resumed their decline in the fourth
quarter of the year, our U.S. Treasury holdings rallied.
Outlook
In our view, there could be continued volatility in global bond markets
resulting from further currency and economic problems in emerging markets. As a
result, we'll keep our stake in emerging-market bonds relatively low for now,
until we see signs to the contrary. Furthermore, we think there's a reasonable
chance that recent and potential devaluations of emerging-market currencies will
be the catalyst for slower worldwide economic growth, including a slowdown in
the U.S. Even so, we believe that the U.S. economy will remain in positive
territory. Given that outlook, we believe high-yield U.S. corporate bonds could
post solid performance next year, although we expect that performance to come
mostly from the bonds' interest payments, rather than from capital appreciation.
Against a slower economic backdrop, U.S. interest rates could also continue to
fall and U.S. Treasury securities could extend their rally.
- --------------------------------------------------------------------------------
International investing involves special risks such as political, economic and
currency risks and differences in accounting standards and financial reporting.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 5%, with 15% at the top and 0% at the bottom. Within the
chart there are two solid bars. The first represents the 11.77% total return for
the John Hancock V.A. Strategic Income Fund. The second represents the 9.53%
total return for the Average variable annuity general bond fund. A footnote
below states: "The total return for John Hancock V.A. Strategic Income Fund is
at net asset value with all distributions reinvested. The average variable
annuity general bond fund is tracked by Lipper Analytical Services, Inc. See the
following page for historical performance information."]
29
<PAGE>
================================================================================
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 11.77% 18.96%
Average Annual Total Returns(1) 11.77% 13.84%
YIELD
For the period ended December 31, 1997
SEC 30-DAY
YIELD
----------
John Hancock V.A. Strategic Income Fund 8.56%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 11.25% and 13.11%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Strategic Income Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Government/Corporate Bond Index--an unmanaged
index that measures the performance of U.S. government bonds, U.S. corporate
bonds and Yankee bonds.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Strategic Income Fund, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the V.A. Strategic Income Fund, before sales charge, and is equal to $12,011
as of December 31, 1997. The second line represents the value of the Lehman
Government/Corporate Bond Index on August 29, 1996, and is equal to $11,484 as
of December 31, 1997.]
30
<PAGE>
================================================================================
BY JAMES K. HO, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Sovereign Bond Fund
Bond investors fared well in 1997, despite heightened volatility
"...we increased our stake in U.S. Treasury Bonds slightly."
It was a good year for bonds, one marked by tame, even falling, inflation, a
healthy economy, and rising prices on most types of bonds. The bond market's
forward moves were most pronounced in the second half of the year, when fears
that the vibrant economy would lead to higher inflation dissipated. The
resulting surge reflected the market's growing belief that the Federal Reserve
was not going to raise rates to slow down the economy. Bolstering the Fed's
sidelines stance were a strong dollar eating into corporate profits and the
currency and financial woes that struck Southeast Asia in the summer. These
events further eased U.S. inflation fears -- a bond holder's worst enemy because
of its corrosive effect on bonds' fixed-income payments. The Asian crisis did,
however, cause a late-year selloff in both investment-grade and high-yield
corporate bonds, as fearful investors gravitated toward U.S. Treasury bonds in a
classic flight to safety. But the bond market had stabilized by year end, and
corporate bonds' gains remained impressive.
Performance and strategy review
For the year ended December 31, 1997, John Hancock V.A. Sovereign Bond Fund
posted a total return of 9.30% at net asset value. That compared to the 10.01%
return of the average variable annuity corporate debt BBB-rated fund, according
to Lipper Analytical Services, Inc. Longer-term performance information can be
found on page 33.
In seeking a high level of current income consistent with prudent
investment risk, the Fund focuses on a blend of investment-grade corporate
bonds, U.S. government bonds and, to a lesser extent, high-yield bonds whose
credit ratings are below investment grade. Each sector in which we invested
contributed to performance at various points, as did our timely moves
[A 2" x 3" photo of V.A. Sovereign Bond Fund team members. Caption reads: "Jim
Ho (seated) and Fund management team members (l - r) Lester Duke, Beverly
Cleathero, Seth Robbins, Linda Carter."]
31
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN BOND FUND
"...there is still room for bonds to do well in 1998."
that helped us successfully maneuver through the late-period pitfalls. Exposure
to emerging-market corporate bonds served us well earlier in the year. At the
same time, we fortunately managed to avoid the most volatile emerging markets,
including Thailand, Malaysia and Korea, by selling our small positions there
ahead of the worst turmoil. Naturally, volatility spilled over into Latin
America, and we opportunistically sold out of our positions there as well after
the first shock waves hit, anticipating further turmoil down the road. In their
place, we increased our stake in U.S. Treasury Bonds slightly.
For most of the year, we benefited from our 24% stake in corporate bonds,
until their late-year price drops curtailed their advances. But the downward
pressure that Asia's turmoil put on U.S. corporate bonds also presented us with
some attractive buying opportunities. Believing that the fundamentals of many
U.S. corporations remained solid, we bought on dips and added to such existing
positions as Time Warner and TCI Communications. We also selectively bought
several high-yield bonds, including Physician Sales & Services, Garden State
Newspapers and Nextel Communications. The three main industry sectors we
emphasized in the corporate arena included media, utilities and financial
services.
Going forward
In our view, there is still room for bonds to do well in 1998. Recent worldwide
events suggest that the trend is toward slower, rather than faster, economic
growth. As the Asian countries try to export their way back to financial health,
their weaker currencies and therefore less expensive products will keep the
pricing pressure on -- and inflation low. Given this scenario, it's fairly
certain that the Fed will not raise interest rates again for now. In fact, the
next move could be a rate decrease.
With this outlook, we'll keep the Fund's duration -- a measure of a bond
price's sensitivity to changes in interest rates -- neutral or slightly longer
to capture the benefits of any more rate drops. The longer the duration, the
more the Fund's share price moves with changes in interest rates. We also will
continue to upgrade the overall portfolio by moving into industry sectors such
as utilities, media and health care, which we believe are less affected by
changes in the economy. For now, we'll minimize our investments in the emerging
markets until there are further signs that the crisis has passed. Until then,
heavier exposure to this sector would present too much volatility for this type
of fund.
[Bar chart with the header "Fund Performance" at top left hand column. A
footnote below states: "For the year ended December 31, 1997." The chart is
scaled in increments of 5%, with 15% at the top and 0% at the bottom. Within the
chart there are two solid bars. The first represents the 9.30% total return for
the John Hancock V.A. Sovereign Bond Fund. The second represents the 10.01%
total return for the Average variable annuity corporate debt BBB-rated fund. A
footnote below states: "The total return for John Hancock V.A. Sovereign Bond
Fund is at net asset value with all distributions reinvested. The average
variable annuity corporate debt BBB-rated fund is tracked by Lipper Analytical
Services, Inc. See the following page for historical performance information."]
32
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN BOND FUND
A LOOK AT PERFORMANCE
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 9.30% 14.13%
Average Annual Total Returns(1) 9.30% 10.37%
YIELD
For the period ended December 31, 1997
SEC 30-DAY
YIELD
----------
John Hancock V.A. Sovereign Bond Fund 5.62%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not
including management fee) of the Fund's daily average net assets. Without
the limitation of expenses, the average annual total return for the
one-year period and since inception would have been 7.52% and 8.18%,
respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Sovereign Bond Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Corporate Bond Index--an unmanaged index that
mirrors the investment objectives and characteristics of the Fund.
[GRAPHIC OMITTED]
[Line chart with the heading V.A. Sovereign Bond Fund, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Lehman Brothers Corporate Bond Index on August 29, 1996, and is equal to
$11,584 as of December 31, 1997. The second line represents the value of the
V.A. Sovereign Bond Fund, before sales charge, and is equal to $11,413 as of
December 31, 1997.]
33
<PAGE>
================================================================================
BY DAWN BAILLIE, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
V.A. Money Market Fund
Moderate economy and dormant inflation
keep money fund yields stable
"...we were able to extend the Fund's maturity."
Uncertainty was the watchword for money market funds during 1997, but status quo
was the end result, as short-term interest rates remained fairly stable. Early
in the year, all eyes were on the Federal Reserve, which everyone knew was just
waiting to pounce at the first signs of rising inflation. In early spring,
interest rates began to rise as the economy surged ahead and investors came to
expect that the Fed would raise short-term interest rates to slow down the
economy. Although that Fed hike in late March -- its first in two years --
turned out to be the only move the Fed made in 1997, money markets fretted all
year over each set of monthly economic data. Fear remained about the strength of
the economy and whether the low unemployment rate would inevitably translate
into rising labor costs and higher inflation, as has been the case in past
economic cycles.
Despite all the concerns, the economy remained fairly moderate after the
first quarter, and, in atypical fashion, inflation never budged. Fed chairman
Alan Greenspan concluded that this economic cycle was different, and by the end
of the year, the Fed had changed its stance. Instead of its earlier inclination
to raise short-term interest rates, the Fed shifted to a more neutral, status
quo policy. Its inclination was further bolstered by currency and financial
turmoil in Asia which many believed would keep the U.S. economy's growth in
check without the Fed's help. As a result, the federal funds rate, which banks
charge each other for overnight loans and which serves as a pricing benchmark
for money market securities, closed the year at 5.50%, where it had been since
March.
On December 31, 1997, John Hancock V.A. Money Market Fund had a 7-day
effective yield
[A 2" x 3" photo of V.A. Money Market Fund team members. Caption reads: "Fund
management team members (l-r): Barry Evans, Dawn Baillie and Bill Larkin, Jr."]
34
<PAGE>
================================================================================
JOHN HANCOCK V.A. MONEY MARKET FUND
"...the Fed is maintaining a neutral stance..."
of 5.01%. By comparison, the average taxable money fund had a 7-day effective
yield of 4.95%, according to Lipper Analytical Services, Inc.
Longer-than-average maturity pays off
During the first half of the year, the Fund's maturity remained shorter than
average because its small size limited our ability to buy a range of money
market securities. But in the second half, the Fund's assets had grown to a
point where we were able to extend the Fund's maturity. It was also an opportune
time to take an aggressive stance to lock in higher yields, since the economy
had begun to moderate and we became more convinced of the Fed's hands-off
approach. That only changed briefly as the year ended, so we could take
advantage of the typically favorable buying environment for money market
securities. By the end of the year, the Fund's maturity remained longer than
average at 80 days.
A word about Asia
Money market funds have not felt the effects of currency and financial problems
afflicting Asia, largely because most money funds stopped buying any short-term
certificates of deposit from Japanese banks. In any event, the Fund had no
exposure to the potential turmoil since we did not own any foreign securities.
Status quo ahead
Given the current near-perfect economic environment -- moderate growth and tame
inflation -- it's unlikely that the Federal Reserve will make any moves for at
least the next three months. For now, our view is that the Fed is maintaining a
neutral stance, without a bias toward either raising or lowering short-term
rates. Against that backdrop, we will continue to aggressively seek yield by
keeping the Fund's maturity longer than average. We'll determine our next course
of action after we evaluate the economic data in February and March. Above all
else, we'll keep focused on providing shareholders with a competitive level of
current income, while maintaining liquidity and stability of principal.
- --------------------------------------------------------------------------------
The Fund is neither insured nor guaranteed by the U.S. government. There can be
no assurances that the Fund will be able to maintain a net asset value of $1.00
per share.
[Bar chart with the header "7-Day Effective Yield" at top left hand column. A
footnote below states: "As of December 31, 1997." The chart is scaled in
increments of 2%, with 6% at the top and 0% at the bottom. Within the chart
there are two solid bars. The first represents the 5.01% total return for the
John Hancock V.A. Money Market Fund. The second represents the 4.95% total
return for the Average taxable money market fund. A footnote below states: "The
average taxable money fund is tracked by Lipper Analytical Services, Inc. Past
performance is no guarantee of future results."]
35
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Assets and Liabilities
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A.
INTERNATIONAL FINANCIAL EMERGING
FUND INDUSTRIES FUND GROWTH FUND
---- --------------- -----------
<S> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $3,249,269, $15,218,242, $3,314,660,
$3,063,484, $7,421,194 and $17,791,716, respectively) ................. $ 3,258,601 $ 16,773,825 $ 3,638,048
Preferred stocks (cost - $152,131, none, none, none, none and
none, respectively) ................................................... 128,406 -- --
Joint repurchase agreements (cost - $345,000, $1,683,000,
$222,000, $213,000, $835,000 and $1,265,000, respectively) ............ 345,000 1,683,000 222,000
Corporate savings account ............................................... -- 791 292
------------ ------------ ------------
3,732,007 18,457,616 3,860,340
Cash .................................................................... 29 -- --
Foreign currency, at value (cost - $137,150, none, $27, none,
none and none, respectively) .......................................... 136,743 -- 27
Receivable for investments sold ......................................... 943 -- 8,968
Dividends and interest receivable ....................................... 2,509 39,816 1,507
Receivable from John Hancock Advisers, Inc. and
affiliates - Note C ................................................... -- -- 2,249
Foreign tax receivable .................................................. 1,565 -- --
Deferred organization expenses - Note B ................................. 7,825 -- 7,825
------------ ------------ ------------
Total Assets .................................... 3,881,621 18,497,432 3,880,916
----------------------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased ....................................... 72,418 5,695 24,868
Payable for forward foreign currency exchange contracts
bought - Note B ....................................................... -- 131 --
Payable for variation margin - Note B ................................... -- -- --
Payable foreign withholding tax ......................................... 409 -- --
Payable to John Hancock Advisers, Inc. and affiliates - Note C .......... 815 11,914 --
Accounts payable and accrued expenses ................................... 15,975 14,251 15,238
------------ ------------ ------------
Total Liabilities ............................... 89,617 31,991 40,106
----------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ......................................................... 3,871,310 16,906,441 3,770,207
Accumulated net realized gain (loss) on investments, financial
futures contracts and foreign currency transactions ................... ( 64,957) 1,353 ( 252,923)
Net unrealized appreciation (depreciation) of investments, financial
futures contracts and foreign currency transactions ................... ( 14,142) 1,555,572 323,393
Undistributed net investment income (distributions in excess
of net investment income) ............................................. ( 207) 2,075 133
------------ ------------ ------------
Net Assets ...................................... $ 3,792,004 $ 18,465,441 $ 3,840,810
====================================================================================================
Net Asset Value Per Share:
(based on 361,090, 1,374,087, 371,198, 347,815, 617,965 and
1,585,173 shares, respectively, of beneficial interest outstanding -
unlimited number of shares authorized with no par value) .............. $ 10.50 $ 13.44 $ 10.35
==========================================================================================================================
<CAPTION>
V.A. V.A. V.A.
GROWTH INDEPENDENCE 500 INDEX
FUND EQUITY FUND FUND
---- ----------- ----
<S> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $3,249,269, $15,218,242, $3,314,660,
$3,063,484, $7,421,194 and $17,791,716, respectively) .............. $ 3,576,456 $ 8,050,558 $ 18,688,297
Preferred stocks (cost - $152,131, none, none, none, none and
none, respectively) ................................................ -- -- --
Joint repurchase agreements (cost - $345,000, $1,683,000,
$222,000, $213,000, $835,000 and $1,265,000, respectively) ......... 213,000 835,000 1,265,000
Corporate savings account ............................................ 576 157 --
---------- ---------- -----------
3,790,032 8,885,715 19,953,297
Cash ................................................................. -- -- 50,420
Foreign currency, at value (cost - $137,150, none, $27, none,
none and none, respectively) ....................................... -- -- --
Receivable for investments sold ...................................... -- -- --
Dividends and interest receivable .................................... 1,115 11,964 24,254
Receivable from John Hancock Advisers, Inc. and
affiliates - Note C ................................................ -- -- --
Foreign tax receivable ............................................... -- 59 105
Deferred organization expenses - Note B .............................. 7,825 7,825 7,825
---------- ---------- -----------
Total Assets ................................. 3,798,972 8,905,563 20,035,901
---------------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased .................................... 51,578 165,725 --
Payable for forward foreign currency exchange contracts
bought - Note B .................................................... -- -- --
Payable for variation margin - Note B ................................ -- -- 250
Payable foreign withholding tax ...................................... -- -- --
Payable to John Hancock Advisers, Inc. and affiliates - Note C ....... 261 -- 3,663
Accounts payable and accrued expenses ................................ 14,421 20,746 24,171
---------- ---------- -----------
Total Liabilities ............................ 66,260 186,471 28,084
---------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ...................................................... 3,428,308 8,062,016 18,904,149
Accumulated net realized gain (loss) on investments, financial
futures contracts and foreign currency transactions ................ ( 208,568) 27,317 197,882
Net unrealized appreciation (depreciation) of investments, financial
futures contracts and foreign currency transactions ................ 512,972 629,364 903,905
Undistributed net investment income (distributions in excess
of net investment income) .......................................... -- 395 1,881
---------- ---------- -----------
Net Assets ................................... $ 3,732,712 $ 8,719,092 $ 20,007,817
=============================================================================================
Net Asset Value Per Share:
(based on 361,090, 1,374,087, 371,198, 347,815, 617,965 and
1,585,173 shares, respectively, of beneficial interest outstanding -
unlimited number of shares authorized with no par value) ........... $ 10.73 $ 14.11 $ 12.62
===================================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Assets and Liabilities (continued)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A.
SOVEREIGN WORLD BOND STRATEGIC
INVESTORS FUND FUND INCOME FUND
-------------- ---- -----------
<S> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $9,790,642, none, $3,750, none and
none, respectively) ...................................................... $10,902,694 $ -- $ 6,090
Preferred stocks and warrants (cost - none, none, $208,781, none and
none, respectively) ...................................................... -- -- 229,386
Bonds (cost - none, $2,124,783, $3,821,647, $852,838 and
none, respectively) ...................................................... -- 2,157,359 3,864,424
U.S. government obligations (cost - $630,453, none, $746,251,
$2,412,519 and none, respectively) ....................................... 636,126 -- 754,937
Short-term investments (cost - none, none, none, none and
$6,548,187, respectively) ................................................ -- -- --
Joint repurchase agreements (cost - $1,491,000, $128,000,
$579,000, $595,000 and $1,729,000, respectively) ......................... 1,491,000 128,000 579,000
Corporate savings account .................................................. 161 -- 506
---------- ---------- ----------
13,029,981 2,285,359 5,434,343
Cash ....................................................................... -- 697 --
Receivable for investments sold ............................................ -- -- --
Receivable for forward foreign currency exchange contracts sold - Note B ... -- -- 8,030
Dividends and interest receivable .......................................... 23,779 29,831 104,292
Receivable from John Hancock Advisers, Inc. and affiliates - Note C ........ -- 1,495 --
Deferred organization expenses - Note B .................................... 7,825 7,825 7,825
---------- ---------- ----------
Total Assets ....................................... 13,061,585 2,325,207 5,554,490
-----------------------------------------------------------------------------------------------
Liabilities:
Distribution payable ....................................................... -- 209 446
Payable for investments purchased .......................................... 852,977 -- --
Payable for forward foreign currency exchange contracts purchased - Note B . -- 6,379 --
Payable for shares repurchased ............................................. -- 10 --
Payable to John Hancock Advisers, Inc. and affiliates - Note C ............. -- -- 2,849
Accounts payable and accrued expenses ...................................... 21,669 16,013 11,634
---------- ---------- ----------
Total Liabilities .................................. 874,646 22,611 14,929
-----------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ............................................................ 11,050,568 2,298,121 5,463,093
Accumulated net realized gain (loss) on investments and
foreign currency transactions ............................................ 17,842 ( 3,341) ( 11,386)
Net unrealized appreciation of investments and foreign currency transactions 1,117,725 26,171 81,385
Undistributed net investment income (distributions in excess of
net investment income) ................................................... 804 ( 18,355) 6,469
---------- ---------- ----------
Net Assets ......................................... $12,186,939 $ 2,302,596 $ 5,539,561
===============================================================================================
Net Asset Value Per Share:
(based on 896,718, 236,469, 529,118, 355,545 and 8,377,058 shares,
respectively, of beneficial interest outstanding - unlimited number of
shares authorized with no par value) ..................................... $ 13.59 $ 9.74 $ 10.47
=====================================================================================================================
<CAPTION>
V.A. V.A.
SOVEREIGN MONEY MARKET
BOND FUND FUND
--------- ----
<S> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $9,790,642, none, $3,750, none and
none, respectively) ...................................................... $ -- $ --
Preferred stocks and warrants (cost - none, none, $208,781, none and
none, respectively) ...................................................... -- --
Bonds (cost - none, $2,124,783, $3,821,647, $852,838 and
none, respectively) ...................................................... 868,083 --
U.S. government obligations (cost - $630,453, none, $746,251,
$2,412,519 and none, respectively) ....................................... 2,444,212 --
Short-term investments (cost - none, none, none, none and
$6,548,187, respectively) ................................................ -- 6,548,187
Joint repurchase agreements (cost - $1,491,000, $128,000,
$579,000, $595,000 and $1,729,000, respectively) ......................... 595,000 1,729,000
Corporate savings account .................................................. 879 --
----------- -----------
3,908,174 8,277,187
Cash ....................................................................... -- 761
Receivable for investments sold ............................................ 1,000 --
Receivable for forward foreign currency exchange contracts sold - Note B ... -- --
Dividends and interest receivable .......................................... 56,076 113,562
Receivable from John Hancock Advisers, Inc. and affiliates - Note C ........ -- --
Deferred organization expenses - Note B .................................... 7,825 7,825
----------- -----------
Total Assets ....................................... 3,973,075 8,399,335
---------------------------------------------------- ----------- -----------
Liabilities:
Distribution payable ....................................................... 607 1,173
Payable for investments purchased .......................................... 278,285 --
Payable for forward foreign currency exchange contracts purchased - Note B . -- --
Payable for shares repurchased ............................................. -- --
Payable to John Hancock Advisers, Inc. and affiliates - Note C ............. 1,583 7,288
Accounts payable and accrued expenses ...................................... 10,119 13,816
----------- -----------
Total Liabilities .................................. 290,594 22,277
---------------------------------------------------- ----------- -----------
Net Assets:
Capital paid-in ............................................................ 3,622,539 8,377,058
Accumulated net realized gain (loss) on investments and
foreign currency transactions ............................................ 12,995 --
Net unrealized appreciation of investments and foreign currency transactions 46,938 --
Undistributed net investment income (distributions in excess of
net investment income) ................................................... 9 --
----------- -----------
Net Assets ......................................... $ 3,682,481 $ 8,377,058
==================================================== =========== ===========
Net Asset Value Per Share:
(based on 896,718, 236,469, 529,118, 355,545 and 8,377,058 shares,
respectively, of beneficial interest outstanding - unlimited number of
shares authorized with no par value) ..................................... $ 10.36 $ 1.00
==========================================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Operations
Year ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A.
INTERNATIONAL FINANCIAL EMERGING
FUND INDUSTRIES FUND(1) GROWTH FUND
---- ------------------ -----------
<S> <C> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of $4,047, $635, $5, none,
$354 and $572, respectively) ........................................ $ 35,141 $ 94,521 $ 7,073
Interest .............................................................. 11,533 27,049 9,343
----------- ----------- -----------
46,674 121,570 16,416
----------- ----------- -----------
Expenses:
Investment management fee - Note C .................................. 26,618 41,060 14,584
Auditing fee ........................................................ 11,772 15,772 11,772
Custodian fee ....................................................... 15,806 9,485 19,901
Printing ............................................................ 2,280 3,565 3,656
Organization expense - Note B ....................................... 2,011 -- 2,011
Registration and filing fees ........................................ 656 368 360
Legal fees .......................................................... 333 201 150
Financial services fee - Note C ..................................... 535 909 349
Miscellaneous ....................................................... 260 151 50
Trustees' fee ....................................................... 171 59 83
----------- ----------- -----------
Total Expenses ................................ 60,442 71,570 52,916
Less Expense Reductions - Note C .............. ( 26,430) ( 17,678) ( 33,471)
----------- ----------- -----------
Net Expenses .................................. 34,012 53,892 19,445
-----------------------------------------------------------------------------------------------
Net Investment Income (Loss) .................. 12,662 67,678 ( 3,029)
-----------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions:
Net realized gain (loss) on investments sold .......................... 224,405 16,030 (181,217)
Net realized gain on financial futures contracts ...................... -- -- --
Net realized gain (loss) on foreign currency transactions ............. ( 84,248) ( 169) 102
Change in net unrealized appreciation/depreciation of investments ..... ( 261,947) 1,555,584 320,418
Change in net unrealized appreciation/depreciation of
financial futures contracts ......................................... -- -- --
Change in net unrealized appreciation/depreciation of
foreign currency transactions ....................................... ( 29) ( 12) --
----------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts and
Foreign Currency Transactions ................. ( 121,819) 1,571,433 139,303
-----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ..................... ($ 109,157) $ 1,639,111 $ 136,274
===============================================================================================
<CAPTION>
V.A. V.A. V.A.
GROWTH INDEPENDENCE 500 INDEX
FUND EQUITY FUND FUND
---- ----------- ----
<S> <C> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of $4,047, $635, $5, none,
$354 and $572, respectively) ........................................ $ 5,164 $ 63,918 $ 121,122
Interest .............................................................. 8,477 9,515 171,152
----------- ----------- -----------
13,641 73,433 292,274
----------- ----------- -----------
Expenses:
Investment management fee - Note C .................................. 16,677 23,457 11,552
Auditing fee ........................................................ 11,775 11,772 11,772
Custodian fee ....................................................... 17,402 12,222 26,639
Printing ............................................................ 3,510 2,300 3,640
Organization expense - Note B ....................................... 2,011 2,011 2,011
Registration and filing fees ........................................ 599 358 2,745
Legal fees .......................................................... 211 206 721
Financial services fee - Note C ..................................... 400 600 1,862
Miscellaneous ....................................................... 62 87 723
Trustees' fee ....................................................... 89 110 401
----------- ----------- -----------
Total Expenses ................................ 52,736 53,123 62,066
Less Expense Reductions - Note C .............. ( 30,501) ( 21,288) ( 24,549)
----------- ----------- -----------
Net Expenses .................................. 22,235 31,835 37,517
-------------------------------------------------------------------------------------------------
Net Investment Income (Loss) .................. ( 8,594) 41,598 254,757
-------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions:
Net realized gain (loss) on investments sold .......................... (111,668) 137,167 27,080
Net realized gain on financial futures contracts ...................... -- -- 785,683
Net realized gain (loss) on foreign currency transactions ............. -- -- --
Change in net unrealized appreciation/depreciation of investments ..... 477,636 544,516 896,580
Change in net unrealized appreciation/depreciation of
financial futures contracts ......................................... -- -- 52,075
Change in net unrealized appreciation/depreciation of
foreign currency transactions ....................................... -- -- --
----------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts and
Foreign Currency Transactions ................. 365,968 681,683 1,761,418
-------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ..................... $ 357,374 $ 723,281 $ 2,016,175
=================================================================================================
</TABLE>
(1) Period from April 30, 1997 (commencement of operations) to December 31,
1997.
The Statement of Operations summarizes for each of the Funds the investment
income earned and expenses incurred in operating each Fund. It also shows net
gains (losses) for the period stated.
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Operations (continued)
Year ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A.
SOVEREIGN WORLD BOND STRATEGIC
INVESTORS FUND FUND INCOME FUND
-------------- ---- -----------
Investment Income:
<S> <C> <C> <C>
Dividends ......................................................................... $ 69,611 $ -- $ 15,005
Interest (net of foreign withholding tax of none, $381, none, none and
none, respectively) ............................................................. 54,025 149,793 295,546
----------- ----------- -----------
123,636 149,793 310,551
----------- ----------- -----------
Expenses:
Investment management fee - Note C .............................................. 27,842 16,085 19,377
Auditing Fee .................................................................... 11,772 11,772 11,775
Custodian Fee ................................................................... 6,536 14,566 5,712
Printing ........................................................................ 3,892 3,227 3,652
Organization expense - Note B ................................................... 2,011 2,011 2,011
Registration and filing fees .................................................... 358 663 671
Legal fees ...................................................................... 254 316 287
Financial services fee - Note C ................................................. 829 390 583
Miscellaneous ................................................................... 128 107 80
Trustees' fee ................................................................... 124 153 169
----------- ----------- -----------
Total Expenses ............................................ 53,746 49,290 44,317
Less Expense Reductions - Note C .......................... ( 14,303) ( 27,843) ( 16,865)
----------- ----------- -----------
Net Expenses .............................................. 39,443 21,447 27,452
----------------------------------------------------------------------------------------------------
Net Investment Income ..................................... 84,193 128,346 283,099
----------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions:
Net realized gain (loss) on investments sold ...................................... 17,842 121,671 ( 30,073)
Net realized gain (loss) on foreign currency transactions ......................... -- ( 209,434) 36,291
Change in net unrealized appreciation/depreciation of investments ................. 1,050,550 ( 14,897) 48,041
Change in net unrealized appreciation/depreciation of foreign
currency transactions ........................................................... -- 4,100 5,851
----------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ......................... 1,068,392 ( 98,560) 60,110
----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations ...... $ 1,152,585 $ 29,786 $ 343,209
====================================================================================================
<CAPTION>
V.A. V.A.
SOVEREIGN MONEY MARKET
BOND FUND FUND
-------- ----
<S> <C> <C>
Investment Income:
Dividends ......................................................................... $ -- $ --
Interest (net of foreign withholding tax of none, $381, none, none and
none, respectively) ............................................................. 130,603 138,320
---------- ----------
130,603 138,320
---------- ----------
Expenses:
Investment management fee - Note C .............................................. 8,924 12,328
Auditing Fee .................................................................... 11,772 11,772
Custodian Fee ................................................................... 17,563 1,420
Printing ........................................................................ 4,078 3,128
Organization expense - Note B ................................................... 2,011 2,011
Registration and filing fees .................................................... 158 76
Legal fees ...................................................................... 219 81
Financial services fee - Note C ................................................. 322 439
Miscellaneous ................................................................... 46 67
Trustees' fee ................................................................... 86 26
---------- ----------
Total Expenses ............................................ 45,179 31,348
Less Expense Reductions - Note C .......................... ( 31,793) ( 12,855)
---------- ----------
Net Expenses .............................................. 13,386 18,493
--------------------------------------------------------------------------------------
Net Investment Income ..................................... 117,217 119,827
--------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions:
Net realized gain (loss) on investments sold ...................................... 30,656 --
Net realized gain (loss) on foreign currency transactions ......................... -- --
Change in net unrealized appreciation/depreciation of investments ................. 33,037 --
Change in net unrealized appreciation/depreciation of foreign
currency transactions ........................................................... -- --
---------- ----------
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ......................... 63,693 --
--------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations ...... $ 180,910 $ 119,827
======================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A FINANCIAL
V.A. INTERNATIONAL FUND INDUSTRIES FUND
---------------------------- -----------
PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1997(2)
------- ---- -------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ................................................... $ 14,426 $ 12,662 $ 67,678
Net realized gain (loss) on investments sold and
foreign currency transactions ................................................ ( 7,426) 140,157 15,861
Change in net unrealized appreciation/depreciation of investments
and foreign currency transactions ............................................ 247,834 ( 261,976) 1,555,572
------------ ------------ -------------
Net Increase (Decrease) in Net Assets Resulting from Operations .............. 254,834 ( 109,157) 1,639,111
------------ ------------ -------------
Distributions to Shareholders: *
Dividends from net investment income ........................................... ( 8,697) ( 2,558) ( 65,434)
Distributions from net realized gain on investments sold and
foreign currency transactions ................................................ -- ( 213,871) ( 14,677)
------------ ------------ -------------
Total Distributions to Shareholders .......................................... ( 8,697) ( 216,429) ( 80,111)
------------ ------------ -------------
From Fund Share Transactions: **
Shares sold .................................................................... 2,012,294 1,809,166 18,526,866
Shares issued to shareholders in reinvestment of distributions ................. 8,697 216,428 80,111
------------ ------------ -------------
2,020,991 2,025,594 18,606,977
Less shares repurchased ........................................................ ( 7) ( 175,125) ( 1,700,536)
------------ ------------ -------------
Net Increase ................................................................. 2,020,984 1,850,469 16,906,441
------------ ------------ -------------
Net Assets:
Beginning of period ............................................................ -- 2,267,121 --
------------ ------------ -------------
End of period (including undistributed net investment income (distributions
in excess) of none, ($207), $2,075, $134 and $133, respectively) ............. $ 2,267,121 $ 3,792,004 $ 18,465,441
============ ============ =============
* Distributions to Shareholders:
Per share dividends from net investment income ................................. $ 0.0432 $ 0.0077 $ 0.0518
------------ ------------ -------------
Per share distributions from net realized gain on investments sold and
foreign currency transactions ................................................ -- $ 0.6422 $ 0.0116
------------ ------------ -------------
** Analysis of Fund Share Transactions:
Shares sold .................................................................... 201,146 152,869 1,501,742
Shares issued to shareholders in reinvestment of distributions ................. 802 21,239 6,125
------------ ------------ -------------
201,948 174,108 1,507,867
Less shares repurchased ........................................................ ( 1) ( 14,965) ( 133,780)
------------ ------------ -------------
Net Increase ................................................................. 201,947 159,143 1,374,087
============ ============ =============
<CAPTION>
V.A. EMERGING GROWTH FUND
-------------------------------
PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996(1) 1997
------- ----
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ...................................................... $ 2,016 $( 3,029)
Net realized gain (loss) on investments sold and
foreign currency transactions ................................................... ( 71,717) ( 181,115)
Change in net unrealized appreciation/depreciation of investments
and foreign currency transactions ............................................... 2,975 320,418
---------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations ................. ( 66,726) 136,274
---------- -------------
Distributions to Shareholders: *
Dividends from net investment income .............................................. ( 1,882) ( 135)
Distributions from net realized gain on investments sold and
foreign currency transactions ................................................... -- --
---------- -------------
Total Distributions to Shareholders ............................................. ( 1,882) ( 135)
---------- -------------
From Fund Share Transactions: **
Shares sold ....................................................................... 1,041,666 2,985,092
Shares issued to shareholders in reinvestment of distributions .................... 1,882 135
---------- -------------
1,043,548 2,985,227
Less shares repurchased ........................................................... ( 25) ( 255,471)
---------- -------------
Net Increase .................................................................... 1,043,523 2,729,756
--------- -------------
Net Assets:
Beginning of period ............................................................... -- 974,915
---------- -------------
End of period (including undistributed net investment income (distributions
in excess) of none, ($207), $2,075, $134 and $133, respectively) ................ $ 974,915 $ 3,840,810
========== =============
* Distributions to Shareholders:
Per share dividends from net investment income .................................... $ 0.0180 $ 0.0004
---------- -------------
Per share distributions from net realized gain on investments sold and
foreign currency transactions ................................................... -- --
---------- -------------
** Analysis of Fund Share Transactions:
Shares sold ....................................................................... 104,379 291,749
Shares issued to shareholders in reinvestment of distributions .................... 206 14
---------- -------------
104,585 291,763
Less shares repurchased ........................................................... ( 3) ( 25,147)
---------- -------------
Net Increase .................................................................... 104,582 266,616
========== =============
</TABLE>
(1) Commenced operations on August 29, 1996.
(2) Commenced operations on April 30, 1997.
The Statement of Changes in net assets shows how the value of each Fund's net
assets have changed since the commencement of operations. The difference
reflects net investment income, and any investment gains and losses,
distributions paid to shareholders, if any and any increase or decrease in money
shareholders invested in each Fund. The footnotes illustrate the number of Fund
shares sold, reinvested and repurchased during the period, along with the per
share of distributions made to shareholders of each Fund for the period
indicated.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. GROWTH FUND V.A. INDEPENDENCE EQUITY FUND
--------------------------- -----------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
------- ---- ------- ----
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ........................................ ($ 795) ($ 8,594) $ 5,925 $ 41,598
Net realized gain (loss) on investments sold ........................ ( 96,900) ( 111,668) 27,151 137,167
Change in net unrealized appreciation/depreciation of investments ... 35,336 477,636 84,848 544,516
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations ... ( 62,359) 357,374 117,924 723,281
----------- ----------- ----------- -----------
Distributions to Shareholders: *
Dividends from net investment income ................................ -- -- ( 6,035) ( 41,203)
Distributions from net realized gain on investments sold ............ -- -- ( 961) ( 135,930)
----------- ----------- ----------- -----------
Total Distributions to Shareholders ............................... -- -- ( 6,996) ( 177,133)
----------- ----------- ----------- -----------
From Fund Share Transactions: **
Shares sold ......................................................... 1,056,861 2,597,730 1,030,749 7,299,605
Shares issued to shareholders in reinvestment of distributions ...... -- -- 6,996 177,133
----------- ----------- ----------- -----------
1,056,861 2,597,730 1,037,745 7,476,738
Less shares repurchased ............................................. ( 644) ( 216,250) ( 21) ( 452,446)
----------- ----------- ----------- -----------
Net Increase ...................................................... 1,056,217 2,381,480 1,037,724 7,024,292
----------- ----------- ----------- -----------
Net Assets:
Beginning of period ................................................. -- 993,858 -- 1,148,652
----------- ----------- ----------- -----------
End of period (including undistributed net investment
income of none, none, none and $395, respectively) ................ $ 993,858 $ 3,732,712 $ 1,148,652 $ 8,719,092
=========== =========== =========== ===========
* Distributions to Shareholders:
Per share dividends from net investment income ...................... -- -- $ 0.0587 $ 0.1376
----------- ----------- ----------- -----------
Per share distributions from net realized gain on investments sold .. -- -- $ 0.0094 $ 0.2476
----------- ----------- ----------- -----------
** Analysis of Fund Share Transactions:
Shares sold ......................................................... 105,902 263,298 102,751 534,688
Shares issued to shareholders in reinvestment of distributions ...... -- -- 626 13,023
----------- ----------- ----------- -----------
105,902 263,298 103,377 547,711
Less shares repurchased ............................................. ( 60) ( 21,325) ( 2) ( 33,121)
----------- ----------- ----------- -----------
Net Increase ...................................................... 105,842 241,973 103,375 514,590
=========== =========== =========== ===========
</TABLE>
(1) Commenced operations on August 29, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. 500 INDEX FUND V.A. SOVEREIGN INVESTORS FUND
-------------------------- -----------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Increase in Net Assets:
From Operations:
Net investment income ................................................... $ 59,702 $ 254,757 $ 6,933 $ 84,193
Net realized gain on investments sold and financial
futures contracts ..................................................... 387,685 812,763 8,426 17,842
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts ........................................... ( 44,750) 948,655 67,175 1,050,550
----------- ----------- ----------- -----------
Net Increase in Net Assets Resulting from Operations .................. 402,637 2,016,175 82,534 1,152,585
----------- ----------- ----------- -----------
Distributions to Shareholders: *
Dividends from net investment income .................................... ( 59,456) ( 253,122) ( 6,880) ( 83,445)
Distributions from net realized gain on investments sold and
financial futures contracts ........................................... ( 201,124) ( 801,442) ( 2,327) ( 6,096)
----------- ----------- ----------- -----------
Total Distributions to Shareholders ................................... ( 260,580) ( 1,054,564) ( 9,207) ( 89,541)
----------- ----------- ----------- -----------
From Fund Share Transactions: **
Shares sold ............................................................. 3,646,277 15,055,266 1,029,113 10,664,200
Shares issued to shareholders in reinvestment of distributions .......... 260,580 1,054,564 9,207 89,541
----------- ----------- ----------- -----------
3,906,857 16,109,830 1,038,320 10,753,741
Less shares repurchased ................................................. ( 221) ( 1,112,317) ( 516) ( 740,977)
----------- ----------- ----------- -----------
Net Increase .......................................................... 3,906,636 14,997,513 1,037,804 10,012,764
----------- ----------- ----------- -----------
Net Assets:
Beginning of period ..................................................... -- 4,048,693 -- 1,111,131
----------- ----------- ----------- -----------
End of period (including undistributed net investment
income of $246, $1,881, $53 and $804, respectively) ................... $ 4,048,693 $20,007,817 $ 1,111,131 $12,186,939
=========== =========== =========== ===========
* Distributions to Shareholders:
Per share dividends from net investment income .......................... $ 0.1637 $ 0.3006 $ 0.0670 $ 0.1769
----------- ----------- ----------- -----------
Per share distributions from net realized gain on investments sold and
financial futures contracts ........................................... $ 0.5538 $ 0.5445 $ 0.0227 $ 0.0072
----------- ----------- ----------- -----------
** Analysis of Fund Share Transactions:
Shares sold ............................................................. 363,218 1,200,874 102,676 844,459
Shares issued to shareholders in reinvestment of distributions .......... 24,676 86,596 856 6,966
----------- ----------- ----------- -----------
387,894 1,287,470 103,532 851,425
Less shares repurchased ................................................. ( 20) ( 90,171) ( 50) ( 58,189)
----------- ----------- ----------- -----------
Net Increase .......................................................... 387,874 1,197,299 103,482 793,236
=========== =========== =========== ===========
</TABLE>
(1) Commenced operations on August 29, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. WORLD BOND FUND V.A. STRATEGIC INCOME FUND
------------------------- --------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Increase in Net Assets:
From Operations:
Net investment income ............................................... $ 40,768 $ 128,346 $ 55,619 $ 283,099
Net realized gain (loss) on investments sold and foreign
currency transactions ............................................. 3,827 ( 87,763) 46,295 6,218
Change in net unrealized appreciation/depreciation
of investments and foreign currency transactions .................. 36,968 ( 10,797) 27,493 53,892
----------- ----------- ----------- -----------
Net Increase in Net Assets Resulting from Operations .............. 81,563 29,786 129,407 343,209
----------- ----------- ----------- -----------
Distributions to Shareholders: *
Dividends from net investment income ................................ ( 40,768) ( 46,497) ( 55,619) ( 283,099)
Distribution in excess of net investment income ..................... -- ( 19,609) -- --
Tax return of capital ............................................... -- ( 62,240) -- --
Distributions from net realized gain on investments sold
and foreign currency transactions ................................. -- -- ( 13,053) ( 44,377)
----------- ----------- ----------- -----------
Total Distributions to Shareholders ............................... ( 40,768) ( 128,346) ( 68,672) ( 327,476)
----------- ----------- ----------- -----------
From Fund Share Transactions: **
Shares sold ......................................................... 2,000,997 234,407 2,002,001 3,436,273
Shares issued to shareholders in reinvestment
of distributions .................................................. 40,768 128,137 68,672 327,029
----------- ----------- ----------- -----------
2,041,765 362,544 2,070,673 3,763,302
Less shares repurchased ............................................. -- ( 43,948) -- ( 370,882)
----------- ----------- ----------- -----------
Net Increase ...................................................... 2,041,765 318,596 2,070,673 3,392,420
----------- ----------- ----------- -----------
Net Assets:
Beginning of period ................................................. -- 2,082,560 -- 2,131,408
----------- ----------- ----------- -----------
End of period (including undistributed net investment
(distributions in excess) income of none, ($18,355),
none and $6,469, respectively) .................................... $ 2,082,560 $ 2,302,596 $ 2,131,408 $ 5,539,561
=========== =========== =========== ===========
* Distributions to Shareholders:
Per share dividends from net investment income ...................... $ 0.2015 $ 0.2134 $ 0.2739 $ 0.9083
----------- ----------- ----------- -----------
Per share distributions in excess of net investment income .......... -- $ 0.0900 -- --
----------- ----------- ----------- -----------
Tax return of capital ............................................... -- $ 0.2857 -- --
----------- ----------- ----------- -----------
Per share distributions from net realized gain on investments
sold and foreign currency transactions ............................ -- -- $ 0.0640 $ 0.0870
----------- ----------- ----------- -----------
** Analysis of Fund Share Transactions:
Shares sold ......................................................... 200,098 23,767 200,193 326,163
Shares issued to shareholders in reinvestment of distributions ...... 4,008 13,037 6,694 31,206
----------- ----------- ----------- -----------
204,106 36,804 206,887 357,369
Less shares repurchased ............................................. -- ( 4,441) -- ( 35,138)
----------- ----------- ----------- -----------
Net Increase ...................................................... 204,106 32,363 206,887 322,231
=========== =========== =========== ===========
</TABLE>
(1) Commenced operations on August 29, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. SOVEREIGN BOND FUND V.A. MONEY MARKET FUND
---------------------------- --------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Increase in Net Assets:
From Operations:
Net investment income ............................................... $ 23,529 $ 117,217 $ 1,784 $ 119,827
Net realized gain on investments sold ............................... 6,419 30,656 -- --
Change in net unrealized appreciation/depreciation of investments ... 13,901 33,037 -- --
----------- ----------- ----------- -----------
Net Increase in Net Assets Resulting from Operations .............. 43,849 180,910 1,784 119,827
----------- ----------- ----------- -----------
Distributions to Shareholders: *
Dividends from net investment income ................................ ( 23,529) ( 117,208) ( 1,784) ( 119,827)
Distributions from net realized gain on investments sold ............ ( 1,795) ( 22,285) -- --
----------- ----------- ----------- -----------
Total Distributions to Shareholders ............................... ( 25,324) ( 139,493) ( 1,784) ( 119,827)
----------- ----------- ----------- -----------
From Fund Share Transactions: **
Shares sold ......................................................... 1,012,301 2,851,276 104,907 9,748,620
Shares issued to shareholders in reinvestment of distributions ...... 25,324 138,885 1,784 118,655
----------- ----------- ----------- -----------
1,037,625 2,990,161 106,691 9,867,275
Less shares repurchased ............................................. ( 7) ( 405,240) ( 63) ( 1,696,845)
----------- ----------- ----------- -----------
Net Increase ...................................................... 1,037,618 2,584,921 106,628 8,170,430
----------- ----------- ----------- -----------
Net Assets:
Beginning of period ................................................. -- 1,056,143 100,000(2) 206,628
----------- ----------- ----------- -----------
End of period (including undistributed net investment
income of none, $9, none and none, respectively) .................. $ 1,056,143 $ 3,682,481 $ 206,628 $ 8,377,058
=========== =========== =========== ===========
* Distributions to Shareholders:
Per share dividends from net investment income ...................... $ 0.2327 $ 0.6766 $ 0.0160 $ 0.0478
----------- ----------- ----------- -----------
Per share distributions from net realized gain on investments sold .. $ 0.0175 $ 0.0653 -- --
----------- ----------- ----------- -----------
** Analysis of Fund Share Transactions:
Shares sold ......................................................... 101,202 277,867 104,907 9,748,620
Shares issued to shareholders in reinvestment of distributions ...... 2,483 13,553 1,784 118,655
----------- ----------- ----------- -----------
103,685 291,420 106,691 9,867,275
Less shares repurchased ............................................. ( 1) ( 39,559) ( 63) ( 1,696,845)
----------- ----------- ----------- -----------
Net Increase ...................................................... 103,684 251,861 106,628 8,170,430
=========== =========== =========== ===========
</TABLE>
(1) Commenced operations on August 29, 1996.
(2) On July 22, 1996, the Adviser made an initial investment of $100,000
(100,000 shares) in order to seed the Trust.
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A FINANCIAL
V.A. INTERNATIONAL FUND INDUSTRIES FUND V.A. EMERGING GROWTH FUND
----------------------- --------------- -------------------------
PERIOD YEAR PERIOD PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1997(2) 1996(1) 1997
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ................... $ 10.00 $ 11.23 $ 10.00 $ 10.00 $ 9.32
-------- -------- --------- --------- --------
Net Investment Income (Loss) (3) ....................... 0.07 0.05 0.11 0.02 ( 0.02)
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions ........ 1.20 ( 0.13) 3.39 ( 0.68) 1.05
-------- -------- --------- --------- --------
Total from Investment Operations ................... 1.27 ( 0.08) 3.50 ( 0.66) 1.03
-------- -------- --------- --------- --------
Less Distributions:
Dividends from Net Investment Income ................. ( 0.04) ( 0.01) ( 0.05) ( 0.02) ( 0.00)(4)
Distributions from Net Realized Gain on
Investments Sold ................................... -- ( 0.64) ( 0.01) -- --
-------- -------- --------- --------- --------
Total Distributions ................................ ( 0.04) ( 0.65) ( 0.06) ( 0.02) 0.00
-------- -------- --------- --------- --------
Net Asset Value, End of Period ......................... $ 11.23 $ 10.50 $ 13.44 $ 9.32 $ 10.35
======== ======== ========= ========= ========
Total Investment Return at Net Asset Value (5) ......... 12.75%(7) ( 0.54%) 35.05%(7) ( 6.62%)(7) 11.06%
Total Adjusted Investment Return at Net Asset
Value (5,6) .......................................... 12.07%(7) ( 1.43%) 34.71%(7) ( 8.05%)(7) 9.34%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............... $ 2,267 $ 3,792 $ 18,465 $ 975 $ 3,841
Ratio of Expenses to Average Net Assets ................ 1.15%(8) 1.15% 1.05%(8) 1.00%(8) 1.00%
Ratio of Adjusted Expenses to Average Net Assets (9) ... 3.13%(8) 2.04% 1.39%(8) 5.19%(8) 2.72%
Ratio of Net Investment Income (Loss) to Average
Net Assets ........................................... 2.03%(8) 0.43% 1.32%(8) 0.62%(8) ( 0.16%)
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets (9) ............................... 0.05%(8) ( 0.46%) 0.98%(8) ( 3.57%)(8) ( 1.88%)
Portfolio Turnover Rate ................................ 14% 273% 11% 31% 79%
Fee Reduction Per Share (3) ............................ $ 0.07 $ 0.10 $ 0.03 $ 0.14 $ 0.17
Average Brokerage Commission Rate (10) ................. $ 0.0162 $ 0.0221 $ 0.0696 $ 0.0694 $ 0.0687
</TABLE>
(1) Commenced operations on August 29, 1996.
(2) Commenced operations on April 30, 1997.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Less than $0.01 per share.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(7) Not annualized.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Per portfolio share traded.
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 commencement of operations.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. GROWTH FUND V.A. INDEPENDENCE EQUITY FUND
----------------------------- -----------------------------
PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 10.00 $ 9.39 $ 10.00 $ 11.11
--------- --------- --------- ---------
Net Investment Income (Loss) (2) .............................. ( 0.01) ( 0.04) 0.06 0.16
Net Realized and Unrealized Gain (Loss) on Investments ........ ( 0.60) 1.38 1.12 3.23
--------- --------- --------- ---------
Total from Investment Operations .......................... ( 0.61) 1.34 1.18 3.39
--------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ........................ -- -- ( 0.06) ( 0.14)
Distributions from Net Realized Gain on
Investments Sold .......................................... -- -- ( 0.01) ( 0.25)
--------- --------- --------- ---------
Total Distributions ....................................... -- -- ( 0.07) ( 0.39)
--------- --------- --------- ---------
Net Asset Value, End of Period ................................ $ 9.39 $ 10.73 $ 11.11 $ 14.11
========= ========= ========= =========
Total Investment Return at Net Asset Value (3) ................ ( 6.10%)(5) 14.27% 11.78%(5) 30.68%
Total Adjusted Investment Return at Net Asset
Value (3,4) ( 7.39%)(5) 12.90% 10.66%(5) 30.04%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $ 994 $ 3,733 $ 1,149 $ 8,719
Ratio of Expenses to Average Net Assets ....................... 1.00%(6) 1.00% 0.95%(6) 0.95%
Ratio of Adjusted Expenses to Average Net Assets (7) .......... 4.76%(6) 2.37% 4.23%(6) 1.59%
Ratio of Net Investment Income (Loss) to Average Net Assets ... ( 0.23%)(6) ( 0.39%) 1.60%(6) 1.24%
Ratio of Adjusted Net Investment Income (Loss) to Average
Net Assets (7) .............................................. ( 3.99%)(6) ( 1.76%) ( 1.68%)(6) 0.60%
Portfolio Turnover Rate ....................................... 68% 136% 24% 53%
Fee Reduction Per Share (2) ................................... $ 0.13 $ 0.13 $ 0.12 $ 0.08
Average Brokerage Commission Rate (8) ......................... $ 0.0691 $ 0.0694 $ 0.0210 $ 0.0249
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded.
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. 500 INDEX FUND V.A. SOVEREIGN INVESTORS FUND
----------------------------- -----------------------------
PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $ 10.00 $ 10.44 $ 10.00 $ 10.74
------------ ------------ ------------ ------------
Net Investment Income (2) ............................... 0.17 0.30 0.07 0.22
Net Realized and Unrealized Gain on Investments and
Financial Futures Contracts ........................... 0.98 2.72 0.76 2.82
------------ ------------ ------------ ------------
Total from Investment Operations .................... 1.15 3.02 0.83 3.04
------------ ------------ ------------ ------------
Less Distributions:
Dividends from Net Investment Income .................. ( 0.16) ( 0.30) ( 0.07) ( 0.18)
Distributions from Net Realized Gain on
Investments Sold .................................... ( 0.55) ( 0.54) ( 0.02) ( 0.01)
------------ ------------ ------------ ------------
Total Distributions ................................. ( 0.71) ( 0.84) ( 0.09) ( 0.19)
------------ ------------ ------------ ------------
Net Asset Value, End of Period .......................... $ 10.44 $ 12.62 $ 10.74 $ 13.59
============ ============ ============ ============
Total Investment Return at Net Asset Value (3) .......... 11.49%(5) 29.51% 8.30%(5) 28.43%
Total Adjusted Investment Return at Net
Asset Value (3,4) ..................................... 11.25%(5) 29.27% 7.30%(5) 28.12%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $ 4,049 $ 20,008 $ 1,111 $ 12,187
Ratio of Expenses to Average Net Assets ................. 0.60%(6) 0.36% 0.85%(6) 0.85%
Ratio of Adjusted Expenses to Average Net Assets (7) .... 1.31%(6) 0.60% 3.78%(6) 1.16%
Ratio of Net Investment Income to Average Net Assets .... 4.57%(6) 2.45% 1.90%(6) 1.81%
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets (7) ................................ 3.86%(6) 2.21% ( 1.03%)(6) 1.50%
Portfolio Turnover Rate ................................. -- 9% 17% 11%
Fee Reduction Per Share (2) ............................. $ 0.03 $ 0.03 $ 0.11 $ 0.04
Average Brokerage Commission Rate (8) ................... $ 0.0500 $ 0.0357 $ 0.0235 $ 0.0700
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. WORLD BOND FUND V.A. STRATEGIC INCOME FUND
----------------------------- -----------------------------
PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ......................... $ 10.00 $ 10.20 $ 10.00 $ 10.30
--------- -------- --------- ---------
Net Investment Income (2) .................................... 0.20 0.59 0.27 0.91
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions .......................... 0.20 ( 0.46) 0.36 0.26
--------- -------- --------- ---------
Total from Investment Operations ......................... 0.40 0.13 0.63 1.17
--------- -------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ....................... ( 0.20) ( 0.21) ( 0.27) ( 0.91)
Distributions in Excess of Net Investment Income ........... -- ( 0.09) -- --
Tax Return of Capital ...................................... -- ( 0.29) -- --
Distributions from Net Realized Gain on Investments Sold ... -- -- ( 0.06) ( 0.09)
--------- -------- --------- ---------
Total Distributions ...................................... ( 0.20) ( 0.59) ( 0.33) ( 1.00)
--------- -------- --------- ---------
Net Asset Value, End of Period ............................... $ 10.20 $ 9.74 $ 10.30 $ 10.47
========= ======== ========= =========
Total Investment Return at Net Asset Value (3) ............... 4.05%(5) 1.37% 6.45%(5) 11.77%
Total Adjusted Investment Return at Net Asset Value (3,4) .... 3.30%(5) 0.07% 5.96%(5) 11.25%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................... $ 2,083 $ 2,303 $ 2,131 $ 5,540
Ratio of Expenses to Average Net Assets ...................... 1.00%(6) 1.00% 0.85%(6) 0.85%
Ratio of Adjusted Expenses to Average Net Assets (7) ......... 3.19%(6) 2.30% 2.28%(6) 1.37%
Ratio of Net Investment Income to Average Net Assets ......... 5.83%(6) 5.98% 7.89%(6) 8.77%
Ratio of Adjusted Net Investment Income to Average
Net Assets (7) ............................................ 3.64%(6) 4.68% 6.46%(6) 8.25%
Portfolio Turnover Rate ...................................... 30% 176% 73% 110%
Fee Reduction Per Share (2) .................................. $ 0.08 $ 0.13 $ 0.05 $ 0.05
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. SOVEREIGN BOND FUND V.A. MONEY MARKET FUND
----------------------------- -----------------------------
PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(1) 1997 1996(1) 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 10.00 $ 10.19 $ 1.00 $ 1.00
--------- --------- ------------ ------------
Net Investment Income (2) ..................................... 0.23 0.68 0.02 0.05
Net Realized and Unrealized Gain on Investments ............... 0.21 0.24 -- --
--------- --------- ------------ ------------
Total from Investment Operations .......................... 0.44 0.92 0.02 0.05
--------- --------- ------------ ------------
Less Distributions:
Dividends from Net Investment Income ........................ ( 0.23) ( 0.68) ( 0.02) ( 0.05)
Distributions from Net Realized Gain on Investments Sold .... ( 0.02) ( 0.07) -- --
--------- --------- ------------ ------------
Total Distributions ....................................... ( 0.25) ( 0.75) ( 0.02) ( 0.05)
--------- --------- ------------ ------------
Net Asset Value, End of Period ................................ $ 10.19 $ 10.36 $ 1.00 $ 1.00
========= ========= ============ ============
Total Investment Return at Net Asset Value (3) ................ 4.42%(5) 9.30% 1.61%(5) 4.88%
Total Adjusted Investment Return at Net Asset Value (3,4) ..... 3.25%(5) 7.52% ( 7.55%)(5) 4.36%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $ 1,056 $ 3,682 $ 207 $ 8,377
Ratio of Expenses to Average Net Assets ....................... 0.75%(6) 0.75% 0.75%(6) 0.75%
Ratio of Adjusted Expenses to Average Net Assets (7) .......... 4.15%(6) 2.53% 27.48%(6) 1.27%
Ratio of Net Investment Income to Average Net Assets .......... 6.69%(6) 6.57% 4.68%(6) 4.86%
Ratio of Adjusted Net Investment Income (Loss) to Average
Net Assets (7) .............................................. 3.29%(6) 4.79% ( 22.05%)(6) 4.34%
Portfolio Turnover Rate ....................................... 45% 193% -- --
Fee Reduction Per Share (2) ................................... $ 0.12 $ 0.18 $ 0.08 $ 0.00(8)
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. International Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Australia (3.09%)
Normandy Mining Ltd. (Metal) .......................... 120,600 $ 117,116
-----------
Brazil (4.54%)
Centrais Electricas Brasileiras S/A, American
Depository Receipt (ADR) (Utilities) ................... 3,100 77,081
Companhia Paranaense de Energia-Copel
(ADR) (Utilities) ...................................... 1,600 21,900
Telecomunicacoes Brasileiras S/A (ADR)
(Telecommunications) ................................... 630 73,356
-----------
172,337
-----------
Canada (6.57%)
Royal Bank of Canada (Banks - Foreign) ................. 2,585 137,005
Toronto-Dominion Bank (Banks - Foreign) ................ 2,978 112,233
-----------
249,238
-----------
Chile (0.32%)
Maderas y Sinteticos SA (ADR) (Building) ............... 1,300 12,350
-----------
France (6.33%)
Axa-UAP SA (Insurance) ................................. 840 64,998
Carrefour SA (Retail) .................................. 170 88,693
France Telecom SA (ADR)
(Telecommunications)* .................................. 2,400 86,400
-----------
240,091
-----------
Germany (4.24%)
Bayerische Motoren Werke AG
(Automobile Trucks) .................................... 40 104,672
Volkswagen AG (Automobile / Trucks) .................... 100 56,255
-----------
160,927
-----------
Hong Kong (4.74%)
China Resources Enterprise Ltd.
(Real Estate Operations) ............................... 28,000 62,511
Hutchison Whampoa Ltd.
(Diversified Operations) ............................... 12,000 75,261
Sun Hung Kai Properties Ltd.
(Real Estate Operations) ............................... 6,000 41,812
-----------
179,584
-----------
India (1.72%)
Reliance Industries Ltd. Global Depository
Receipt (GDR) (Diversified Operations) (R) ............. 1,900 16,340
Reliance Industries Ltd. (GDR) (Diversified
Operations)* ........................................... 1,650 14,190
The Schedule of Investments is a complete list of all securities owned by the
V.A. International Fund on December 31, 1997. It's divided into three main
categories: common stocks, preferred stock and short-term investments. Common
stocks and preferred stock are further broken down by country. Short-term
investments, which represent the Fund's "cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
India (continued)
State Bank of India (GDR) (Banks - Foreign) ............ 1,900 $ 34,580
-----------
65,110
-----------
Ireland (4.95%)
Allied Irish Banks PLC (ADR) (Banks - Foreign) ......... 3,234 187,572
-----------
Japan (9.00%)
Ito-Yokado Co., Ltd. (Retail) .......................... 2,000 101,861
Sony Corp. (Electronics) ............................... 1,000 88,841
TDK Corp. (Electronics) ................................ 2,000 150,724
-----------
341,426
-----------
Mexico (3.66%)
Grupo Industrial Maseca SA de CV
(ADR) (Food) ........................................... 2,000 31,000
Panamerican Beverages, Inc. (Beverages) ................ 3,300 107,662
-----------
138,662
-----------
Netherlands (7.71%)
ABN Amro Holdings NV (ADR)
(Banks - Foreign) ...................................... 5,254 102,453
ING Groep NV (ADR) (Banks - Foreign) ................... 3,130 132,438
Ispat International NV (Steel)* ....................... 2,665 57,631
-----------
292,522
-----------
Norway (0.23%)
Saga Petroleum ASA (Oil & Gas) ......................... 500 8,598
-----------
Singapore (1.60%)
NatSteel Ltd. (Steel) .................................. 19,000 25,702
Oversea-Chinese Banking Corp., Ltd. ....................
(Banks - Foreign) ....................................... 6,000 34,886
-----------
60,588
-----------
Sweden (3.73%)
Investor AB (Diversified Operations) ................... 2,795 136,232
Nordbanken Holding AB (Banks - Foreign)* ............... 900 5,089
-----------
141,321
-----------
Switzerland (7.03%)
Novartis AG (Medical) .................................. 85 137,866
Zurich Versicherungs-Gesellschaft
(Insurance) ............................................. 270 128,607
-----------
266,473
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. International Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
United Kingdom (14.43%)
EMAP PLC (Media) ....................................... 6,000 $ 89,286
Marks & Spencer PLC (Retail) ........................... 7,500 74,170
Northern Rock PLC (Banks - Foreign)* ................... 10,000 98,057
Pearson PLC (Media) .................................... 8,000 103,937
Regal Hotel Group PLC (Leisure) ....................... 100,000 73,913
Royal & Sun Alliance Insurance Group PLC
(Insurance) ............................................ 7,085 71,336
Royal Bank of Scotland Group PLC
(Banks - Foreign) ...................................... 2,860 36,462
-----------
547,161
-----------
United States (2.04%)
Carnival Corp. (Class A) (Leisure) ..................... 1,400 77,525
-----------
TOTAL COMMON STOCKS
(Cost $3,249,269) ( 85.93%) 3,258,601
-------- -----------
PREFERRED STOCK
Brazil (3.39%)
Compania Riograndense de
Telecomunicaciones SA
(Telecommunications) ................................... 104,224 128,406
-----------
TOTAL PREFERRED STOCK
(Cost $152,131) ( 3.39%) 128,406
-------- -----------
TOTAL COMMON AND PREFERRED STOCKS
(Cost $3,401,400) ( 89.32%) 3,387,007
-------- -----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (9.10%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 11.25% Due 02-15-15
and 9.25% Due 02-15-16) -
Note A................................. 6.60% $345 345,000
-----------
TOTAL SHORT-TERM INVESTMENTS ( 9.10%) 345,000
------- -----------
TOTAL INVESTMENTS ( 98.42%) 3,732,007
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 1.58%) 59,997
------- -----------
TOTAL NET ASSETS ( 100.00%) $ 3,792,004
======= ===========
Industry Diversification
- --------------------------------------------------------------------------------
The Fund primarily invests in securities issued by companies of
other countries. The performance of the Fund is closely tied to the economic
conditions within the countries it invests. The concentration of investments by
country for individual securities held by the Fund is shown in the schedule of
investments. In addition, the concentration of investments can be aggregated by
various industry groups. The table below shows the percentages of the Fund's
Investments at December 31, 1997 assigned to the various investment categories.
MARKET VALUE OF SECURITIES
INVESTMENT CATEGORIES AS A % OF FUND NET ASSETS
- --------------------- -------------------------
Automobile/Trucks........................ 4.24%
Banks - Foreign.......................... 23.23
Beverages................................ 2.84
Building................................. 0.32
Diversified Operations................... 6.38
Electronics.............................. 6.32
Food..................................... 0.82
Insurance................................ 6.99
Leisure.................................. 3.99
Media.................................... 5.09
Medical.................................. 3.64
Metal.................................... 3.09
Oil & Gas................................ 0.23
Real Estate Operations................... 2.75
Retail................................... 6.98
Steel.................................... 2.20
Telecommunications....................... 7.60
Utilities................................ 2.61
Short-Term Investments................... 9.10
-----
TOTAL INVESTMENTS 98.42%
=====
* Non-income producing security.
(R) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. Such securities may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $16,340 or 0.43% of the Fund's net assets, as of
December 31, 1997.
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.
51
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Financial Industries Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Banks - Foreign (7.89%)
Allied Irish Banks PLC, (American
Depository Receipt), (ADR) (Ireland) ................. 7,500 $435,000
ING Groep N.V. (ADR) (Netherlands) ..................... 4,174 176,612
Nordbanken Holding AB * (Sweden) ....................... 4,200 23,767
Royal Bank of Canada (Canada) .......................... 15,500 821,500
-----------
1,456,879
-----------
Banks - Money Center (4.15%)
Chase Manhattan Corp. .................................. 7,000 766,500
-----------
Banks - Southeast (2.86%)
First Tennessee National Corp. ......................... 7,900 527,325
-----------
Banks - Super Regional (7.10%)
BankBoston Corp. ....................................... 8,200 770,287
Norwest Corp. .......................................... 14,000 540,750
-----------
1,311,037
-----------
Banks - West (2.71%)
Westamerica Bancorp .................................... 4,900 501,025
-----------
Broker Services (13.77%)
Edwards (A.G.), Inc. ................................... 22,250 884,437
Friedman, Billings, Ramsey Group, Inc.
(Class A) * ............................................ 2,000 35,875
Legg Mason, Inc. ....................................... 14,166 792,411
McDonald & Co., Investments ............................ 12,600 357,525
Morgan Stanley, Dean Witter, Discover & Co. ............ 8,000 473,000
-----------
2,543,248
-----------
Computer - Services (4.34%)
Fiserv, Inc.* .......................................... 16,300 800,737
-----------
Finance - Consumer Loan (6.70%)
American Express Co. ................................... 8,500 758,625
Imperial Credit Industries, Inc.* ...................... 7,200 147,600
MBNA Corp. ............................................. 9,650 263,566
New Century Financial Corp. * .......................... 6,500 66,625
-----------
1,236,416
-----------
Finance - Investment Management (8.75%)
Affiliated Managers Group, Inc. * ...................... 1,500 43,500
Conning Corp. * ........................................ 1,500 25,125
Franklin Resources, Inc. ............................... 8,400 730,275
Price (T. Rowe) Associates, Inc. ....................... 13,000 817,375
-----------
1,616,275
-----------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Financial Industries Fund on December 31, 1997. It's divided into three
main categories: common stocks, right and short-term investments. Common stocks
and right are further broken down by industry groups. Short-term investments,
which represent the Fund's "cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Finance - Savings & Loan (0.96%)
InterWest Bancorp, Inc. ................................ 4,700 $ 177,425
-----------
Finance - SBIC & Commercial (0.70%)
CIT Group, Inc. (The) (Class A) * ...................... 4,000 129,000
-----------
Insurance - Accident & Health (2.89%)
Provident Cos., Inc. ................................... 13,000 502,125
Summit Holdings Southeast, Inc. * ...................... 1,400 31,325
-----------
533,450
-----------
Insurance - Life (1.67%)
ARM Financial Group, Inc. (Class A) .................... 11,700 308,588
-----------
Insurance - Multi Line (3.00%)
Allmerica Financial Corp. .............................. 11,100 554,306
-----------
Insurance - Property & Casualty (15.20%)
Aetna, Inc. ............................................ 5,500 388,094
Commerce Group, Inc. ................................... 2,000 65,250
Donegal Group, Inc. .................................... 5,000 110,625
Frontier Insurance Group, Inc. ......................... 4,800 109,800
General Re Corp. ....................................... 2,000 424,000
Penn-America Group, Inc. ............................... 4,800 98,400
RLI Corp. .............................................. 5,000 249,063
SAFECO Corp. ........................................... 10,500 511,875
St. Paul Cos., Inc. .................................... 6,600 541,613
Travelers Property Casualty Corp. (Class A) ............ 7,000 308,000
-----------
2,806,720
-----------
REIT - Equity Trust (7.43%)
Brandywine Realty Trust ................................ 8,000 201,000
Excel Realty Trust, Inc. ............................... 8,000 252,000
Glenborough Realty Trust, Inc. ......................... 1,500 44,437
Prentiss Properties Trust .............................. 7,200 201,150
SL Green Realty Corp. .................................. 4,500 116,719
Spieker Properties, Inc. ............................... 13,000 557,375
-----------
1,372,681
-----------
TOTAL COMMON STOCKS
(Cost $15,087,930) ( 90.12%) 16,641,612
-------- -----------
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Financial Industries Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
RIGHT
Finance - SBIC & Commercial (0.72%)
Newcourt Credit Group, Inc. ............................ 4,000 $ 132,213
-----------
TOTAL RIGHT
(Cost $130,312) ( 0.72%) 132,213
------- -----------
TOTAL COMMON STOCKS AND RIGHT
(Cost $15,218,242) (90.84%) 16,773,825
-------- -----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreements (9.12%)
Investment in a joint repurchase
agreement transaction with HSBS
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 7.25% thru 13.25%
due 11-15-08 thru 11-15-16, and
U.S. Treasury Note 6.50%
due 04-30-99) - Note A................ 6.60% $1,683 1,683,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%............................... 791
-----------
TOTAL SHORT-TERM INVESTMENTS ( 9.12%) 1,683,791
------- -----------
TOTAL INVESTMENTS ( 99.96%) 18,457,616
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 0.04%) 7,825
------- -----------
TOTAL NET ASSETS (100.00%) $18,465,441
======= ===========
* 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.
53
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (2.03%)
Lamar Advertising Co.* ............................... 900 $ 35,775
Outdoor Systems, Inc.* ............................... 450 17,269
Princeton Video Image, Inc.* ......................... 1,000 9,375
Universal Outdoor Holdings, Inc.* .................... 300 15,600
-----------
78,019
-----------
Aerospace (0.51%)
AAR Corp. ............................................ 500 19,375
-----------
Agricultural Operations (0.59%)
Scheid Vineyards, Inc. (Class A)* .................... 2,500 22,812
-----------
Automobile/Trucks (1.59%)
Avis Rent A Car, Inc.* ............................... 700 22,356
Budget Group, Inc. (Class A)* ........................ 700 24,194
Special Devices, Inc.* ............................... 300 8,775
United Rentals, Inc.* ................................ 300 5,794
-----------
61,119
-----------
Beverages (1.16%)
Beringer Wine Estates Holdings, Inc. (Class B)* ...... 400 15,200
Mondavi (Robert) Corp. (Class A)* .................... 600 29,250
-----------
44,450
-----------
Broker Services (0.77%)
E*TRADE Group, Inc.* ................................. 700 16,100
Interra Financial, Inc. .............................. 200 13,800
-----------
29,900
-----------
Building (0.61%)
UNIFAB International, Inc.* .......................... 100 1,925
Vari-Lite International, Inc.* ....................... 1,800 21,487
-----------
23,412
-----------
Business Services - Misc (6.62%)
Abacus Direct Corp.* ................................. 700 28,700
Caribiner International, Inc.* ....................... 500 22,250
Coinstar, Inc.* ...................................... 1,600 14,600
CORESTAFF, Inc.* ..................................... 750 19,875
Hagler Bailly, Inc.* ................................. 1,200 27,000
Hall, Kinion & Associates, Inc.* ..................... 100 2,187
Mac-Gray Corp.* ...................................... 1,400 21,875
Market Facts, Inc.* .................................. 1,300 21,775
MAXIMUS, Inc.* ....................................... 100 2,419
On Assignment, Inc.* ................................. 1,100 29,150
Pre-Paid Legal Services, Inc.* ....................... 700 23,931
The Schedule of Investments is a complete list of all securities owned by the
V.A. Emerging Growth Fund on December 31, 1997. It's divided into three main
categories: common stocks, unit and short-term investments. Common stocks and
unit are further broken down by industry groups. Short-term investments, which
represent the Fund's "cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Business Services - Misc (continued)
ProBusiness Services, Inc.* .......................... 1,000 $ 22,875
Securacom, Inc.* ..................................... 1,800 17,550
-----------
254,187
-----------
Computers (9.01%)
Advent Software, Inc.* ............................... 700 20,037
Aris Corp.* .......................................... 1,100 23,100
Aspect Development, Inc.* ............................ 400 20,800
Box Hill Systems Corp.* .............................. 1,000 10,438
CBT Group PLC, (American Depository
Receipt)* (Ireland) ................................. 300 24,638
Concord Communications, Inc.* ........................ 100 2,075
Discreet Logic, Inc.* ................................ 700 15,356
FlexiInternational Software, Inc.* ................... 100 1,550
Information Management Resources, Inc.* .............. 750 28,125
JDA Software Group, Inc.* ............................ 500 17,500
National Computer Systems, Inc. ...................... 600 21,150
National Instruments Corp.* .......................... 600 17,400
Network Appliance, Inc.* ............................. 1,200 42,600
PRT Group, Inc.* ..................................... 900 10,237
SCM Microsystems, Inc.* .............................. 800 19,200
SPR, Inc.* ........................................... 1,000 17,000
Symantec Corp.* ...................................... 1,300 28,519
Visio Corp.* ......................................... 600 23,025
Xionics Document Technologies, Inc.* ................. 900 3,431
-----------
346,181
-----------
Consumer Products Misc. (0.33%)
Samsonite Corp.* ..................................... 400 12,650
-----------
Containers (0.19%)
Ivex Packaging Corp.* ................................ 300 7,200
-----------
Electronics (5.35%)
Aavid Thermal Technologies, Inc.* ................... 800 19,200
Aeroflex, Inc.* ...................................... 1,600 14,000
Aseco Corp * ......................................... 600 5,118
ATMI, Inc.* .......................................... 600 14,550
Aztec Manufacturing Co. .............................. 1,100 15,400
SEE NOTES TO FINANCIAL STATEMENTS.
54
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Electronics (continued)
FARO Technologies, Inc.* ............................... 1,000 $ 11,625
Integrated Circuit Systems, Inc.* ..................... 600 17,100
Level One Communications, Inc.* ........................ 600 16,950
Metromedia Fiber Network, Inc. (Class A)* .............. 1,600 26,600
MMC Networks, Inc.* .................................... 100 1,700
PRI Automation, Inc.* .................................. 400 11,550
Sawtek, Inc.* .......................................... 600 15,825
SeaMED Corp.* .......................................... 1,300 24,050
Semtech Corp.* ......................................... 300 11,737
-----------
205,405
-----------
Finance (1.92%)
FIRSTPLUS Financial Group, Inc.* ....................... 400 15,350
LINC Capital, Inc.* .................................... 1,400 27,475
Medallion Financial Corp. .............................. 1,400 30,800
-----------
73,625
-----------
Food (1.61%)
American Italian Pasta Co. (Class A)* .................. 900 22,500
Fine Host Corp.* ....................................... 900 9,112
Suiza Foods Corp.* ..................................... 510 30,377
-----------
61,989
-----------
Funeral Services & Related (0.57%)
Rock of Ages Corp.* .................................... 1,400 21,700
-----------
Insurance (3.85%)
Capital Re Corp. ....................................... 200 12,412
CMAC Investment Corp. .................................. 500 30,188
ESG Re Ltd.* (Bermuda) ................................. 200 4,700
Hartford Life, Inc. (Class A) .......................... 500 22,656
Healthcare Recoveries, Inc.* ........................... 1,100 24,475
Life Re Corp. .......................................... 500 32,594
Western National Corp. ................................. 700 20,737
-----------
147,762
-----------
Lasers - Systems / Components (0.36%)
General Scanning, Inc.* ................................ 800 13,800
-----------
Leasing Companies (0.74%)
Rollins Truck Leasing Corp. ............................ 1,600 28,600
-----------
Leisure (3.66%)
Ballantyne of Omaha, Inc.* ............................. 1,500 27,000
Cinar Films, Inc. (Class B)* (Canada) .................. 700 27,213
GameTech International Inc.* ........................... 900 9,675
Premier Parks, Inc.* ................................... 700 28,350
Silverleaf Resorts, Inc.* .............................. 1,100 26,950
Travel Services International, Inc.* ................... 900 21,375
-----------
140,563
-----------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Machinery (1.51%)
Applied Power Inc. (Class A) ........................... 400 $ 27,600
Gardner Denver Machinery, Inc.* ........................ 1,200 30,375
-----------
57,975
-----------
Media (3.07%)
Central Newspapers, Inc. (Class A) ..................... 300 22,181
CMP Media, Inc. (Class A)* ............................. 600 10,350
Heftel Broadcasting Corp. (Class A)* ................... 800 37,400
Jacor Communications, Inc.* ............................ 200 10,625
Network Event Theater, Inc.* ........................... 3,000 14,250
Petersen Cos., Inc. (The) (Class A)* ................... 100 2,300
Univision Communications, Inc. (Class A)* .............. 300 20,944
-----------
118,050
-----------
Medical (11.57%)
Affymetrix, Inc.* ...................................... 800 24,900
American Healthcorp, Inc.* ............................. 1,800 12,600
Amsurg Corp. (Class A)* ................................ 165 1,238
Amsurg Corp. (Class B)* ................................ 1,068 8,277
Andrx Corp.* ........................................... 800 27,400
ESC Medical Systems Ltd.* (Israel) ..................... 500 19,375
Health Care & Retirement Corp.* ........................ 500 20,125
Incyte Pharmaceuticals, Inc.* .......................... 600 27,000
Mentor Corp. ........................................... 800 29,200
MiniMed, Inc.* ......................................... 700 27,213
Monarch Dental Corp.* .................................. 1,000 13,250
Myriad Genetics, Inc.* ................................. 700 16,975
Ocular Sciences, Inc.* ................................. 900 23,625
PAREXEL International Corp.* ........................... 700 25,900
PathoGenesis Corp.* .................................... 600 22,275
Perclose, Inc.* ........................................ 700 13,475
Protein Design Labs, Inc.* ............................. 400 16,000
Sano Corp.* ............................................ 600 19,875
SONUS Pharmaceuticals, Inc.* ........................... 700 23,188
Sunrise Assisted Living, Inc.* ......................... 700 30,187
Universal Health Services, Inc. (Class B)* ............. 300 15,112
Wesley Jessen VisionCare, Inc.* ........................ 700 27,300
-----------
444,490
-----------
Metal (0.49%)
Maverick Tube Corp.* ................................... 700 17,719
Prudential Steel Ltd. (Canada) ......................... 100 978
-----------
18,697
-----------
Office (0.52%)
Shelby Williams Industries, Inc. ....................... 1,200 19,800
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Oil & Gas (5.18%)
Brown (Tom) Inc.* ...................................... 900 $ 17,325
Core Laboratories N.V.* (Netherlands) .................. 600 10,838
Dawson Production Services, Inc.* ..................... 700 12,162
Dril-Quip, Inc.* ....................................... 100 3,513
Eagle Geophysical, Inc.* ............................... 900 11,700
IRI International Corp.* ............................... 200 2,800
Key Energy Group, Inc.* ................................ 700 15,181
National-Oilwell, Inc.* ................................ 700 23,931
Ocean Energy, Inc.* .................................... 300 14,794
Precision Drilling Corp.* (Canada) ..................... 700 17,062
Pride International, Inc.* ............................. 600 15,150
Santa Fe Energy Resources, Inc.* ....................... 1,900 21,375
Stone Energy Corp.* .................................... 600 20,100
TransCoastal Marine Services, Inc.* .................... 100 1,425
Vintage Petroleum, Inc. ................................ 600 11,400
-----------
198,756
-----------
Pollution Control (4.83%)
American Disposal Services, Inc.* ..................... 700 25,550
Eastern Environmental Services, Inc.* .................. 800 17,600
Innovative Valve Technologies, Inc.* ................... 1,400 28,350
ITEQ, Inc.* ............................................ 2,800 32,200
Newpark Resources, Inc.* ............................... 1,800 31,500
Philip Services Corp.* (Canada) ........................ 2,100 30,188
Superior Services, Inc.* ............................... 700 20,213
-----------
185,601
-----------
Printing - Commercial (0.47%)
Mail-Well, Inc.* ....................................... 450 18,225
-----------
Real Estate Investment Trust (3.01%)
Arden Realty Group, Inc. ............................... 800 24,600
Crescent Real Estate Equities Co. ...................... 400 15,750
Equity Office Properties Trust ......................... 563 17,754
Glenborough Realty Trust, Inc. ......................... 1,000 29,625
Mack-Cali Realty Corp. ................................. 400 16,400
Starwood Lodging Trust ................................. 200 11,575
-----------
115,704
-----------
Retail (12.34%)
Abercrombie & Fitch Co.* ............................... 800 25,000
Arbor Drugs, Inc. ...................................... 1,200 22,200
Big Dog Holdings, Inc.* ................................ 1,200 6,750
Brylane Inc.* .......................................... 500 24,625
CKE Restaurants, Inc. .................................. 500 21,063
Concepts Direct, Inc.* ................................. 800 16,800
Cost Plus, Inc.* ....................................... 800 23,200
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Retail (continued)
Dominick's Supermarkets, Inc.* ......................... 700 $ 25,550
Famous Dave's of America, Inc.* ........................ 1,100 9,830
Fresh America Corp.* ................................... 800 15,400
Furniture Brands International, Inc.* .................. 1,200 24,600
Genovese Drug Stores, Inc. (Class A) ................... 660 11,303
Hibbett Sporting Goods, Inc.* .......................... 1,000 22,000
Il Fornaio (America) Corp.* ............................ 1,000 14,875
Keystone Automotive Industries, Inc.* .................. 1,000 23,750
Linens `N Things, Inc.* ................................ 500 21,813
Meadowcraft, Inc. ...................................... 800 9,400
99 Cents Only Stores* .................................. 975 28,763
Peapod, Inc.* .......................................... 1,700 11,050
Proffitt's, Inc.* ...................................... 800 22,750
Quality Food Centers, Inc.* ............................ 500 33,500
Rainforest Cafe, Inc.* ................................. 600 19,800
Stage Stores, Inc.* .................................... 600 22,425
Track `n Trail Inc.* ................................... 1,600 14,200
U.S.A. Floral Products, Inc.* .......................... 100 1,575
White Cap Industries, Inc.* ............................ 100 1,862
-----------
474,084
-----------
Schools/Education (1.31%)
EduTrek International, Inc. (Class A)* ................. 700 18,200
ITI Education Corp.* (Canada) .......................... 2,000 12,159
Strayer Education, Inc. ................................ 600 19,800
-----------
50,159
-----------
Shoes & Related Apparel (0.41%)
Wolverine World Wide, Inc. ............................. 700 15,838
-----------
Telecommunications (2.87%)
Comverse Technology, Inc.* ............................. 500 19,500
Innova Corp.* .......................................... 1,200 18,300
MRV Communications, Inc.* .............................. 700 16,713
REMEC, Inc.* ........................................... 950 21,375
Tel-Save Holdings, Inc.* ............................... 600 11,925
WinStar Communications, Inc.* .......................... 900 22,443
-----------
110,256
-----------
Textile (1.80%)
Culp, Inc. ............................................. 1,200 24,000
Cutter & Buck, Inc.* ................................... 1,300 24,213
Tefron Ltd.* (Israel) .................................. 900 20,700
-----------
68,913
-----------
Transport (3.40%)
C.H. Robinson Worldwide, Inc. .......................... 1,100 24,613
Carey International, Inc.* ............................. 1,000 15,125
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Transport (continued)
Eagle USA Airfreight, Inc.* ............................ 600 $ 17,100
Jevic Transportation, Inc.* ............................ 1,500 24,188
MotivePower Industries, Inc.* .......................... 1,100 25,575
Simon Transportation Services Inc.* .................... 1,000 24,000
-----------
130,601
-----------
TOTAL COMMON STOCKS
(Cost $3,298,160) (94.25%) 3,619,898
------- -----------
UNIT
Real Estate Investment Trust (0.47%)
Hanover Capital Mortgage Holdings, Inc.* ............... 1,100 18,150
-----------
TOTAL UNIT
(Cost $16,500) ( 0.47%) 18,150
------- -----------
TOTAL COMMON STOCKS AND UNIT
(Cost $3,314,660) (94.72%) 3,638,048
------- -----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.78%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 12-31-97, Due 01-02-98
(Secured by U.S. Treasury Bonds
7.25% thru 13.25% Due 11-15-08 thru
11-15-16, and U.S. Treasury Note
6.50% due 04-30-99 - Note A 6.60% $222 $ 222,000
-----------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%............... 292
-----------
TOTAL SHORT-TERM INVESTMENTS ( 5.79%) 222,292
------- -----------
TOTAL INVESTMENTS (100.51%) 3,860,340
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 0.51%) ( 19,529)
------- -----------
TOTAL NET ASSETS ( 100%) $ 3,840,811
======= ===========
* 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.
57
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Growth Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (1.90%)
Outdoor Systems, Inc.* ................................. 1,850 $ 70,994
-----------
Beverages (1.71%)
Beringer Wine Estates Holdings, Inc. (Class B)* ........ 400 15,200
Mondavi (Robert) Corp. (Class A)* ..................... 1,000 48,750
-----------
63,950
-----------
Commercial Services (3.03%)
Corrections Corporation of America* .................... 1,700 63,006
EduTrek International, Inc. (Class A)* ................. 200 5,200
Market Facts, Inc. ..................................... 400 6,700
Securacom, Inc.* ....................................... 3,900 38,025
-----------
112,931
-----------
Computers (19.38%)
Advantage Learning Systems, Inc.* ..................... 100 2,137
America Online, Inc.* .................................. 700 62,431
BMC Software, Inc.* .................................... 900 59,063
CBT Group Plc, American
Depository Receipt (Ireland)* .......................... 800 65,700
Discreet Logic, Inc.* .................................. 2,000 43,875
E*TRADE Group, Inc.* ................................... 1,500 34,500
Edwards (J.D.) & Co.* .................................. 1,100 32,450
EMC Corp.* ............................................. 1,400 38,413
HBO & Co. .............................................. 1,200 57,600
Iomega Corp.* .......................................... 4,400 54,725
Network Appliance, Inc.* ............................... 2,600 92,300
SCM Microsystems, Inc.* ................................ 100 2,400
Security Dynamics Technologies, Inc.* .................. 1,800 64,350
SPR Inc.* .............................................. 100 1,700
Symantec Corp.* ........................................ 3,000 65,813
Visio Corp.* ........................................... 1,200 46,050
-----------
723,507
-----------
Electronics (6.13%)
ATMI, Inc.* ............................................ 1,600 38,800
General Scanning, Inc.* ................................ 100 1,725
Level One Communications, Inc.* ........................ 1,250 35,313
Metromedia Fiber Network, Inc. (Class A)* .............. 3,800 63,175
Semtech Corp.* ......................................... 1,000 39,125
Teradyne, Inc.* ........................................ 400 12,800
Vitesse Semiconductor Corp.* ........................... 1,000 37,750
-----------
228,688
-----------
Finance (2.09%)
FIRSTPLUS Financial Group, Inc.* ....................... 600 23,025
The Schedule of Investments is a complete list of all securities owned by the V.
A. Growth Fund on December 31, 1997. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Finance (continued)
Medallion Financial Corp. .............................. 2,500 $ 55,000
-----------
78,025
-----------
Food (1.90%)
Suiza Foods Corp.* ..................................... 1,190 70,879
-----------
Insurance (2.58%)
Ace, Ltd. (Bermuda) .................................... 500 48,250
Progressive Corp. ...................................... 400 47,950
-----------
96,200
-----------
Leisure (3.78%)
Carnival Corp. (Class A) ............................... 1,300 71,987
Royal Caribbean Cruises Ltd. ........................... 1,300 69,306
-----------
141,293
-----------
Machinery (1.42%)
Gardner Denver Machinery, Inc.* ........................ 2,100 53,156
-----------
Media (8.29%)
Central Newspapers, Inc. (Class A) ..................... 1,100 81,331
Clear Channel Communications, Inc.* .................... 900 71,494
Heftel Broadcasting Corp. (Class A)* ................... 1,600 74,800
Jacor Communications, Inc.* ............................ 1,500 79,687
Petersen Companies, Inc. (The) (Class A)* .............. 100 2,300
-----------
309,612
-----------
Medical (7.56%)
Health Care & Retirement Corp.* ........................ 1,400 56,350
Health Management Associates, Inc. (Class A)* .......... 2,250 56,813
Sunrise Assisted Living, Inc.* ......................... 1,500 64,687
Warner-Lambert Co. ..................................... 400 49,600
Wesley Jessen VisionCare, Inc.* ........................ 1,400 54,600
-----------
282,050
-----------
Office (1.58%)
HON INDUSTRIES, Inc. ................................... 1,000 59,000
-----------
Oil & Gas (7.21%)
ENSCO International, Inc. .............................. 1,500 50,250
EVI, Inc.* ............................................. 600 31,050
Falcon Drilling Company, Inc.* ......................... 1,600 56,100
IRI International Corp.* ............................... 200 2,800
Marine Drilling Companies, Inc.* ....................... 1,600 33,200
National-Oilwell, Inc.* ................................ 1,800 61,537
Precision Drilling Corp.* (Canada) ..................... 1,400 34,125
-----------
269,062
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Pollution Control (5.89%)
ITEQ, Inc.* ........................................... 4,300 $ 49,450
Newpark Resources, Inc.* .............................. 4,400 77,000
Philip Services Corp.* (Canada) ....................... 4,000 57,500
US Filter Corp.* ...................................... 1,200 35,925
-----------
219,875
-----------
Retail (11.77%)
Borders Group, Inc. * ................................. 1,200 37,575
Consolidated Stores Corp.* ............................ 1,375 60,414
Costco Companies, Inc.* ............................... 1,300 58,013
Dollar General Corp. .................................. 1,650 59,813
Home Depot, Inc. (The) ................................ 1,150 67,706
Meyer (Fred), Inc. * .................................. 1,600 58,200
Pier 1 Imports, Inc. .................................. 1,600 36,200
Starbucks Corp.* ...................................... 1,600 61,400
-----------
439,321
-----------
Schools / Education (1.90%)
Apollo Group, Inc. (Class A)*` ........................ 1,500 70,875
-----------
Telecommunications (7.69%)
Comverse Technology, Inc.* ............................ 1,300 50,700
Innova Corp.* ......................................... 2,000 30,500
Nextel Communications, Inc. (Class A)* ................ 2,100 54,600
Qwest Communications International, Inc.* ............. 900 53,550
Teligent, Inc. (Class A)* ............................. 100 2,463
Tellabs, Inc.* ........................................ 1,000 52,875
WorldCom, Inc.* ....................................... 1,400 42,350
-----------
287,038
-----------
TOTAL COMMON STOCKS
(Cost $3,063,484) (95.81%) 3,576,456
------- -----------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED)
- ------------------- ---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.71%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 7.25% thru 13.25%
due 11-15-08 thru 11-15-16,
and U.S. Treasury Note, 6.50%
Due 04-30-99), - Note A............. 6.60% $213 213,000
---------
MARKET
ISSUER, DESCRIPTION VALUE
- ------------------- -----
Corporate Savings Account (0.02%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%......... $ 576
-----------
TOTAL SHORT-TERM INVESTMENTS ( 5.73%) 213,576
------- -----------
TOTAL INVESTMENTS (101.54%) 3,790,032
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 1.54%) ( 57,320)
------- -----------
TOTAL NET ASSETS (100.00%) $ 3,732,712
======= ===========
*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.
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The V. A. Growth 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 of the countries within 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 December 31, 1997 assigned to country categories.
MARKET VALUE AS A
COUNTRY DIVERSIFICATION PERCENTAGE OF FUND'S NET ASSETS
- ----------------------- -------------------------------
Bermuda........................... 1.29%
Canada............................ 2.45
Ireland........................... 1.76
United States..................... 96.04
------
TOTAL INVESTMENTS 101.54%
======
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Independence Equity Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Aerospace (2.05%)
Northrop Grumman Corp. ................................ 200 $ 23,000
Raytheon Co. (Class A) ................................ 64 3,145
United Technologies Corp. ............................. 2,100 152,906
-----------
179,051
-----------
Automobile/Trucks (3.10%)
Dana Corp. ............................................ 500 23,750
Ford Motor Co. ........................................ 3,700 180,144
General Motors Corp. .................................. 1,100 66,688
-----------
270,582
-----------
Banks - United States (7.28%)
BankAmerica Corp. ..................................... 1,700 124,100
Bankers Trust New York Corp. .......................... 600 67,462
Citicorp .............................................. 1,500 189,656
Comerica, Inc. ........................................ 1,400 126,350
Norwest Corp. ......................................... 3,000 115,875
U.S. Bancorp .......................................... 100 11,194
-----------
634,637
-----------
Beverages (2.38%)
PepsiCo, Inc. ......................................... 5,700 207,694
-----------
Building (0.71%)
Centex Corp. .......................................... 100 6,294
Clayton Homes, Inc. ................................... 250 4,500
Masco Corp. ........................................... 1,000 50,875
-----------
61,669
-----------
Business Services - Misc (0.18%)
Dun & Bradstreet Corp. ................................ 500 15,469
-----------
Chemicals (2.05%)
Air Products & Chemicals, Inc. ........................ 1,200 98,700
Millennium Chemicals, Inc. ............................ 1,100 25,919
Praxair, Inc. ......................................... 1,200 54,000
-----------
178,619
-----------
Computers (4.91%)
Cadence Design Systems, Inc.* ......................... 1,000 24,500
Compaq Computer Corp.* ................................ 1,500 84,656
Computer Associates International, Inc. ............... 1,250 66,094
Hewlett-Packard Co. ................................... 700 43,750
Microsoft Corp.* ...................................... 1,400 180,950
Oracle Corp.* ......................................... 1,250 27,891
-----------
427,841
-----------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Independence Equity Fund on December 31, 1997. It is divided into two main
catagories: common stocks and short-term investments. Common stocks are further
broken down by industry group. Short-term investments, which represent the
Fund's "cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Containers (0.17%)
Owens-Illinois, Inc.* ................................. 400 $ 15,175
-----------
Cosmetics & Personal Care (1.67%)
Avon Products, Inc. ................................... 1,100 67,512
Dial Corp. (The) ...................................... 3,100 64,519
Revlon, Inc. (Class A) * .............................. 400 14,125
-----------
146,156
-----------
Diversified Operations (3.31%)
Canadian Pacific, Ltd. (Canada) ....................... 600 16,350
Corning, Inc. ......................................... 1,400 51,975
Du Pont (E.I.) De Nemours & Co. ....................... 2,000 120,125
National Service Industries, Inc. ..................... 600 29,738
Ogden Corp. ........................................... 300 8,456
Textron, Inc. ......................................... 1,000 62,500
-----------
289,144
-----------
Electronics (5.47%)
General Electric Co. .................................. 2,700 198,113
Honeywell, Inc. ....................................... 2,000 137,000
Intel Corp. ........................................... 500 35,125
Parker-Hannifin Corp. ................................. 600 27,525
Raychem Corp. ......................................... 900 38,756
Texas Instruments, Inc. ............................... 900 40,500
-----------
477,019
-----------
Finance (2.95%)
American Express Co. .................................. 900 80,325
Household International, Inc. ......................... 500 63,781
MBNA Corp. ............................................ 1,100 30,044
Morgan Stanley, Dean Witter, Discover & Co. ........... 1,400 82,775
-----------
256,925
-----------
Food (1.36%)
ConAgra, Inc. ......................................... 1,200 39,375
Quaker Oats Co. ....................................... 1,500 79,125
-----------
118,500
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Independence Equity Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Household (0.32%)
Tupperware Corp. ...................................... 1,000 $ 27,875
-----------
Instruments - Scientific (0.32%)
Perkin-Elmer Corp. .................................... 400 28,425
-----------
Insurance (7.74%)
American International Group, Inc. .................... 1,450 157,687
CIGNA Corp. ........................................... 300 51,919
Equitable Cos., Inc. (The) ............................ 600 29,850
General Re Corp. ...................................... 800 169,600
Hartford Financial Services Group, Inc. (The) ......... 500 46,781
Marsh & McLennan Cos., Inc. ........................... 1,200 89,475
Travelers Group, Inc. ................................. 2,400 129,300
-----------
674,612
-----------
Leisure (1.15%)
Cendant Corp. ......................................... 2,922 100,460
-----------
Machinery (1.02%)
Cooper Industries, Inc. ............................... 1,100 53,900
Deere & Co. ........................................... 600 34,987
-----------
88,887
-----------
Medical (10.74%)
Abbott Laboratories ................................... 1,800 118,012
Allegiance Corp. ...................................... 600 21,262
Becton, Dickinson & Co. ............................... 1,000 50,000
Bristol-Myers Squibb Co. .............................. 1,400 132,475
Cardinal Health, Inc. ................................. 1,000 75,125
Glaxo Wellcome PLC American Depository
Receipt (ADR) (United Kingdom) ....................... 500 23,938
Health Management Associates, Inc.
(Class A)* ........................................... 1,000 25,250
HEALTHSOUTH Corp.* .................................... 2,700 74,925
Johnson & Johnson ..................................... 1,800 118,575
Merck & Co., Inc. ..................................... 1,800 191,250
Schering-Plough Corp. ................................. 1,700 105,613
-----------
936,425
-----------
Mortgage Banking (0.91%)
Fannie Mae ............................................ 1,400 79,888
-----------
Office (1.40%)
Avery Dennison Corp. .................................. 300 13,425
Danka Business Systems PLC (ADR)
(United Kingdom) ..................................... 600 9,562
Pitney Bowes, Inc. .................................... 1,100 98,931
-----------
121,918
-----------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Oil & Gas (9.73%)
Anadarko Petroleum Corp. .............................. 200 $ 12,137
Atlantic Richfield Co. ................................ 1,100 88,137
Baker Hughes, Inc. .................................... 700 30,537
British Petroleum Co. PLC (ADR)
(United Kingdom) ..................................... 1,000 79,687
Chevron Corp. ......................................... 1,400 107,800
Dresser Industries, Inc. .............................. 700 29,356
El Paso Natural Gas Co. ............................... 300 19,950
Halliburton Co. ....................................... 300 15,581
Mobil Corp. ........................................... 1,300 93,844
Phillips Petroleum Co. ................................ 2,100 102,113
Schlumberger, Ltd. .................................... 1,100 88,550
Texaco Inc. ........................................... 2,200 119,625
USX - Marathon Group .................................. 1,800 60,750
-----------
848,067
-----------
Paper & Paper Products (1.21%)
Fort James Corp. ...................................... 1,300 49,725
International Paper Co. ............................... 1,300 56,063
-----------
105,788
-----------
Pollution Control (0.83%)
Browning-Ferris Industries, Inc. ...................... 1,000 37,000
USA Waste Services, Inc.* ............................. 900 35,325
-----------
72,325
-----------
Retail (4.60%)
Costco Cos., Inc.* .................................... 700 31,237
Dayton Hudson Corp. ................................... 1,000 67,500
Home Depot, Inc. ...................................... 2,200 129,525
Lowe's Cos., Inc. ..................................... 1,200 57,225
Staples, Inc.* ........................................ 1,100 30,525
TJX Cos., Inc. ........................................ 1,200 41,250
Wal-Mart Stores, Inc. ................................. 1,100 43,381
-----------
400,643
-----------
Soap & Cleaning Preparations (0.92%)
Proctor & Gamble Co. (The) ............................ 1,000 79,813
-----------
Steel (0.47%)
British Steel PLC (ADR) (United Kingdom) .............. 1,900 40,731
-----------
Telecommunications (2.78%)
Harris Corp. .......................................... 1,000 45,875
Lucent Technologies, Inc. ............................. 2,459 196,413
-----------
242,288
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Independence Equity Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Textile (1.10%)
Jones Apparel Group, Inc.* ............................ 700 $ 30,100
Liz Claiborne, Inc. ................................... 900 37,631
Tommy Hilfiger Corp.* ................................. 800 28,100
-----------
95,831
-----------
Tobacco (0.41%)
Philip Morris Cos., Inc. .............................. 700 31,719
Universal Corp. ....................................... 100 4,113
-----------
35,832
-----------
Transport (1.93%)
Burlington Northern Santa Fe .......................... 900 83,644
Norfolk Southern Corp. ................................ 900 27,731
Southwest Airlines Co. ................................ 2,300 56,638
-----------
168,013
-----------
Utilities (7.16%)
Baltimore Gas & Electric Co. .......................... 700 23,844
Bell Atlantic Corp. ................................... 2,000 182,000
Consolidated Natural Gas Co. .......................... 400 24,200
Dominion Resources, Inc. .............................. 1,400 59,587
Entergy Corp. ......................................... 400 11,975
Florida Progress Corp. ................................ 1,700 66,725
FPL Group, Inc. ....................................... 1,800 106,537
GTE Corp. ............................................. 2,700 141,075
Texas Utilities Co. ................................... 200 8,313
-----------
624,256
-----------
TOTAL COMMON STOCKS
(Cost $7,421,194) (92.33%) 8,050,558
------- -----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (9.58%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 12-31-97, Due 01-02-98
(Secured by U. S. Treasury Bonds,
7.25% thru 13.25%, due
11-15-08 thru 11-15-16, and
by U.S. Treasury Note, 6.50%
due 04-30-99 - Note A............... 6.60% $835 $ 835,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%.................. 157
---------
TOTAL SHORT-TERM INVESTMENTS ( 9.58%) 835,157
------- -----------
TOTAL INVESTMENTS (101.91%) 8,885,715
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 1.91%) ( 166,623)
------- -----------
TOTAL NET ASSETS ( 100%) $ 8,719,092
======= ===========
* 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.
62
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (0.10%)
Interpublic Group, Inc. ............................... 400 $ 19,925
-----------
Aerospace (1.19%)
Boeing Co. (The) ...................................... 2,400 117,450
General Dynamics Corp. ................................ 200 17,288
Northrop Grumman Corp. ................................ 200 23,000
Raytheon Co. (Class A) ................................ 114 5,622
Raytheon Co. (Class B) ................................ 600 30,300
United Technologies Corp. ............................. 600 43,687
-----------
237,347
-----------
Agricultural Operations (0.11%)
Pioneer Hi-Bred International, Inc. ................... 200 21,450
-----------
Automobile/Trucks (1.87%)
Chrysler Corp. ........................................ 1,800 63,337
Dana Corp. ............................................ 400 19,000
Eaton Corp. ........................................... 300 26,775
Ford Motor Co. ........................................ 3,000 146,062
General Motors Corp. .................................. 1,800 109,125
PACCAR, Inc. .......................................... 200 10,500
-----------
374,799
-----------
Banks - United States (7.78%)
Banc One Corp. ........................................ 1,400 76,037
Bank of New York Co., Inc. ............................ 900 52,031
BankAmerica Corp. ..................................... 1,700 124,100
BankBoston Corp. ...................................... 400 37,575
Bankers Trust New York Corp. .......................... 300 33,731
Barnett Banks, Inc. ................................... 500 35,937
Chase Manhattan Corp. ................................. 1,000 109,500
Citicorp .............................................. 1,100 139,081
Comerica, Inc. ........................................ 300 27,075
CoreStates Financial Corp. ............................ 500 40,031
Fifth Third Bancorp ................................... 400 32,700
First Chicago NBD Corp. ............................... 700 58,450
First Union Corp. ..................................... 1,500 76,875
Fleet Financial Group, Inc. ........................... 600 44,962
Huntington Bancshares, Inc. ........................... 600 21,600
KeyCorp ............................................... 600 42,487
Mellon Bank Corp. ..................................... 600 36,375
Morgan (J.P.) & Co., Inc. ............................. 400 45,150
National City Corp. ................................... 600 39,450
The Schedule of Investments is a complete list of all securities owned by the V.
A. 500 Index Fund on December 31, 1997. It is divided into two main catagories:
common stocks and short-term investments. Common stocks are further broken down
by industry group. Short-term investments, which represent the Fund's "cash"
position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Banks - United States (continued)
NationsBank Corp. ..................................... 1,700 $ 103,381
Norwest Corp. ......................................... 1,800 69,525
PNC Bank Corp. ........................................ 800 45,650
Republic New York Corp. ............................... 200 22,838
State Street Corp. .................................... 400 23,275
SunTrust Banks, Inc. .................................. 500 35,687
Synovus Financial Corp. ............................... 500 16,375
U.S. Bancorp .......................................... 600 67,162
Wachovia Corp. ........................................ 400 32,450
Wells Fargo & Co. ..................................... 200 67,887
-----------
1,557,377
-----------
Beverages (3.10%)
Anheuser-Busch Cos., Inc. ............................. 1,200 52,800
Coca-Cola Co. (The) ................................... 6,000 399,750
PepsiCo, Inc. ......................................... 3,700 134,819
Seagram Co. Ltd. (The) (Canada) ....................... 1,000 32,312
-----------
619,681
-----------
Broker Services (0.44%)
Merrill Lynch & Co. ................................... 800 58,350
Schwab (Charles) Corp. ................................ 700 29,356
-----------
87,706
-----------
Building (0.78%)
Black & Decker Corp. .................................. 400 15,625
Fluor Corp. ........................................... 300 11,213
Georgia-Pacific Group ................................. 300 18,225
Georgia Pacific Timber Group* ......................... 300 6,806
Masco Corp. ........................................... 600 30,525
Sherwin-Williams Co. .................................. 600 16,650
Stanley Works (The) ................................... 300 14,156
Weyerhauser Co. ....................................... 600 29,438
Willamette Industries, Inc. ........................... 400 12,875
-----------
155,513
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
63
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Business Services - Misc (0.23%)
Block, H & R, Inc. .................................... 300 $ 13,444
Dun & Bradstreet Corp. (The) .......................... 600 18,563
Equifax, Inc. ......................................... 400 14,175
-----------
46,182
-----------
Chemicals (1.51%)
Air Products & Chemicals, Inc. ........................ 300 24,675
Dow Chemical Co. ...................................... 600 60,900
Eastman Chemical Co. .................................. 300 17,869
Grace (W. R.) & Co. ................................... 200 16,088
Hercules, Inc. ........................................ 300 15,019
Monsanto Co. .......................................... 1,500 63,000
Morton International, Inc. ............................ 500 17,188
PPG Industries, Inc. .................................. 500 28,563
Praxair, Inc. ......................................... 500 22,500
Rohm & Haas Co. ....................................... 200 19,150
Union Carbide Corp. ................................... 400 17,175
-----------
302,127
-----------
Computers (7.84%)
Adobe Systems, Inc. ................................... 200 8,250
Apple Computer, Inc. * ................................ 500 6,563
Automatic Data Processing, Inc. ....................... 700 42,962
Bay Networks, Inc.* ................................... 600 15,338
Cabletron Systems, Inc.* .............................. 500 7,500
Ceridian Corp.* ....................................... 200 9,163
Cisco Systems, Inc.* .................................. 2,400 133,800
Cognizant Corp. ....................................... 400 17,825
Compaq Computer Corp.* ................................ 1,900 107,231
Computer Associates International, Inc. ............... 1,300 68,737
Computer Sciences Corp.* .............................. 200 16,700
Dell Computer Corp.* .................................. 800 67,200
Digital Equipment Corp.* .............................. 400 14,800
EMC Corp.* ............................................ 1,200 32,925
First Data Corp. ...................................... 1,100 32,175
HBO & Co. ............................................. 500 24,000
Hewlett-Packard Co. ................................... 2,600 162,500
International Business Machines Corp. ................. 2,400 250,950
Microsoft Corp.* ...................................... 2,900 374,825
Novell, Inc.* ......................................... 1,100 8,250
Oracle Corp.* ......................................... 2,400 53,550
Parametric Technology Corp.* .......................... 300 14,213
Seagate Technology, Inc.* ............................. 700 13,475
Silicon Graphics, Inc.* ............................... 500 6,219
Sun Microsystems, Inc.* ............................... 900 35,887
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Computers (continued)
3Com Corp.* ........................................... 900 $ 31,444
Unisys Corp. * ........................................ 500 6,938
UNOVA, Inc. * ......................................... 300 4,931
-----------
1,568,351
-----------
Containers (0.18%)
Crown Cork & Seal Co., Inc. ........................... 400 20,050
Owens-Illinois, Inc.* ................................. 400 15,175
-----------
35,225
-----------
Cosmetics & Personal Care (0.93%)
Avon Products, Inc. ................................... 400 24,550
Gillette Co. .......................................... 1,400 140,612
International Flavors & Fragrances, Inc. .............. 400 20,600
-----------
185,762
-----------
Diversified Operations (3.08%)
AlliedSignal, Inc. .................................... 1,400 54,512
Corning, Inc. ......................................... 600 22,275
Du Pont (E.I.) De Nemours & Co. ....................... 2,700 162,169
Fortune Brands, Inc. .................................. 600 22,238
IKON Office Solutions, Inc. ........................... 400 11,250
ITT Industries, Inc. .................................. 500 15,688
Johnson Controls, Inc. ................................ 400 19,100
Laidlaw, Inc. (Canada) ................................ 1,100 14,988
Lockheed Martin Corp. ................................. 500 49,250
Loews Corp. ........................................... 300 31,837
Minnesota Mining & Manufacturing Co. .................. 1,000 82,062
Tenneco, Inc. ......................................... 500 19,750
Textron, Inc. ......................................... 500 31,250
TRW, Inc. ............................................. 400 21,350
Tyco International Ltd. ............................... 1,300 58,581
-----------
616,300
-----------
Electronics (6.74%)
Advanced Micro Devices, Inc.* ......................... 400 7,175
AMP, Inc. ............................................. 600 25,200
Applied Materials, Inc.* .............................. 900 27,113
CBS Corp. ............................................. 2,800 82,425
Emerson Electric Co. .................................. 1,100 62,081
General Electric Co. .................................. 8,000 587,000
Grainger (W.W.), Inc. ................................. 200 19,438
Honeywell, Inc. ....................................... 400 27,400
Intel Corp. ........................................... 4,000 281,000
KLA-Tencor Corp.* ..................................... 200 7,725
LSI Logic Corp.* ...................................... 400 7,900
Micron Technology, Inc. * ............................. 600 15,600
SEE NOTES TO FINANCIAL STATEMENTS.
64
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Electronics (continued)
Motorola, Inc. ........................................ 1,500 $ 85,594
National Semiconductor Corp.* ......................... 400 10,375
Parker- Hannifin Corp. ................................ 400 18,350
Raychem Corp. ......................................... 200 8,613
Rockwell International Corp. .......................... 600 31,350
Texas Instruments, Inc. ............................... 1,000 45,000
-----------
1,349,339
-----------
Finance (1.67%)
Ahmanson (H.F.) & Co. ................................. 300 20,081
American Express Co. .................................. 1,100 98,175
Household International, Inc. ......................... 300 38,269
MBNA Corp. ............................................ 1,300 35,506
Morgan Stanley, Dean Witter, Discover & Co. ........... 1,400 82,775
SunAmerica, Inc. ...................................... 500 21,375
Washington Mutual, Inc. ............................... 600 38,287
-----------
334,468
-----------
Food (2.84%)
Archer-Daniels-Midland Co. ............................ 1,500 32,531
Campbell Soup Co. ..................................... 1,100 63,937
ConAgra, Inc. ......................................... 1,200 39,375
CPC International, Inc. ............................... 400 43,100
General Mills, Inc. ................................... 400 28,650
Heinz (H.J.) Co. ...................................... 900 45,731
Hershey Foods Corp. ................................... 400 24,775
Kellogg Co. ........................................... 1,000 49,625
Quaker Oats Co. ....................................... 400 21,100
Ralston Purina Group .................................. 300 27,881
Sara Lee Corp. ........................................ 1,200 67,575
Unilever N.V. PLC (Netherlands) ....................... 1,600 99,900
Wrigley (WM) Jr. Co. .................................. 300 23,869
-----------
568,049
-----------
Funeral Services & Related (0.13%)
Service Corporation International ..................... 700 25,856
-----------
Household (0.16%)
Newell Co. ............................................ 500 21,250
Whirlpool Corp. ....................................... 200 11,000
-----------
32,250
-----------
Instruments - Scientific (0.11%)
Thermo Electron Corp.* ................................ 500 22,250
-----------
Insurance (4.62%)
Aetna, Inc. ........................................... 400 28,225
Allstate Corp. ........................................ 1,000 90,875
American General Corp. ................................ 600 32,437
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Insurance (continued)
American International Group, Inc. .................... 1,700 $ 184,875
Aon Corp. ............................................. 500 29,313
Chubb Corp. ........................................... 400 30,250
CIGNA Corp. ........................................... 200 34,612
Conseco, Inc. ......................................... 500 22,719
General Re Corp. ...................................... 200 42,400
Hartford Financial Services Group, Inc. (The) ......... 300 28,069
Humana, Inc.* ......................................... 600 12,450
Jefferson Pilot Corp. ................................. 200 15,575
Lincoln National Corp. ................................ 300 23,438
Marsh & McLennan Cos., Inc. ........................... 400 29,825
MBIA, Inc. ............................................ 300 20,044
MGIC Investment Corp. ................................. 300 19,950
Progressive Corp. ..................................... 200 23,975
SAFECO Corp. .......................................... 400 19,500
St. Paul Cos., Inc. ................................... 300 24,619
Torchmark Corp. ....................................... 400 16,825
Transamerica Corp. .................................... 200 21,300
Travelers Group, Inc. ................................. 2,800 150,850
UNUM Corp. ............................................ 400 21,750
-----------
923,876
-----------
Leisure (2.09%)
Cendant Corp. * ....................................... 2,061 70,847
Disney (Walt) Co., (The) .............................. 1,700 168,406
Eastman Kodak Co. ..................................... 800 48,650
Hasbro, Inc. .......................................... 400 12,600
Hilton Hotels Corp. ................................... 700 20,825
ITT Corp.* ............................................ 300 24,863
Marriott International, Inc. .......................... 400 27,700
Mattel, Inc. .......................................... 800 29,800
Mirage Resorts, Inc. * ................................ 600 13,650
-----------
417,341
-----------
Machinery (0.84%)
Case Corp. ............................................ 300 18,131
Caterpiller Tractor, Inc. ............................. 1,000 48,562
Cooper Industries, Inc. ............................... 400 19,600
Deere & Co. ........................................... 700 40,819
Dover Corp. ........................................... 600 21,675
Ingersoll-Rand Co. .................................... 500 20,250
-----------
169,037
-----------
Media (1.88%)
Clear Channel Communications, Inc.* ................... 300 23,831
Comcast Corp. ......................................... 900 28,406
SEE NOTES TO FINANCIAL STATEMENTS.
65
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Media (continued)
Dow Jones & Co., Inc. ................................. 300 $ 16,106
Gannett Co., Inc. ..................................... 700 43,269
Knight-Ridder, Inc. ................................... 300 15,600
McGraw-Hill Cos., Inc. ................................ 300 22,200
New York Times Co. (Class A) .......................... 300 19,838
Tele-Communications, Inc. (Class A)* .................. 1,300 36,319
Time Warner, Inc. ..................................... 1,400 86,800
Times Mirror Co. (Class A) ............................ 300 18,450
Tribune Co. ........................................... 400 24,900
Viacom, Inc. (Class B)* ............................... 1,000 41,437
-----------
377,156
-----------
Medical (10.34%)
Abbott Laboratories ................................... 1,900 124,569
ALZA Corp.* ........................................... 300 9,544
American Home Products Corp. .......................... 1,600 122,400
Amgen, Inc.* .......................................... 700 37,887
Baxter International, Inc. ............................ 800 40,350
Becton, Dickinson & Co. ............................... 400 20,000
Boston Scientific Corp.* .............................. 500 22,938
Bristol-Myers Squibb Co. .............................. 2,400 227,100
Cardinal Health, Inc. ................................. 300 22,538
Columbia/HCA Healthcare Corp. ......................... 1,700 50,362
Guidant Corp. ......................................... 400 24,900
HEALTHSOUTH Corp.* .................................... 1,000 27,750
Johnson & Johnson ..................................... 3,300 217,387
Lilly (Eli) & Co. ..................................... 2,700 187,988
Mallinckrodt, Inc. .................................... 400 15,200
Medtronic, Inc. ....................................... 1,200 62,775
Merck & Co., Inc. ..................................... 3,000 318,750
Pfizer, Inc. .......................................... 3,200 238,600
Pharmacia & Upjohn, Inc. .............................. 1,300 47,612
Schering-Plough Corp. ................................. 1,800 111,825
Tenet Healthcare Corp.* ............................... 800 26,500
United Healthcare Corp. ............................... 500 24,844
Warner-Lambert Co. .................................... 700 86,800
-----------
2,068,619
-----------
Metal (0.95%)
Alcan Aluminium Ltd. (Canada) ......................... 700 19,338
Aluminum Co. of America ............................... 500 35,187
Barrick Gold Corp. (Canada) ........................... 1,200 22,350
Freeport-McMoRan Copper & Gold, Inc. .................. 800 12,600
Illinois Tool Works, Inc. ............................. 700 42,087
Inco, Ltd. (Canada) ................................... 600 10,200
Newmont Mining Corp. .................................. 600 17,625
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Metal (continued)
Phelps Dodge Corp. .................................... 200 $ 12,450
Reynolds Metals Co. ................................... 300 18,000
-----------
189,837
-----------
Mortgage Banking (1.22%)
Countrywide Credit Industries, Inc. ................... 300 12,863
Fannie Mae ............................................ 2,600 148,362
Federal Home Loan Mortgage Corp. ...................... 1,700 71,294
Green Tree Financial Corp. ............................ 400 10,475
-----------
242,994
-----------
Office (0.56%)
Avery Dennison Corp. .................................. 400 17,900
Pitney Bowes, Inc. .................................... 400 35,975
Xerox Corp. ........................................... 800 59,050
-----------
112,925
-----------
Oil & Gas (8.29%)
Amerada Hess Corp. .................................... 300 16,463
Amoco Corp. ........................................... 1,200 102,150
Anadarko Petroleum Corp. .............................. 200 12,138
Apache Corp. .......................................... 400 14,025
Ashland, Inc. ......................................... 300 16,106
Atlantic Richfield Co. ................................ 800 64,100
Baker Hughes, Inc. .................................... 500 21,813
Burlington Resources, Inc. ............................ 600 26,888
Chevron Corp. ......................................... 1,600 123,200
Coastal Corp. (The) ................................... 300 18,581
Dresser Industries, Inc. .............................. 600 25,163
Enron Corp. ........................................... 800 33,250
Exxon Corp. ........................................... 6,000 367,125
Halliburton Co. ....................................... 700 36,356
Mobil Corp. ........................................... 1,900 137,156
Occidental Petroleum Corp. ............................ 900 26,381
Pennzoil Co. .......................................... 200 13,363
Phillips Petroleum Co. ................................ 800 38,900
Rowan Cos., Inc.* ..................................... 300 9,150
Royal Dutch Petroleum Co. (Netherlands) ............... 5,200 281,775
Schlumberger, Ltd. .................................... 1,200 96,600
Texaco, Inc. .......................................... 1,400 76,125
Union Pacific Resources Group ......................... 800 19,400
Unocal Corp. .......................................... 700 27,169
USX - Marathon Group .................................. 800 27,000
Williams Cos., Inc. (The) ............................. 1,000 28,375
-----------
1,658,752
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
66
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Paper & Paper Products (0.78%)
Champion International Corp. .......................... 300 $ 13,594
Fort James Corp. ...................................... 600 22,950
International Paper Co. ............................... 800 34,500
Kimberly-Clark Corp. .................................. 1,400 69,037
Union Camp Corp. ...................................... 300 16,106
-----------
156,187
-----------
Pollution Control (0.26%)
Browning-Ferris Industries, Inc. ...................... 500 18,500
Waste Management, Inc. ................................ 1,200 33,000
-----------
51,500
-----------
Printing - Commercial (0.09%)
Donnelley (R.R.) & Sons ............................... 500 18,625
-----------
Retail (5.30%)
Albertson's, Inc. ..................................... 700 33,162
American Stores Co. ................................... 800 16,450
AutoZone, Inc.* ....................................... 400 11,600
Circuit City Stores, Inc. ............................. 300 10,669
Costco Cos., Inc.* .................................... 600 26,775
CVS Corp. ............................................. 500 32,031
Dayton Hudson Corp. ................................... 600 40,500
Dillards, Inc. ........................................ 400 14,100
Federated Department Stores, Inc.* .................... 600 25,838
Gap, Inc. (The) ....................................... 1,050 37,209
Genuine Parts Co. ..................................... 700 23,756
Home Depot, Inc. ...................................... 1,800 105,975
Kmart Corp.* .......................................... 1,400 16,188
Kroger Co. * .......................................... 700 25,856
Limited, Inc. (The) ................................... 800 20,400
Lowe's Cos., Inc. ..................................... 500 23,844
May Department Stores ................................. 600 31,612
McDonald's Corp. ...................................... 1,700 81,175
Nordstrom, Inc. ....................................... 200 12,075
Penney (J. C.) Co., Inc. .............................. 600 36,187
Rite Aid Corp. ........................................ 300 17,606
Sears, Roebuck & Co. .................................. 1,000 45,250
Sysco Corp. ........................................... 500 22,781
Tandy Corp. ........................................... 300 11,569
TJX Cos., Inc. ........................................ 400 13,750
Toys "R" Us, Inc.* .................................... 800 25,150
Tricon Global Restaurants, Inc.* ..................... 500 14,531
Wal-Mart Stores, Inc. ................................. 5,500 216,906
Walgreen Co. .......................................... 1,200 37,650
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Retail (continued)
Winn-Dixie Stores, Inc. ............................... 500 $ 21,844
Woolworth Corp. * ..................................... 400 8,150
-----------
1,060,589
-----------
Rubber - Tires & Misc (0.13%)
Goodyear Tire & Rubber Co. (The) ..................... 400 25,450
-----------
Shoes & Related Apparel (0.14%)
Nike, Inc. (Class B) .................................. 700 27,475
-----------
Soap & Cleaning Preparations (1.69%)
Clorox Co. ............................................ 300 23,719
Colgate-Palmolive Co. ................................. 700 51,450
Proctor & Gamble Co. (The) ............................ 3,300 263,381
-----------
338,550
-----------
Steel (0.15%)
Allegheny Teledyne, Inc. .............................. 600 15,525
Nucor Corp. ........................................... 300 14,494
-----------
30,019
-----------
Telecommunications (3.87%)
A T & T Corp. ......................................... 4,000 245,000
Airtouch Communications, Inc. * ....................... 1,300 54,031
DSC Communications Corp. .............................. 400 9,600
Lucent Technologies, Inc. ............................. 1,600 127,800
MCI Communications Corp. .............................. 1,700 72,781
Northern Telecom Ltd. (Canada) ........................ 700 62,300
Sprint Corp. .......................................... 1,100 64,487
Tellabs, Inc.* ........................................ 500 26,438
U.S. West Media Group* ................................ 1,600 46,200
WorldCom, Inc.* ....................................... 2,200 66,550
-----------
775,187
-----------
Textile (0.16%)
Liz Claiborne, Inc. ................................... 300 12,544
V.F. Corp. ............................................ 400 18,375
-----------
30,919
-----------
Tobacco (1.47%)
Philip Morris Cos., Inc. .............................. 5,900 267,344
UST, Inc. ............................................. 700 25,856
-----------
293,200
-----------
Transport (1.16%)
AMR Corp.* ............................................ 200 25,700
Burlington Northern Santa Fe .......................... 400 37,175
CSX Corp. ............................................. 600 32,400
Delta Air Lines, Inc. ................................. 200 23,800
Federal Express Corp. * ............................... 300 18,319
Norfolk Southern Corp. ................................ 1,000 30,812
SEE NOTES TO FINANCIAL STATEMENTS.
67
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Transport (continued)
Southwest Airlines Co. ................................ 600 $ 14,775
Union Pacific Corp. ................................... 600 37,462
US Airways Group, Inc.* ............................... 200 12,500
-----------
232,943
-----------
Utilities (6.63%)
Alltel Corp. .......................................... 600 24,638
American Electric Power Co., Inc. ..................... 600 30,975
Ameritech Corp. ....................................... 1,400 112,700
Bell Atlantic Corp. ................................... 1,900 172,900
BellSouth Corp. ....................................... 2,400 135,150
Central & South West Corp. ............................ 800 21,650
Consolidated Edison Co. of NY, Inc. ................... 700 28,700
Consolidated Natural Gas Co. .......................... 300 18,150
Dominion Resources, Inc. .............................. 600 25,538
Duke Energy Corp. ..................................... 900 49,838
Edison International .................................. 1,100 29,906
Entergy Corp. ......................................... 900 26,944
FirstEnergy Corp. * ................................... 800 23,200
FPL Group, Inc. ....................................... 500 29,594
Frontier Corp. ........................................ 600 14,438
GTE Corp. ............................................. 2,400 125,400
Houston Industries, Inc. .............................. 1,000 26,688
PacifiCorp ............................................ 1,100 30,044
PECO Energy Co. ....................................... 900 21,825
PG&E Corp. ............................................ 1,200 36,525
Public Service Enterprise Group, Inc. ................. 800 25,350
SBC Communications, Inc. .............................. 2,200 161,150
Southern Co. .......................................... 1,800 46,575
Texas Utilities Co. ................................... 700 29,094
Unicom Corp. .......................................... 700 21,525
US WEST Communications Group .......................... 1,300 58,662
-----------
1,327,159
-----------
TOTAL COMMON STOCKS
(Cost $17,791,716) (93.41%) 18,688,297
------- -----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (6.32%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 11.25% due
02-15-15 and 9.25% due
02-15-16) - Note A.................. 6.60% $1,265 $ 1,265,000
-----------
TOTAL SHORT-TERM INVESTMENTS ( 6.32%) 1,265,000
------- -----------
TOTAL INVESTMENTS ( 99.73%) 19,953,297
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 0.27%) 54,520
------- -----------
TOTAL NET ASSETS (100.00%) $20,007,817
======= ===========
* 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.
68
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
Schedule of Investments
December 31, 1997
Per share earnings and dividends and their compound growth rates are shown for
the most recently reported ten year periods on common stocks, and are not
audited.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
--------- -------- ------
<S> <C> <C> <C>
COMMON STOCKS
Advertising (1.39%)
3,400 Interpublic Group, Inc. @ 49 13/16......................................... $ 169,363
----------
One of the largest advertising agencies in the world
Earnings P/S.......$ .60, .70, .79, .87, 1.00, 1.11, 1.25, 1.11, 1.71, 1.82 13.1%
Dividends P/S............$ .17, .21, .25, .27, .30, .33, .36, .40, .44, .50 12.7%
Price/Earnings Ratio...................................................27.4
Banks (7.21%)
2,600 Banc One Corp. @ 54 5/16................................................... 141,212
Ohio-based bank holding company
Earnings P/S...$ 1.43, 1.45, 1.66, 1.72, 2.08, 2.62, 2.20, 2.91, 3.23, 2.25 5.2%
Dividends P/S........$ .50, .57, .63, .70, .81, .98, 1.13, 1.24, 1.36, 1.52 13.1%
Price/Earnings Ratio...................................................24.7
1,300 BB&T Corp. @ 64 1/16....................................................... 83,281
Full-service commercial and retail bank
Earnings P/S....$ .95, 1.13, 1.19, 1.01, 1.36, 1.84, 2.13, 2.21, 2.34, 2.54 11.5%
Dividends P/S...........$ .34, .36, .38, .42, .46, .50, .64, .74, .86, 1.00 12.7%
Price/Earnings Ratio...................................................23.4
700 First Tennessee National Corp. @ 66 3/4.................................... 46,725
Tennessee-based bank holding company
Earnings P/S....$ 1.10, .61, 1.00, 1.32, 1.60, 1.66, 2.15, 2.42, 2.68, 2.97 11.7%
Dividends P/S..........$ .43, .49, .54, .57, .63, .75, .87, .97, 1.10, 1.23 12.4%
Price/Earnings Ratio...................................................22.3
2,200 First Union Corp. @ 51 1/4................................................. 112,750
North Carolina-based bank holding company
Earnings P/S...$ 1.38, 1.20, 1.26, 1.28, 1.12, 2.37, 2.29, 2.52, 2.68, 3.43 10.6%
Dividends P/S..........$ .43, .50, .54, .56, .64, .75, .86, .98, 1.10, 1.22 12.3%
Price/Earnings Ratio...................................................14.9
2,500 KeyCorp. @ 70 13/16........................................................ 177,031
Bank holding company with offices from coast to coast.
Earnings P/S....$ 2.10, 2.32, 2.32, 1.31, 2.39, 2.89, 3.45, 3.3, 3.37, 3.73 6.6%
Dividends P/S.......$ .68, .80, .88, .92, .98, 1.12, 1.28, 1.44, 1.52, 1.68 10.6%
Price/Earnings Ratio...................................................18.9
3,000 NationsBank Corp. @ 60 13/16............................................... 182,438
Largest superregional bank in the Southeast
Earnings P/S....$ 1.44, 2.22, 1.31, .38, 2.30, 2.50, 3.06, 3.57, 4.00, 4.22 12.7%
Dividends P/S.........$ .47, .55, .71, .74, .76, .82, .94, 1.04, 1.20, 1.32 12.2%
Price/Earnings Ratio...................................................14.4
3,500 Norwest Corp. @ 38 5/8..................................................... 135,188
The 12th largest bank holding company in the U.S.
Earnings P/S.........$ .57, .63, .22, .73, .71, .95, 1.23, 1.38, 1.54, 1.69 12.8%
Dividends P/S............$ .16, .19, .21, .24, .27, .32, .38, .45, .53, .62 16.2%
Price/Earnings Ratio...................................................22.5
----------
878,625
----------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Sovereign Investors Fund on December 31, 1997. It is divided into three main
catagories: common stocks, U.S. government and agencies obligations and
short-term investments. Common stocks are further broken down by industry group.
Short-term investments, which represent the Fund's "cash" position, are listed
last.
Beverages (0.45%)
1,500 PepsiCo, Inc. @ 36 7/16.................................................... $ 54,656
----------
Second largest soft drink company
Earnings P/S..........$ .48, .57, .69, .68, .81, .98, 1.11, 1.00, .72, 1.07 9.3%
Dividends P/S............$ .12, .15, .18, .21, .23, .28, .32, .36, .41, .47 16.4%
Price/Earnings Ratio...................................................33.6
Building (1.63%)
3,900 Masco Corp. @ 50 7/8....................................................... 198,413
----------
Manufactures buildings, home improvement and consumer products
Earnings P/S.....$ 2.03, 1.42, .91, .30, 1.21, 1.45, 1.09, 1.25, 1.84, 2.23 1.1%
Dividends P/S............$ .44, .50, .54, .57, .61, .65, .69, .73, .77, .81 7.0%
Price/Earnings Ratio...................................................22.7
Chemicals (12.51%)
5,000 Air Products & Chemicals, Inc. @ 82 1/4.................................... 411,250
Producer of industrial gases
Earnings P/S...$ 1.95, 2.02, 2.08, 2.23, 2.45, 1.76, 2.05, 3.29, 3.73, 3.90 8.0%
Dividends P/S.........$ .55, .63, .69, .75, .83, .89, .95, 1.01, 1.07, 1.15 8.5%
Price/Earnings Ratio...................................................21.4
5,900 BetzDearborn,Inc. @ 61 1/16................................................ 360,269
Produces and markets a wide range of engineered programs and specialty
chemical products for process systems
Earnings P/S...$ 1.58, 1.77, 2.12, 2.47, 2.71, 2.05, 2.43, 2.27, 2.10, 2.47 5.1%
Dividends P/S....$ .80, .89, 1.01, 1.16, 1.30, 1.38, 1.42, 1.46, 1.49, 1.51 7.3%
Price/Earnings Ratio...................................................24.9
17,000 RPM, Inc. @ 15 1/4......................................................... 259,250
Manufacturer of specialty chemicals and coatings to waterproof and
rustproof structures
Earnings P/S.............$ .30, .37, .34, .44, .47, .47, .60, .68, .72, .80 11.5%
Dividends P/S............$ .20, .22, .24, .27, .29, .31, .34, .36, .39, .42 8.6%
Price/Earnings Ratio...................................................19.2
7,000 Schulman (A), Inc. @ 25 1/8................................................ 175,875
Manufactures proprietary and custom plastic compounds, buys and
sells plastic resins and distributes plastic products and synthetic
rubber for prime producers in domestic and international markets
Earnings P/S......$ .73, .82, .64, 1.15, 1.18, 1.04, 1.19, 1.43, 1.12, 1.37 7.2%
Dividends P/S............$ .11, .14, .16, .19, .22, .26, .30, .34, .38, .42 16.1%
Price/Earnings Ratio...................................................16.3
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
--------- -------- ------
<S> <C> <C> <C>
Chemicals (continued)
8,000 Sigma - Aldrich Corp. @ 39 3/4............................................. $ 318,000
Manufacturer of biochemical and organic products used for research and diagnostics
Earnings P/S........$ .57, .65, .72, .80, .96, 1.08, 1.11, 1.32, 1.48, 1.61 12.2%
Dividends P/S............$ .08, .09, .10, .11, .13, .15, .17, .19, .23, .26 14.0%
Price/Earnings Ratio...................................................24.7
----------
1,524,644
----------
Computers (4.06%)
4,000 Automatic Data Processing, Inc. @ 61 3/8................................... 245,500
Largest independent computing services firm in the U.S.
Earnings P/S........$ .55, .63, .72, .82, .92, 1.04, 1.19, 1.38, 1.57, 1.76 13.8%
Dividends P/S............$ .13, .15, .17, .20, .23, .26, .29, .35, .42, .48 15.6%
Price/Earnings Ratio...................................................33.3
4,000 Hewlett-Packard Co. @ 62 1/2............................................... 250,000
Manufactures and services electronic measurement, analysis and computation instruments
Earnings P/S........$ .84, .88, .77, .76, .87, 1.16, 1.54, 2.32, 2.46, 2.95 15.0%
Dividends P/S............$ .07, .10, .11, .13, .20, .24, .29, .38, .46, .54 25.5%
Price/Earnings Ratio...................................................21.9
----------
495,500
----------
Containers (5.48%)
5,700 Bemis Company, Inc. @ 44 1/16.............................................. 251,156
Producer of a broad range of flexible packaging and equipment and pressure sensitive materials
Earnings P/S.......$ .74, .90, .99, 1.03, 1.10, .89, 1.40, 1.63, 1.90, 1.93 11.2%
Dividends P/S............$ .22, .30, .36, .42, .46, .50, .54, .64, .72, .80 15.4%
Price/Earnings Ratio...................................................22.7
12,000 Sonoco Products Corp. @ 34 11/16........................................... 416,250
Leading manufacturer of containers, paper products and packaging
Earnings P/S.....$ 1.05, 1.12, .55, 1.05, .89, 1.29, 1.33, 1.72, 1.81, 1.81 6.2%
Dividends P/S............$ .30, .39, .43, .44, .48, .50, .53, .59, .65, .71 10.0%
Price/Earnings Ratio...................................................18.9
----------
667,406
----------
Diversified Operations (3.47%)
3,300 DuPont (E.I.) De Nemours & Co. @ 60 1/16................................... 198,206
Nation's largest chemical manufacturer
Earnings P/S.....$ 1.52, 1.77, 1.70, 1.04, .72, .42, 2.00, 2.81, 3.24, 2.65 6.4%
Dividends P/S.........$ .62, .73, .81, .84, .87, .88, .91, 1.02, 1.12, 1.23 7.9%
Price/Earnings Ratio...................................................22.9
8,000 Ikon Office Solutions, Inc. @ 28 1/8....................................... 225,000
Distributor of office and paper products
Earnings P/S.......$ 1.06, 1.14, .88, .85, 1.11, (.02), .55, .86, 1.12, .77 NMF
Dividends P/S..$ .080, .089, .097, .103, .106, .111, .117, .123, .129, .160 8.0%
Price/Earnings Ratio...................................................36.3
----------
423,206
----------
Electronics (9.95%)
6,000 AMP, Inc. @ 42 ......................................................... $ 252,000
World's largest manufacturer of electrical/electronic connectors
Earnings P/S.........$ 1.48, 1.32, 1.35, 1.23, 1.38, 1.42, 1.72, 1.96, 1.31 NMF
Dividends P/S..........$ .50, .60, .68, .72, .76, .80, .84, .92, 1.00, 1.04 8.5%
Price/Earnings Ratio...................................................32.0
3,200 Emerson Electric Co. @ 56 7/16............................................. 180,600
Produces and sells electrical/electronic products and systems
Earnings P/S...$ 1.16, 1.32, 1.38, 1.42, 1.48, 1.58, 2.02, 2.08, 2.28, 2.52 9.0%
Dividends P/S..........$ .52, .58, .64, .67, .70, .74, .80, .92, 1.01, 1.11 8.8%
Price/Earnings Ratio...................................................22.5
600 General Electric Co. @ 73 3/8.............................................. 44,025
Dominant force in home appliances, electrical power, and financial services
Earnings P/S....$ .94, 1.09, 1.21, 1.28, 1.26, 1.23, 1.73, 1.95, 2.20. 2.42 11.1%
Dividends P/S...........$ .35, .41, .47, .51, .56, .63, .72, .82, .92, 1.04 12.9%
Price/Earnings Ratio...................................................30.6
3,600 Grainger (W.W.), Inc. @ 97 3/16............................................ 349,875
Leading distributor of electrical equipment
Earnings P/S...$ 1.96, 2.20, 2.31, 2.37, 2.58, 2.88, 2.50, 3.64, 4.04, 4.36 9.3%
Dividends P/S...........$ .43, .50, .57, .61, .65, .71, .78, .89, .98, 1.06 10.5%
Price/Earnings Ratio...................................................22.4
4,500 Honeywell, Inc. @ 68 1/2................................................... 308,250
Makes automation and control systems.
Earnings P/S.$ (2.73), 3.12, 2.45, 2.35, 2.89, 2.40, 2.15, 2.62, 3.18, 3.51 NMF
Dividends P/S.........$ .51, .55, .69, .77, .84, .91, .97, 1.01, 1.06, 1.09 8.8%
Price/Earnings Ratio...................................................19.9
1,500 Rockwell International Corp. @ 52 1/4...................................... 78,375
Leading producer of aerospace, automotive and electronics products
Earnings P/S...$ 2.23, 3.01, 2.84, 2.47, 2.20, 2.47, 2.80, 3.15, 3.79, 2.74 2.3%
Dividends P/S...........$ .58, .63, .68, .72, .77, .81, .84, .91, .97, 1.02 6.5%
Price/Earnings Ratio...................................................16.9
----------
1,213,125
----------
Food (1.34%)
6,300 Archer-Daniel Midland Co. @ 21 11/16....................................... 136,631
Processes and merchandises agricultural products
Earnings P/S...........$ .53, .65, .74, .71, .81, .86, .81, 1.34, 1.20, .66 2.5%
Dividends P/S..$ .028, .033, .046, .048, .050, .053, .063, .110, .184, .193 23.9%
Price/Earnings Ratio...................................................24.2
800 ConAgra, Inc. @ 32 13/16................................................... 26,250
Leader in frozen & processed foods, and distributes agricultural supplies
Earnings P/S...........$ .43, .54, .62, .71, .75, .79, .91, 1.03, .40, 1.34 13.5%
Dividends P/S............$ .15, .18, .21, .24, .28, .32, .37, .43, .49, .57 16.0%
Price/Earnings Ratio...................................................23.4
----------
162,881
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
--------- -------- ------
<S> <C> <C> <C>
Furniture (2.75%)
8,000 Leggett & Platt, Inc. @ 41 7/8............................................. $ 335,000
----------
Produces intermediate products for the home furnishings industry
Earnings P/S........$ .35, .66, .42, .56, .82, 1.05, 1.39, 1.49, 1.67, 2.08 21.9%
Dividends P/S............$ .16, .19, .21, .22, .23, .27, .31, .38, .46, .54 14.5%
Price/Earnings Ratio...................................................20.4
Insurance (6.04%)
700 AFLAC Corp. @ 51 1/8....................................................... 35,787
Global specialty insurer
Earnings P/S.......$ .72, .53, .77, .97, 1.19, 1.55, 1.89, 2.33, 2.73, 4.39 22.2%
Dividends P/S............$ .13, .15, .18, .20, .23, .26, .30, .34, .39, .45 14.8%
Price/Earnings Ratio...................................................11.4
300 American International Group @ 108 3/4..................................... 32,625
Broadly based property-casualty insurance organization
Earnings P/S...$ 1.74, 1.97, 2.05, 2.16, 2.27, 2.68, 3.05, 3.53, 4.10, 4.57 11.3%
Dividends P/S............$ .08, .10, .12, .14, .16, .17, .19, .22, .25, .28 14.9%
Price/Earnings Ratio...................................................24.1
3,000 Chubb Corp. @ 75 5/8....................................................... 226,875
Property and casualty insurance.
Earnings P/S...$ 2.14, 2.46, 3.04, 3.16, 3.48, 1.96, 2.98, 3.70, 2.75, 3.46 5.5%
Dividends P/S..........$ .54, .58, .66, .74, .80, .86, .92, .98, 1.08, 1.16 8.9%
Price/Earnings Ratio...................................................22.0
350 General RE Corp. @ 212..................................................... 74,200
Broadly based re-insurance organization
Earnings P/S..$ 5.09, 6.52, 6.89, 7.46, 6.84, 8.11, 7.97, 9.92, 11.0, 11.91 9.9%
Dividends P/S..$ 1.20, 1.36, 1.52, 1.68, 1.80, 1.88, 1.92, 1.96, 2.04, 2.20 7.0%
Price/Earnings Ratio...................................................17.8
4,000 Reliastar Financial Corp. @ 41 3/16........................................ 164,750
Financial services company engaged in life/health insurance and consumer finance
Earnings P/S.....$ 1.04, 1.00, .98, .86, 1.04, 1.32, 1.65, 2.18, 2.52, 2.57 10.6%
Dividends P/S............$ .29, .30, .32, .35, .37, .39, .44, .49, .55, .61 8.6%
Price/Earnings Ratio...................................................16.0
3,750 Travelers Group, Inc. @ 53 7/8............................................. 202,031
Diversified financial services company
Earnings P/S......$ .91, .71, .82, 1.07, 1.67, 1.94, 1.93, 2.75, 3.50, 3.00 14.2%
Dividends P/S..........$ .045, .048, .06, .08, .12, .16, .19, .27, .30, .40 27.5%
Price/Earnings Ratio...................................................17.8
----------
736,268
----------
Machinery (5.41%)
8,000 Dover Corp. @ 36 1/8....................................................... 289,000
Manufactures a variety of specialized industrial products
Earnings P/S..........$ .56, .57, .64, .54, .56, .69, .89, 1.23, 1.72, 1.73 13.4%
Dividends P/S............$ .16, .18, .19, .21, .22, .23, .25, .28, .32, .36 9.4%
Price/Earnings Ratio...................................................20.8
10,300 Pentair, Inc. @ 35 15/16................................................... $ 370,156
Manufactures enclosures for electrical, electronic, woodworking and power tool equipment
Earnings P/S.....$ 1.23, .99, .84, 1.10, 1.07, 1.13, 1.21, 1.48, 1.83, 2.07 6.0%
Dividends P/S............$ .22, .27, .29, .31, .33, .34, .36, .40, .50, .54 10.5%
Price/Earnings Ratio...................................................16.8
----------
659,156
----------
Media (0.93%)
400 Gannett Co., Inc. @ 61 13/16............................................... 24,725
Publishes 81 daily/50 nondaily newspapers, operates 10 TV , 8 FM and 7 AM stations
Earnings P/S...$ 1.13, 1.24, 1.18, 1.00, 1.20, 1.36, 1.62, 1.64, 2.22, 2.74 10.3%
Dividends P/S............$ .51, .56, .61, .62, .63, .65, .67, .69, .71, .74 4.2%
Price/Earnings Ratio...................................................22.1
1,200 McGraw-Hill Companies, Inc. @ 74........................................... 88,800
Provides informational products and services for business and industry
Earnings P/S.....$ 1.92, .41, 1.77, 1.52, 1.57, .12, 2.05, 2.28, 4.96, 5.32 12.0%
Dividends P/S...$ .92, 1.00, 1.08, 1.10, 1.12, 1.14, 1.16, 1.20, 1.32, 1.44 5.1%
Price/Earnings Ratio...................................................13.6
----------
113,525
----------
Medical (9.22%)
3,000 Abbott Laboratories @ 65 9/16.............................................. 196,687
Major pharmaceutical and healthcare firm
Earnings P/S.....$ .83, .96, 1.11, 1.28, 1.47, 1.69, 1.87, 2.12, 2.41, 2.64 13.7%
Dividends P/S...........$ .29, .34, .40, .48, .58, .66, .74, .82, .93, 1.05 15.4%
Price/Earnings Ratio...................................................25.5
2,000 American Home Products Corp. @ 76 1/2...................................... 153,000
Pharmaceutical and healthcare company
Earnings P/S...$ 1.61, 1.77, 3.01, 2.18, 1.83, 2.37, 2.49, 2.71, 2.96, 3.08 7.5%
Dividends P/S....$ .90, .98, 1.08, 1.19, 1.33, 1.43, 1.47, 1.51, 1.57, 1.66 7.0%
Price/Earnings Ratio...................................................25.0
4,600 Baxter International, Inc. @ 50 7/16....................................... 232,012
The company operates four divisions: renal, biotech, cardiovascular
and intravenous systems and international distribution
Earnings P/S..$ 1.31, 1.50, (.05), 1.73, 1.99, (.97), 1.45, 1.34, 2.11. .99 NMF
Dividends P/S.........$ .47, .52, .60, .69, .80, .93, .95, 1.03, 1.11, 1.14 10.3%
Price/Earnings Ratio...................................................50.6
5,000 Becton, Dickinson & Co. @ 50............................................... 250,000
Manufactures broad line of medical supplies
Earnings P/S....$ .92, 1.00, 1.17, 1.22, 1.29, 1.36, 1.53, 1.79, 2.11, 2.30 10.7%
Dividends P/S............$ .22, .26, .28, .29, .31, .34, .38, .42, .48, .54 10.5%
Price/Earnings Ratio...................................................21.7
3,000 Johnson & Johnson @ 65 7/8................................................. 197,625
Major producer of prescription and non-prescription drugs,
toiletries, medical instruments and supplies
Earnings P/S......$ .72, .81, .86, 1.10, 1.23, 1.37, 1.56, 1.86, 2.17, 2.42 14.4%
Dividends P/S............$ .24, .28, .33, .39, .45, .51, .57, .64, .74, .85 15.1%
Price/Earnings Ratio...................................................26.9
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
--------- -------- ------
<S> <C> <C> <C>
Medical (continued)
600 Lilly (Eli) & Co. @ 69 5/8................................................. $ 41,775
Major producer of prescription and non-prescription drugs, health products
Earnings P/S........$ .67, .80, .98, 1.13, .70, .40, 1.03, 1.15, 1.39, 1.61 10.2%
Dividends P/S............$ .29, .34, .41, .50, .55, .61, .63, .65, .69, .74 11.0%
Price/Earnings Ratio...................................................42.8
1,000 Medtronic, Inc. @ 52 5/16.................................................. 52,313
Leading manufacturer of medical devices and instruments
Earnings P/S............$ .20, .23, .24, .28, .34, .45, .51, .64, .94, 1.11 21.0%
Dividends P/S..........$ .035, .045, .05, .06, .07, .09, .11, .13, .16, .21 22.0%
Price/Earnings Ratio...................................................41.7
----------
1,123,412
----------
Metal (0.54%)
4,000 Worthington Industries, Inc. @ 16 1/2...................................... 66,000
----------
Manufactures metal and plastic products
Earnings P/S...........$ .61, .70, .61, .50, .63, .76, .94, 1.29, 1.05, .97 5.3%
Dividends P/S............$ .19, .23, .26, .28, .32, .34, .39, .43, .47, .51 11.6%
Price/Earnings Ratio...................................................18.6
Office (0.74%)
1,000 Pitney Bowes, Inc. @ 89 15/16.............................................. 89,938
----------
Manufactures office automation equipment
Earnings P/S...$ 1.50, 1.13, 1.30, 1.80, 1.96, 1.92, 2.21, 2.68, 3.12, 3.43 9.6%
Dividends P/S........$ .46, .52, .60, .68, .78, .90, 1.04, 1.20, 1.38, 1.60 14.9%
Price/Earnings Ratio...................................................26.1
Oil & Gas (1.90%)
600 Exxon Corp. @ 61 3/16...................................................... 36,713
Major factor in the crude oil, natural gas and chemical industry
Earnings P/S...$ 1.98, 1.16, 1.98, 2.23, 1.91, 2.11, 2.04, 2.59, 3.01, 3.40 6.2%
Dividends P/S..$ 1.08, 1.15, 1.24, 1.34, 1.42, 1.44, 1.46, 1.50, 1.56, 1.63 4.7%
Price/Earnings Ratio...................................................18.2
2,700 Mobil Corp. @ 72 3/16...................................................... 194,906
One of the largest integrated, international oil companies with interest
in petro-chemicals and plastics
Earnings P/S...$ 2.47, 2.20, 2.30, 2.33, 1.57, 2.54, 2.14, 2.94, 3.69, 4.05 5.6%
Dividends P/S..$ 1.18, 1.28, 1.41, 1.56, 1.60, 1.63, 1.70, 1.81, 1.96, 2.12 6.7%
Price/Earnings Ratio...................................................17.9
----------
231,619
----------
Retail (4.57%)
2,500 Dayton Hudson Corp. @ 67 1/2............................................... 168,750
General merchandiser selling through Target and Marvyn stores
Earnings P/S....$ .80, 1.15, 1.79, 1.80, 1.29, 1.67, 1.66, 1.92, 1.34, 2.07 11.1%
Dividends P/S............$ .34, .37, .44, .48, .51, .53, .56, .58, .61, .66 7.6%
Price/Earnings Ratio...................................................23.5
3,000 Home Depot, Inc. @ 58 7/8.................................................. $ 176,625
Operates a chain of retail building supply/home improvement "warehouse" stores
Earnings P/S..........$ .15, .21, .30, .40, .55, .67, .88, 1.03, 1.29, 1.50 29.2%
Dividends P/S............$ .01, .02, .03, .04, .06, .08, .10, .13, .15, .19 38.7%
Price/Earnings Ratio.....................................................39
3,600 Sysco Corp. @ 45 9/16...................................................... 164,025
Largest distributor of food service products
Earnings P/S........$ .45, .60, .73, .84, .93, 1.08, 1.18, 1.38, 1.52, 1.71 16.0%
Dividends P/S............$ .08, .09, .10, .14, .22, .28, .36, .44, .52, .60 25.1%
Price/Earnings Ratio...................................................25.3
1,200 Wal-Mart Stores, Inc. @ 39 7/16............................................ 47,325
Operates chain of discount department stores
Earnings P/S........$ .37, .48, .57, .70, .87, 1.02, 1.17, 1.19, 1.33, 1.47 16.6%
Dividends P/S............$ .04, .06, .07, .09, .11, .13, .17, .20, .21, .27 23.6%
Price/Earnings Ratio...................................................26.8
----------
556,725
----------
Soap & Cleaning Preparations (0.68%)
1,500 Ecolab, Inc. @ 55 7/16..................................................... 83,156
----------
Develops and markets premium institutional cleansing, sanitizing and
maintenance products and services
Earnings P/S......$ .82, .05, 1.07, .96, 1.03, 1.23, 1.25, 1.50, 1.75, 2.01 10.5%
Dividends P/S............$ .32, .33, .34, .35, .36, .40, .46, .52, .58, .67 8.6%
Price/Earnings Ratio...................................................27.6
Steel (0.63%)
1,600 Nucor Corp. @ 48 5/16...................................................... 77,300
----------
Manufactures steel and steel products
Earnings P/S........$ .84, .68, .88, .75, .92, 1.42, 2.60, 3.14, 2.83, 3.42 16.9%
Dividends P/S.............$ .10, .11, .12, .13, .14, .16, .18, 28, .32, .40 16.6%
Price/Earnings Ratio...................................................14.4
Utilities (8.56%)
3,000 Ameritech Corp. @ 80 1/2................................................... 241,500
Provider of local telephone service
Earnings P/S...$ 2.27, 2.30, 2.37, 2.20, 2.51, 2.78, 2.13, 3.63, 3.87, 4.10 6.8%
Dividends P/S..$ 1.35, 1.46, 1.58, 1.70, 1.76, 1.84, 1.92, 2.00, 2.12, 2.26 5.9%
Price/Earnings Ratio...................................................20.0
3,000 Century Telephone Enterprise,
Inc. @ 49 13/16 ......................................................... 149,438
Louisiana based telecommunications company
Earnings P/S.......$ .57, .49, .67, .80, 1.25, 1.35, 1.88, 1.97, 2.15, 3.11 20.7%
Dividends P/S..$ .264, .272, .280, .287, .293, .310, .320, .330, .360, .370 3.8%
Price/Earnings Ratio...................................................15.9
1,500 Duke Energy Corp. @ 55 3/8................................................. 83,063
Generates, transmits, distributes and sells electric energy
in the Piedmont sections of North and South Carolina
Earnings P/S...$ 1.95, 2.57, 2.40, 2.60, 2.21, 2.80, 2.88, 3.25, 3.37, 2.61 3.3%
Dividends P/S..$ 1.42, 1.52, 1.60, 1.68, 1.76, 1.84, 1.92, 2.00, 2.08, 2.16 4.8%
Price/Earnings Ratio...................................................21.2
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
--------- -------- ------
<S> <C> <C> <C>
Utilities (continued)
4,400 National Fuel Gas Co. @ 48 11/16........................................... $ 214,225
Integrated natural gas system serving N.Y., P.A. and O.H.
Earnings P/S...$ 1.65, 1.93, 1.83, 1.63, 1.94, 2.15, 2.23, 2.03, 2.78, 3.01 6.9%
Dividends P/S..$ 1.25, 1.32, 1.40, 1.45, 1.49, 1.53, 1.57, 1.61, 1.67, 1.73 0.5%
Price/Earnings Ratio...................................................16.0
2,200 Questar Corp. @ 44 5/8..................................................... 98,175
Diversified holding company for Utah, Wyoming and Colorado
natural gas transmission, distribution and storage
Earnings P/S....$ .64, 1.28, 1.46, 1.63, 1.85, 2.10, 1.21, 2.05, 2.39, 2.55 16.6%
Dividends P/S.....$ .94, .95, .97, 1.01, 1.04, 1.09, 1.13, 1.16, 1.19, 1.24 3.1%
Price/Earnings Ratio...................................................17.2
3,500 SBC Communications, Inc. @ 73 1/4.......................................... 256,375
Provides telephone service throughout the United States and internationally
Earnings P/S...$ 1.74, 1.76, 1.82, 1.84, 1.93, 2.17, 2.39, 2.74, 3.10, 3.46 7.9%
Dividends P/S.$ 1..22, 1.29, 1.36, 1.41, 1.45, 1.50, 1.56, 1.63, 1.70, 1.77 4.2%
Price/Earnings Ratio...................................................20.5
----------
1,042,776
----------
TOTAL COMMON STOCKS
(Cost $9,790,642) (89.46%) 10,902,694
----------
<CAPTION>
PAR VALUE
(000s
OMITTED)
--------
UNITED STATES GOVERNMENT
AND AGENCIES OBLIGATIONS
$100 United States Treasury, Bond 10.750%,
08-15-05 @ 130.0940........................................................ 130,094
100 United States Treasury, Note 7.875%,
11-15-99 @ 103.8440........................................................ 103,844
400 United States Treasury, Note 5.875%,
09-30-02 @ 100.5470........................................................ 402,188
----------
TOTAL UNITED STATES GOVERNMENT
AND AGENCIES OBLIGATIONS
(Cost $630,453) (5.22%) 636,126
----------
<CAPTION>
PAR VALUE
(000s INTEREST MARKET
OMITTED) RATE VALUE
-------- -------- ------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
$1,491 Joint Repurchase Agreement (12.24%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U. S.
Treasury Bonds,7.25% thru
13.25%, due 11-15-08 thru
11-15-16 and by U.S. Treasury
Note 6.50% due 04-30-99 -
Note A .................................................................... 6.60% $ 1,491,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ........................................................ 161
-----------
TOTAL SHORT-TERM INVESTMENTS ( 12.24%) 1,491,161
------- -----------
TOTAL INVESTMENTS (106.92%) 13,029,981
------- -----------
OTHER ASSETS AND LIABILITIES, NET ( 6.92%) (843,042)
------- -----------
TOTAL NET ASSETS (100.00%) $12,186,939
======= ===========
</TABLE>
NMF = No Meaningful Figure
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.
73
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. World Bond Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
BONDS
British Pound Sterling (6.51%)
United Kingdom Treasury,
Bond 11-06-01# ......................... 7.000% 90 $ 149,857
----------
U.S. Dollar (87.18%)
Federal Home Loan Bank,
Bond 10-15-03 .......................... 5.440 $150 146,179
Bond 03-26-07 .......................... 6.945 100 106,269
Federal National Mortgage Assn.,
Note Ser MTN 10-23-02 .................. 6.080 250 251,399
Federative Republic of Brazil, (Brazil),
Global Bond 11-05-01 ................... 8.875 50 49,625
Republic of Ecuador, (Ecuador),
Unsub Deb 04-25-02 (R) ................. 11.250 50 51,625
Republic of Panama, (Panama),
Note Ser REGS 02-13-02 ................. 7.875 50 48,375
Republic of South Africa, (South Africa),
Note 06-23-17 .......................... 8.500 50 47,500
Republic of Venezuela, (Venezuela),
Floating Rate Note Ser C 12-30-03 ...... 7.188* 50 47,000
United Mexican States, (Mexico),
Global Bond 02-06-01 ................... 9.750 50 52,000
United States Treasury,
Bond 08-15-27 .......................... 6.375 150 158,203
Note 05-31-02 .......................... 6.500 550 566,071
Note 07-31-02 .......................... 6.000 200 202,094
Note 05-15-07 .......................... 6.625 120 127,013
Note 08-15-07 .......................... 6.125 150 154,149
----------
2,007,502
----------
TOTAL BONDS
(Cost $2,124,783) (93.69%) 2,157,359
------ ----------
The Schedule of Investments is a complete list of all securities owned by V.A.
World Bond Fund on December 31, 1997. It's divided into two main categories:
bonds and short-term investments. The bonds are further broken down by currency
denomination. Short-term investments, which represent the Fund's "cash"
position, are listed last.
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.56%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 11.25%
Due 02-15-15 and 9.25%
Due 02-15-16) - Note A ................. 6.60% $128 $ 128,000
----------
TOTAL SHORT-TERM INVESTMENTS ( 5.56%) 128,000
------- ----------
TOTAL INVESTMENTS ( 99.25%) 2,285,359
------- ----------
OTHER ASSETS AND LIABILITIES, NET ( 0.75%) 17,237
------- ----------
TOTAL NET ASSETS (100.00%) $2,302,596
======= ==========
* Represents rate in effect on December 31, 1997.
# Par value of non U.S. dollar denominated foreign bonds is expressed in
local currency for each country listed.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $51,625 or 2.24% of the Fund's net assets
as of December 31, 1997.
MTN = Medium Term Note.
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.
74
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. World Bond Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by the U.S. government, its agencies
or instrumentalities, foreign governments and companies. The performance of the
Fund is closely tied to the economic condition within the countries in which it
invests. The concentration of investments by currency denomination for
individual securities held by the Fund is shown in the schedule of investments.
In addition, concentration of investments can be aggregated by various
investment categories. The table below shows the percentages of the Fund's
investments at December 31, 1997 assigned to the various investment categories.
MARKET VALUE AS A
INVESTMENT CATEGORIES % OF FUND'S NET ASSETS
- --------------------- ----------------------
Government - Foreign ................................... 19.37%
Government - U.S. ...................................... 52.44
Government - U.S. Agencies ............................. 21.88
Short-term Investments ................................. 5.56
-----
TOTAL INVESTMENTS 99.25%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
75
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
Schedule of Investments
December 31, 1997
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
BONDS
Advertising (1.92%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 ........... 9.375% B1 $100 $ 106,500
----------
Banks - Foreign (1.85%)
International Bank for
Reconstruction &
Development, Sr Note
(South Africa) 07-21-98# ....... 15.000 AAA 500 102,332
----------
Containers (3.57%)
Riverwood International
Corp., Gtd Sr Sub
Note 04-01-08 .................. 10.875 CCC+ 100 94,500
Stone Container Corp.,
Unit (Sr Sub Deb &
Supplemental Interest Cert)
04-01-02 ....................... 12.250 B- 100 103,500
----------
198,000
----------
Diversified Operations (1.95%)
Euramax International Plc,
Sr Sub Note (United Kingdom)
10-01-06 (Y) ................... 11.250 B 100 108,250
----------
Electronics (1.83%)
Delco Remy International, Inc.
Sr Note 12-15-07 ............... 8.625 B+ 100 101,250
----------
Government - Foreign (4.32%)
Australia, Commonwealth of,
Government Bond (Australia)
11-15-06# ...................... 6.750 AAA 350 239,321
----------
Government - U.S. (10.38%)
United States Treasury,
Bond 02-15-16 .................. 9.250 Aaa 200 271,374
Note 05-15-98 .................. 9.000 Aaa 300 303,750
----------
575,124
----------
Government - U.S. Agencies (3.25%)
Federal National Mortgage Assn.,
Global Bond (Australia)
07-10-02## ................... 6.500 Aaa 100 66,709
Global Bond (New Zealand)
09-26-00## ................... 7.000 Aaa 200 113,104
----------
179,813
----------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Strategic Income Fund on December 31, 1997. It is divided into three main
catagories: bonds, common and preferred stocks and warrants and short-term
investments. Bonds are further broken down by industry group. Short-term
investments, which represent the Fund's "cash" position, are listed last.
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Leisure (12.56%)
Ascent Entertainment Group,
Inc., Sr Sec Disc Note,
Step Coupon (11.875%,
12-15-02) 12-15-04 (R) ......... Zero B- $200 $ 115,500
Casino America, Inc.,
Sr Sec Note 08-01-03 ........... 12.500% B 250 271,250
Cinemark USA, Inc.,
Sr Sub Note Ser D
08-01-08 ....................... 9.625 B2 100 103,500
Riddell Sports, Inc.,
Gtd Sr Note 07-15-07 ........... 10.500 B2 100 103,750
Sun International Hotels Ltd.,
Sr Sub Note (Bahamas)
12-15-07 (Y) ................... 8.625 B+ 100 101,500
----------
695,500
----------
Media (5.95%)
Intermedia Capital Partners,
Sr Note 08-01-06 ............... 11.250 B2 100 111,125
Katz Media Corp.,
Gtd Sr Sub Note 01-15-07 ....... 10.500 B2 100 110,500
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ........... 11.000 B3 100 108,000
----------
329,625
----------
Oil & Gas (1.82%)
Canadian Forest Oil Ltd.,
Sr Sub Note (Canada)
09-15-07 (R), (Y) .............. 8.750 B 100 101,000
----------
Printing - Commercial (2.04%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 ........... 12.000 B 100 113,000
----------
Retail (1.89%)
Southern Foods Group L.P.,
Sr Sub Note 09-01-07 (R) ....... 9.875 B 100 104,500
----------
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Telecommunications (30.06%)
COLT Telecom Group Plc,
Sr Note (United Kingdom)
11-30-07# ...................... 10.125% B $ 75 $ 125,100
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%,
11-15-00) (Colombia)
11-15-03 (A), (Y) .............. Zero B3 100 75,750
Crown Castle International
Corp., Sr Disc Note, Step
Coupon (10.625%, 11-01-02)
11-15-07 (A), (R) .............. Zero B 150 94,125
Esprit Telecom Group Plc,
Sr Note (United Kingdom)
12-15-07 (Y) ................... 11.500 B- 100 103,000
Globalstar L.P./Globalstar
Capital Corp., Sr Note
06-15-04 ....................... 11.250 B3 100 100,421
Innova S. de R.L., Sr Note
(Mexico) 04-01-07 (Y) .......... 12.875 B- 100 99,000
Intercel, Inc.,
Unit (Sr Discount Note &
Warrant), Step Coupon
(12.00%, 02-01-01)
02-01-06 (A) ................... Zero B 200 146,000
Ionica, Plc, Sr Disc Note,
Step Coupon (15.00%,
05-01-02) (United Kingdom)
05-01-07 (A), (Y) .............. Zero B 200 80,000
Iridium LLC/Iridium Capital
Corp., Gtd Sr Note Ser A
07-15-05 ....................... 13.000 B- 100 105,000
MetroNet Communications
Corp., Sr Disc Note,
Step Coupon (10.75%,
11-01-02) (Canada)
11-01-07 (A), (R), (Y) ......... Zero B 100 61,000
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon
(9.75%, 02-15-99)
08-15-04 (A) ................... Zero CCC 150 133,500
Orion Network Systems, Inc.,
Sr Note 01-15-07 ............... 11.250 B2 100 113,000
Qwest Communications
International, Inc., Sr Note
Ser B 04-01-07 ................. 10.875% B+ $100 $ 113,750
RCN Corp.,
Sr Note 10-15-07 (R) ........... 10.000 B3 100 103,750
Teligent, Inc.,
Sr Note 12-01-07 ............... 11.500 CCC 100 100,250
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 .......... 12.500 B3 100 111,500
----------
1,665,146
----------
TOTAL BONDS
(Cost $4,567,898) (83.39%) 4,619,361
-------- ---------
NUMBER OF
SHARES
------
COMMON AND PREFERRED STOCKS AND WARRANTS
Comunicacion Celular S.A. Warrant
(Colombia) (Y)** ..................................... 1,000 7,000
Ionica, Plc, Warrant (United Kingdom)#** .............. 200 --
Nextel Communications, Inc. (Class A),
Common Stock** ....................................... 232 6,090
Nextlink Communications, Inc., 14.00%,
Preferred Stock ...................................... 1,552 97,000
Orion Network Systems, Inc., Warrant** ................ 100 1,000
SFX Broadcasting, Inc., 12.625%, Ser E,
Preferred Stock ...................................... 1,063 124,386
----------
TOTAL COMMON AND PREFERRED
STOCKS AND WARRANTS
(Cost $212,531) (4.25%) 235,476
------ ----------
SEE NOTES TO FINANCIAL STATEMENTS.
77
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (10.45%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 7.25% thru
13.25% Due 11-15-08 thru
11-15-16 and U.S. Treasury Note,
6.50% Due 04-30-99) - Note A ... 6.60% $579 $ 579,000
---------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%............ 506
---------
TOTAL SHORT-TERM INVESTMENTS ( 10.46%) 579,506
------- ---------
TOTAL INVESTMENTS ( 98.10%) 5,434,343
------- ---------
OTHER ASSETS AND LIABILITIES, NET ( 1.90%) 105,218
------- ---------
TOTAL NET ASSETS (100.00%) $5,539,561
======= =========
* Credit Ratings are unaudited and rated by Moody's Investor Service or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
** Non-income producing security.
# Par value of foreign bonds is expressed in local currency, as shown
parenthetically in security description.
## Parenthetical disclosure of a foreign country in the security description
represents country of local currency and par value is expressed in local
currency.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
See Note A of the Notes to Financial Statements for valuation policy. Rule
144A securities amounted to $579,875 or 10.47% of net assets as of
December 31, 1997.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of foreign issuer; however, security is U.S. dollar
denominated.
Portfolio Concentration (Unaudited)
- - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - -
The V.A. Strategic Income Fund invests primarily in securities issued in the
United States of America. The performance of this Fund is closely tied to the
economic and financial conditions of the countries within which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the Schedule of Investments. In addition, concentration
of investments can be aggregated by various countries. The table below shows the
percentages of the Fund's investments at December 31, 1997 assigned to country
categories.
MARKET VALUE
AS A PERCENTAGE OF
COUNTRY DIVERSIFICATION FUND'S NET ASSETS
- ----------------------- -----------------
Australia.................................. 5.52%
Bahamas.................................... 1.83
Canada..................................... 2.92
Colombia................................... 1.49
Mexico..................................... 1.79
New Zealand................................ 2.04
South Africa............................... 1.85
United Kingdom............................. 7.52
United States.............................. 73.14
-----
TOTAL INVESTMENTS 98.10%
=====
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
QUALITY DISTRIBUTION
- --------------------
AAA........................................ 19.80
B.......................................... 57.66
CCC........................................ 5.93
-----
TOTAL BONDS 83.39%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
Schedule of Investments
December 31, 1997
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
BONDS
Banks - Foreign (1.57%)
Landeskreditbank Baden -
Wuerttemberg, Sub Note
(Germany) 02-01-23 (Y) ......... 7.625% AAA $ 15 $ 17,000
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 .......... 10.125 A+ 15 17,766
Scotland International
Finance No. 2 B.V., Gtd
Sub Note (United Kingdom)
11-01-06 (R) (Y) ............... 8.850 A+ 20 22,998
----------
57,764
----------
Banks - United States (0.59%)
Banque National de Paris -
New York Branch, Sub Note
01-15-07 ....................... 7.200 A1 5 5,169
National Westminster Bank
Plc - New York Branch,
Sub Note 05-01-01 .............. 9.450 AA- 5 5,462
NB Capital Trust IV,
Gtd Cap Security
04-15-27 ....................... 8.250 A- 10 10,913
----------
21,544
----------
Broker Services (0.27%)
Salomon Smith
Barney Holdings,
Inc., Note 10-15-02 ............ 6.500 A 10 10,036
----------
Building (0.14%)
Georgia-Pacific Corp.,
Deb 01-15-18 ................... 9.750 BBB- 5 5,198
----------
Containers (0.10%)
Riverwood International
Corp., Gtd Sr Sub Note
04-01-08 ....................... 10.875 CCC+ 4 3,780
----------
Energy (0.59%)
AES Corp.,
Sr Sub Note 07-15-06 ........... 10.250 B+ 10 10,825
CalEnergy Company, Inc.,
Sr Note 09-15-06 ............... 9.500 BB- 10 10,927
----------
21,752
----------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Sovereign Bond Fund on December 31, 1997. It is divided into two main
catagories: bonds and short-term investments. Bonds are further broken down by
industry group. Short-term investments, which represent the Fund's "cash"
position, are listed last.
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Finance (3.35%)
Constitution Capital
Trust I, Cap Security
04-15-27 (R) ................... 9.150% BBB $ 3 $ 3,377
ContiFinancial Corp.,
Sr Note 08-15-03 ............... 8.375 BB+ 5 5,175
DR Investments,
Sr Note 05-15-07 (R) ........... 7.450 A- 10 10,640
Ford Motor Credit Co.,
Note 12-08-05 .................. 6.250 A 5 4,946
Industrial Credit Investment
Corporation of India
Ltd., Bond (India)
08-15-07 (R) (Y) ............... 7.550 BB+ 10 8,292
JCP Master Credit Card Trust,
Pass Thru Ctf Ser C Class A
06-15-00 ....................... 9.625 AA+ 25 26,928
MBNA Master Credit Card
Trust, Ser 1995-D Class A
11-15-02 ....................... 6.050 AAA 50 50,063
SUSA Partnership, L.P.
Note 12-01-07 .................. 7.000 BBB 5 5,026
United Companies Financial
Corp., Note 01-15-04 ........... 7.700 BBB- 5 5,033
Yanacocha Receivables,
Pass Thru Cert Ser 1997-A
06-15-05 (R) ................... 8.400 BBB- 4 3,920
----------
123,400
----------
Funeral Services & Related (0.42%)
Loewen Group International,
Inc., Gtd Sr Note Ser 4
10-15-03 ....................... 8.250 BB+ 15 15,356
----------
Glass Products (0.09%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico)
05-15-07 (R) (Y) ............... 11.375 B+ 3 3,202
----------
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Government - Foreign (0.60%)
Croatia, Republic of,
Sr Note (Croatia)
02-27-02 (R) (Y) ............. 7.000% BBB- $ 10 $ 10,017
Panama, Republic of,
Note (Panama)
02-13-02 (R) (Y) ............. 7.875 BB+ 7 6,738
Quebec, Province of,
Deb (Canada)
07-15-23 (Y) ................. 7.500 A+ 5 5,373
----------
22,128
----------
Government - U.S. (55.72%)
United States Treasury,
Bond 08-15-17 ................ 8.875 AAA 38 50,439
Bond 02-15-23 ................ 7.125 AAA 497 567,355
Note 02-15-99 ................ 8.875 AAA 205 212,079
Note 11-30-99 ................ 7.750 AAA 142 147,258
Note 05-15-01 ................ 8.000 AAA 70 74,780
Note 05-15-02 ................ 7.500 AAA 553 590,156
Note 02-15-05 ................ 7.500 AAA 373 409,949
----------
2,052,016
----------
Government - U.S. Agencies (10.65%)
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf
03-01-24 + ................... 6.500 AAA 230 227,125
30 Yr Pass Thru Ctf
09-01-27 ..................... 7.000 AAA 25 25,032
Pass Thru Ctf Ser 1997-M8
Class A-1 01-25-22 ........... 6.940 AAA 3 3,087
Government National
Mortgage Assn., 30 Yr Pass
Thru Ctf 02-15-25 + .......... 7.500 AAA 50 51,219
30 Yr Pass thru Ctf 07-15-26
to 08-15-27 .................. 8.000 AAA 83 85,733
----------
392,196
----------
Insurance (1.76%)
Conseco, Inc.,
Sr Note 12-15-04 ............... 10.500 BBB 5 6,016
Fairfax Financial Holdings
Ltd., Note (Canada)
04-15-26 (Y) ................... 8.300 BBB+ 15 16,634
Liberty Mutual Insurance Co.,
Surplus Note
05-04-07 (R) ................. 8.200 A+ 5 5,517
Surplus Note 10-15-26 (R) ...... 7.875% A2 $ 5 $ 5,503
Massachusetts Mutual Life
Insurance Co., Surplus
Note 11-15-23 (R) .............. 7.625 AA 5 5,464
NAC Re Corp.,
Note 06-15-99 .................. 8.000 A- 5 5,117
New York Life Insurance
Co., Surplus Note
12-15-23 (R) ................... 7.500 AA- 5 5,077
Phoenix Home Life Mutual
Insurance Co., Surplus Note
12-01-06 (R) ................... 6.950 A+ 5 5,084
Sun Canada Financial Co.,
Gtd Sub Note
12-15-07 (R) ................... 6.625 AA 5 5,093
URC Holdings Corp.,
Sr Note 06-30-06 (R) ........... 7.875 A- 5 5,394
----------
64,899
----------
Leisure (0.29%)
Sun International Hotels Ltd.,
Sr Sub Note (Bahamas)
12-15-07 (Y) ................... 8.625 B+ 5 5,075
Trump Hotels & Casino Resorts
Funding, Inc./Holdings, L.P.,
Sr Note 06-15-05 ............... 15.500 B- 5 5,725
----------
10,800
----------
Media (2.07%)
Adelphia Communications
Corp., Sr Note Ser B
10-01-02 ....................... 9.250 B3 8 8,160
Clear Channel Communications,
Inc., Deb 10-15-27 ............. 7.250 BBB- 7 7,042
Comcast Cable Communications
Inc., Note 05-01-17 ........... 8.875 BBB- 5 5,921
Comcast Corp., Sr Sub Deb
07-15-12 ....................... 10.625 BB+ 4 4,954
Garden State Newspapers,
Inc., Sr Sub Note
10-01-09 (R) ................... 8.750 B+ 9 9,045
Hearst-Argyle Television, Inc.,
Note 11-15-07 .................. 7.000 Baa3 5 5,037
News America Holdings Inc.,
Gtd Sr Deb 08-10-18 ........... 8.250 BBB- 8 8,734
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Media (continued)
SFX Broadcasting, Inc.,
Sr Sub Note Ser B
05-15-06 ....................... 10.750% B- $ 5 $ 5,488
TeleWest Communications
Plc, Sr Deb (United Kingdom)
10-01-06 (Y) ................... 9.625 B+ 2 2,110
Time Warner, Inc.,
Deb 01-15-13 ................... 9.125 BBB- 9 10,717
TKR Cable I, Inc.,
Sr Deb 10-30-07 ................ 10.500 BBB- 8 9,018
----------
76,226
----------
Medical (0.70%)
Integrated Health Services, Inc.,
Sr Sub Note 01-15-08 (R) ....... 9.250 B- 10 10,200
Physician Sales & Services,
Inc., Sr Sub Note
10-01-07 (R) ................... 8.500 B 3 3,060
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 ........... 10.750 B+ 3 3,270
Tenet Healthcare Corp.,
Sr Sub Note 01-15-07 ........... 8.625 B+ 9 9,293
----------
25,823
----------
Mortgage Banking (2.66%)
EQCC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-3
Class A-9 02-15-29 ............. 6.570 AAA 25 25,036
First Plus Home Loan Trust,
Pass Thru Ctf Ser 1997-1
Class A6 12-10-15 .............. 6.950 AAA 5 5,078
GMAC Commercial Mortgage
Securities, Inc., Pass Thru Ctf
Ser 1997-C2 Class A3
11-15-07 ....................... 6.566 AAA 25 25,281
Money Store Home Equity
Trust (The), Pass Thru Ctf
Ser 1997-D Class AF-7
12-15-38 ....................... 6.485 AAA 16 16,065
Money Store Residential
Trust (The), Pass Thru Ctf
Ser 1997-I Class A-3
08-15-12 ....................... 6.680 AAA 10 9,953
Salomon Brothers Mortgage
Securities VII, Inc., Mtg
Pass Thru Ctf Ser 1997-HUD2
Class A-2 07-25-24 ............. 6.750% AAA $ 6 $ 6,050
UCFC Home Equity Loan
Trust, Pass Thru Ctf
Ser 1997-A1 Class A8
06-15-28 ....................... 7.220 AAA 10 10,345
----------
97,808
----------
Oil & Gas (0.48%)
Camuzzi Gas Pampeana
S.A., Bond (Argentina)
12-15-01 (Y) ................... 9.250 BBB- 2 2,000
Norsk Hydro ASA, Deb
(Norway) 10-01-16 (Y) .......... 7.500 A 5 5,386
Transgas de Occidenta S.A.,
Sr Note (Colombia)
11-01-10 (R) (Y) ............... 9.790 BBB- 10 10,211
----------
17,597
----------
Paper & Paper Products (0.82%)
Celulosa Arauco Y Constitucion
S.A., Note (Chile)
09-15-09 (Y) ................... 7.200 Baa3 10 9,790
Fort James Corp.,
Sr Note 09-15-02 ............... 6.500 BBB- 5 5,023
Indah Kiat International
Finance Co., Gtd Sec Bond
Ser C (Indonesia)
06-15-06 (Y) ................... 12.500 BB 4 3,880
Indah Kiat Pulp & Paper
Corp. (P.T.), Sr Sec Deb
(Indonesia) 11-01-00 (R) ....... 8.875 BB 9 8,100
S.D. Warren Co.,
Sr Sub Note Ser B
12-15-04 ....................... 12.000 B+ 3 3,352
----------
30,145
----------
Real Estate Investment Trust (0.28%)
American Health Properties,
Inc., Note 01-15-07 ............ 7.500 BBB- 5 5,211
TriNet Corporate Realty Trust,
Inc., Note 05-15-01 ............ 7.300 BBB- 5 5,112
----------
10,323
----------
SEE NOTES TO FINANCIAL STATEMENTS.
81
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Retail (0.20%)
Southern Foods Group, L.P.,
Sr Sub Note 09-01-07 (R) ....... 9.875% B $ 7 $ 7,315
----------
Steel (0.09%)
IVACO Inc., Sr Note
(Canada) 09-15-05 (Y) .......... 11.500 B+ 3 3,262
----------
Telecommunications (1.28%)
Iridium LLC/Iridium Capital
Corp., Gtd Sr Note Ser A
07-15-05 ....................... 13.000 B- 11 11,550
MetroNet Communications
Corp., Unit (Sr Note &
Warrant) (Canada)
08-15-07 (Y) ................... 12.000 B- 5 5,775
Nextel Communications,
Inc., Sr Disc Note, Step
Coupon (9.75%, 02-15-99)
08-15-04 (A) ................... Zero CCC 12 10,680
Qwest Communications
International Inc., Sr Note
Ser B 04-01-07 ................. 10.875 B+ 4 4,550
TCI Communications, Inc.,
Sr Deb 08-01-15 ................ 8.750 BBB- 9 10,431
Teligent, Inc.,
Sr Note 12-01-07 ............... 11.500 CCC 4 4,010
----------
46,996
----------
Tobacco (0.59%)
Philip Morris,
Note 08-15-02 .................. 7.125 A 10 10,248
RJR Nabisco, Inc.,
Note 12-01-02 .................. 8.625 BBB- 6 6,388
Note 09-15-03 .................. 7.625 BBB- 5 5,111
----------
21,747
----------
Transport (0.66%)
America West Airlines, Inc.
Pass Thru Ctf Ser B
01-02-08 ....................... 6.930 A- 5 5,007
Northwest Airlines Inc.,
Gtd Note 03-15-04 .............. 8.375 BB- 4 4,118
Pass Thru Ctf Ser 1996-1
01-02-15 ....................... 8.970 BBB- 5 5,452
NWA Trust,
Sr Note Ser A 06-21-14 ......... 9.250% A2 $ 4 $ 4,379
U.S. Air, Inc.,
Pass Thru Ctf Ser 1989-A2
01-01-13 ....................... 9.820 A- 5 5,531
----------
24,487
----------
Utilities (3.98%)
Avon Energy Partners
Holdings, Sr Note
(United Kingdom)
12-11-07 (R) (Y) ............... 7.050 A- 7 7,128
BVPS II Funding Corp.,
Collateralized Lease
Bond 06-01-17 .................. 8.890 BB- 5 5,595
Calpine Corp.,
Sr Note 07-15-07 (R) ........... 8.750 BB- 8 8,160
CE Electric UK Funding Co.,
Sr Note 12-30-07 (R) ........... 6.995 BBB+ 10 10,095
Cleveland Electric Illuminating
Co. & Toledo Edison Co.,
Sec Note Ser B 07-01-04 ........ 7.670 Ba1 5 5,206
Cleveland Electric
Illuminating Co.,
1st Mtg Ser B 05-15-05 ......... 9.500 BB+ 23 25,507
CMS Energy Corp.,
Sr Note 05-15-02 ............... 8.125 BB 5 5,141
Enersis S.A.,
Note (Cayman Islands)
12-01-16 (Y) ................... 7.400 A- 5 4,961
First PV Funding Corp.,
Deb Ser 86B 01-15-16 ........... 10.150 BB- 3 3,247
Hydro-Quebec, Gtd Bond
(Canada) 02-01-21 (Y) .......... 9.400 A+ 15 19,368
Iberdrola International B.V.,
Note 10-01-02 .................. 7.500 AA- 15 15,787
Long Island Lighting Co.,
Deb 07-15-19 ................... 8.900 BB+ 3 3,192
Gen Ref Mtg 05-01-21 ........... 9.750 BBB 10 10,250
North Atlantic Energy Corp.,
1st Mtg Bond 06-01-02 .......... 9.050 B+ 8 8,221
SEE NOTES TO FINANCIAL STATEMENTS.
82
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Utilities (continued)
Philippine Long Distance
Telephone Co., Note
(Philippines) 03-06-07, (Y) .... 7.850% BB+ $ 6 $ 5,228
Waterford 3 Funding Corp.,
Sec Lease Obligation
Bond 01-02-17 .................. 8.090 BBB- 9 9,409
----------
146,495
----------
TOTAL BONDS
(Cost $3,265,357) (89.95%) 3,312,295
------- -----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (16.16%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Bonds, 7.25% thru 13.25%
due 11-15-08 thru 11-15-16, and
U.S. Treasury Note, 6.50% Due
04-30-99), -
Note A..................... 6.60% $595 $ 595,000
---------
Corporate Savings Account ( 0.02%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%......... 879
---------
TOTAL SHORT-TERM INVESTMENTS ( 16.18%) 595,879
------- ---------
TOTAL INVESTMENTS (106.13%) 3,908,174
------- ---------
OTHER ASSETS AND LIABILITIES, NET ( 6.13%) ( 225,693)
------- ---------
TOTAL NET ASSETS (100.00%) $3,682,481
======== ==========
NOTES TO THE SCHEDULE OF INVESTMENTS
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investor Services or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
+ A portion of these securities having an aggregate value of $278,344 or
7.56% of the Fund's net assets, have been purchased on a when issued
basis. The purchase price and the interest rate of such securities are
fixed at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with current values at least equal to the amounts
of its when issued commitments. Accordingly, the market values of $54,224
of United States Treasury Bond 7.125%, 02-15-23 and $58,695 of United
States Treasury Note 7.50%, 05-15-02 have been segregated to the when
issued commitments.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $179,630 or 4.88% of net assets as of
December 31, 1997.
(Y) 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.
83
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Money Market Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Money Market Fund on December 31, 1997.
INTEREST QUALITY PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATINGS* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
COMMERCIAL PAPER
Broker Services (4.73%)
Merrill Lynch & Co., Inc.,
02/25/98 ....................... 5.700% Tier 1 $400 $ 396,517
----------
Mortgage Banking (4.78%)
Countrywide Home Loans,
01/02/98 ....................... 6.350 Tier 1 400 399,929
----------
Utilities - Telephone (4.76%)
Bell Atlantic Network Funding
Corp. 01/22/98 ................. 5.800 Tier 1 400 398,647
----------
TOTAL COMMERCIAL PAPER
(Cost $1,195,093) (14.27%) 1,195,093
------- ----------
CORPORATE INTEREST BEARING OBLIGATIONS
Automotive (3.59)
Chrysler Financial Corp.,
06/23/98 ....................... 6.300 Tier 1 300 300,617
----------
Finance (4.19%)
CIT Group Holdings, Inc.,
07/31/98 ....................... 6.350 Tier 1 350 350,673
----------
Retail Stores (3.61)
Sears Roebuck Acceptance
Corp., 04/15/98 ................ 9.250 Tier 1 300 302,884
----------
TOTAL CORPORATE
INTEREST BEARING OBLIGATIONS
(Cost $954,174) (11.39%) 954,174
------- ----------
U.S. GOVERNMENT OBLIGATIONS
Governmental - U.S. Agencies (52.51%)
Federal Farm Credit Bank
02/02/98 ....................... 5.650 Tier 1 1,000 999,665
Federal Home Loan Bank
02/26/98 ....................... 5.875 Tier 1 1,000 999,673
Federal National Mortgage
Association, 01/15/1998 ........ 5.520 Tier 1 1,000 999,748
Private Export Funding Corp.,
04/30/98 ....................... 5.750% Tier 1 $500 $ 499,834
Student Loan Marketing
Association, 12/04/98 .......... 5.910 Tier 1 500 500,000
Student Loan Marketing
Association, 12/10/98 .......... 5.900 Tier 1 400 400,000
----------
4,398,920
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $4,398,920) (52.51%) 4,398,920
------- ----------
JOINT REPURCHASE AGREEMENT
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
due 01-02-98 (Secured by U.S.
Treasury Bonds 11.25% due
02-15-15 and 9.25%
due 02-15-16), - Note A ... 6.60% 1,729 1,729,000
----------
TOTAL JOINT REPURCHASE AGREEMENT (20.64%) 1,729,000
------- ----------
TOTAL INVESTMENTS (98.81%) 8,277,187
------- ----------
OTHER ASSETS AND LIABILITIES, NET (1.19%) 99,871
------- ----------
TOTAL NET ASSETS (100.00%) $8,377,058
======= ==========
* Quality ratings indicate the categories of eligible securities, as defined
by Rule 2a-7 of the Investment Company Act of 1940, owned by the Fund. The
percentage shown for each investment category is the total value of that
category expressed as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
84
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
NOTE A --
ORGANIZATION
John Hancock V.A. International Fund ("V.A. International Fund"), John Hancock
V.A. Financial Industries Fund (which commenced operations on April 30, 1997)
("V.A. Financial Industries Fund"), John Hancock V.A. Emerging Growth Fund
("V.A. Emerging Growth Fund"), John Hancock V.A. Growth Fund ("V.A. Growth
Fund"), John Hancock V.A. Independence Equity Fund ("V.A. Independence Equity
Fund"), John Hancock V.A. 500 Index Fund ("V.A. 500 Index Fund"), John Hancock
V.A. Sovereign Investors Fund ("V.A. Sovereign Investors Fund"), John Hancock
V.A. World Bond Fund ("V.A. World Bond Fund"), John Hancock V.A. Strategic
Income Fund ("V.A. Strategic Income Fund"), John Hancock V.A. Sovereign Bond
Fund ("V.A. Sovereign Bond Fund"), John Hancock V.A. Money Market Fund ("V.A.
Money Market Fund"), (each a "Fund" collectively, the "Funds") are separate
series of John Hancock Declaration Trust (the "Trust") an open-end management
investment company, registered under the Investment Company Act of 1940. Prior
to January 2, 1998, V.A. Growth Fund was known as John Hancock V.A. Discovery
Fund. The Trust, organized as a Massachusetts business trust in 1995, consisted
of eleven different series at December 31, 1997. Each Fund currently has one
class of shares with equal rights as to voting, redemption, dividends, and
liquidation within their respective Fund. The Trustees may authorize the
creation of additional series from time to time to satisfy various investment
objectives. The Trustees approved the organization of three new series of John
Hancock Declaration Trust: John Hancock V.A. High Yield Bond Fund, John Hancock
V.A. Growth and Income Fund and John Hancock V.A. Special Opportunities Fund,
effective January 2, 1998. An insurance company issuing a Variable Contract that
participates in the Trust will vote shares of the Funds held by the insurance
company's separate accounts as required by law. In accordance with current law
and interpretations thereof, participating insurance companies are required to
request voting instructions from policy owners and must vote shares of the Funds
in proportion to the voting instructions received.
The investment objective of the V.A. International Fund is to seek
long-term growth of capital by primarily investing in equity securities of
foreign companies and governments. The investment objective of the V.A.
Financial Industries Fund is to seek capital appreciation primarily through
investments in equity securities of financial services companies throughout the
world. The investment objective of the V.A. Emerging Growth Fund is to seek
long-term growth of capital. The investment objective of the V.A. Growth Fund is
to seek long-term capital appreciation by investing primarily in common stocks
of companies which the Fund's management believes offer outstanding growth
potential over both the intermediate and long term. The investment objective of
the V.A. Independence Equity Fund is to seek above-average total return,
consisting of capital appreciation and income by focusing on stocks of companies
that management believes are undervalued and have improving fundamentals over
both the intermediate and long-term. The investment objective of the V.A. 500
Index Fund is to provide investment results that correspond to the total return
performance of the Standard & Poor's 500 Stock Price Index (the "S&P 500
Index"). The investment objective of the V.A. Sovereign Investors Fund is to
seek long term growth of capital and income without assuming undue market risks
by investing primarily in common stocks of seasoned companies in sound financial
condition with a long record of paying increasing dividends. The investment
objective of the V.A. World Bond Fund is to seek a high total investment return,
a combination of current income and capital appreciation, by investing primarily
in a global portfolio of fixed income securities. The investment objective of
the V.A. Strategic Income Fund is to seek a high level of current income by
primarily investing in foreign government and corporate fixed income securities,
U.S. Government securities and lower-rated high yield, high risk, fixed income
securities of U.S. issuers. The investment objective of the V.A. Sovereign Bond
Fund is to seek a high level of current income consistent with prudent
investment risk by investing primarily in a diversified portfolio of investment
grade fixed income securities of U.S. and foreign issuers, although the Fund may
invest up to 25% of its total assets in lower-rated high yield, high risk, fixed
income securities. The investment objective of the V.A. Money Market Fund is to
seek maximum current income consistent with
85
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
capital preservation and liquidity by investing primarily in high-quality money
market instruments.
NOTE B --
ACCOUNTING POLICIES
VALUATION OF INVESTMENTS Securities in the Funds' portfolios (except for the
V.A. Money Market Fund) 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. The Funds may invest in indexed
securities whose value is linked either directly or inversely to changes in
foreign currencies, interest rates, commodities, indices or other reference
instruments. Indexed securities may be more volatile than the reference
instrument itself, but any loss is limited to the amount of the original
investment.
The V.A. Money Market Fund's portfolio of securities is valued at
amortized cost, in accordance with Rule 2a-7 of the Investment Company Act of
1940, which approximates market value. The amortized cost method involves
valuing a security at its cost on the date of purchase and thereafter assuming a
constant amortization to maturity of the difference between the principal amount
due at maturity and the cost of the security to the Fund. Interest income on
certain portfolio securities such as negotiable bank certificates of deposit and
interest bearing notes is accrued daily and included in interest receivable.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more large repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Funds' custodian bank receives delivery of the underlying
securities for the joint account on the Funds' 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 Funds' policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies.
They will not be subject to federal income tax on taxable earnings which are
distributed to shareholders. For federal income tax purposes, net currency
exchange gains and losses from sales of foreign debt securities may be treated
as ordinary income even though such items are capital gains and losses for
accounting purposes.
For federal income tax purposes, the following funds had capital loss
carryforwards available. These carryforwards are available to offset future net
realized capital gains to the extent provided by regulations. Additionally, net
capital losses attributable to security transactions occurring after October 31,
1997 are treated as arising on the first day (January 1, 1998) of the Funds next
taxable year.
CAPITAL LOSS CAPITAL LOSS POST 10/31/1997
CARRYFORWARD CARRYFORWARD LOSS TREATED AS
FUND EXPIRES 12/31/2004 EXPIRES 12/31/2005 ARISING 1/1/98
- ---- ------------------ ------------------ --------------
V.A. International Fund .... $ -- $ -- $65,667
V.A. Financial Industries
Fund...................... -- -- --
V.A. Emerging Growth Fund 18,937 167,508 66,172
V.A. Growth Fund............ 11,062 197,206 --
V.A. Independence
Equity Fund............... -- -- --
V.A. 500 Index Fund. ....... -- -- --
V.A. Sovereign Investors
Fund...................... -- -- --
V.A. World Bond Fund ....... -- -- 27,755
V.A. Strategic Income Fund . -- 2,482 8,904
V.A. Sovereign Bond Fund ... -- -- --
V.A. Money Market Fund ..... -- -- --
86
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
DIVIDENDS, INTEREST AND DISTRIBUTIONS 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 Funds are notified 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 Funds record 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.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Funds.
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 Funds. Actual results could differ from these estimates.
ORGANIZATION EXPENSES Expenses incurred in connection with the organization of
the Funds have been capitalized and are being charged to the Funds' operations
ratably over a five year period that commenced with the investment operations of
each Fund.
BANK BORROWINGS The Funds are 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 Funds to participate with other Funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each of the Funds, based on its borrowings,
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 Funds had no
borrowing activity for the year ended December 31, 1997.
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 Funds. 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 Funds do 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
Funds' 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for the V.A.
Independence Equity Fund, V.A. 500 Index Fund, V.A. Sovereign Investors Fund,
and V.A. Money Market Fund) may enter into forward foreign currency exchange
contracts as a hedge against the effect of fluctuations in currency exchange
rates. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date at a set price. The
aggregate principal amounts of the contracts are marked to market daily at the
applicable foreign currency exchange rates. Any resulting unrealized gains and
losses are included in the determination of each of the Fund's daily net assets.
The Funds record realized gains and losses at the time the forward foreign
currency contract is closed out or offset by a matching contract. Risks may
arise upon
87
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
entering these contracts from potential inability of counterparties to meet the
terms of the contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. These contracts involve market or credit
risk in excess of the unrealized gain or loss reflected in the Funds' Statement
of Assets and Liabilities.
The Funds may also purchase and sell forward contracts to facilitate the
settlement of foreign currency denominated portfolio transactions, under which
it intends to take delivery of the foreign currency. Such contracts normally
involve no market risk if they are offset by the currency amount of the
underlying transaction.
Open forward foreign currency contracts for the Trust at December 31, 1997
were as follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION/
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ----- --------------
V.A. WORLD BOND FUND
Buy
German Deutsche Mark............ 800,000 Jan 98 ($6,379)
======
V.A. STRATEGIC INCOME FUND
Sells
Australian Dollar............... 106,000 Jan 98 $8,179
Australian Dollar............... 182,000 Mar 98 (149)
------
$8,030
======
V.A. FINANCIAL INDUSTRIES FUND
Buy
Swedish Krona................... 45,193 Jan 98 ($ 131)
======
FINANCIAL FUTURES CONTRACTS The Funds (except V.A. Money Market Fund) may buy
and sell financial futures contracts to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. Buying futures tends to increase the Funds' exposure to the
underlying instrument. Selling futures tends to decrease the Funds' exposure to
the underlying instrument or hedge other Funds instruments. At the time each
Fund enters into a financial futures contract, it will be required to deposit
with its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of the
financial futures contract being traded. Each day, the futures contract is
valued at the official settlement price on the board of trade or U.S.
commodities exchange on which it trades. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market," will be recorded by the
Funds as unrealized gains or losses.
When the contracts are closed, the Funds recognize a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Funds could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Funds' gains and/or losses can be affected as a result of futures contracts.
Open financial futures contracts for the Trust at December 31, 1997 were
as follows:
UNREALIZED
OPEN APPRECIATION/
EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- ---------- --------- -------- --------------
V.A. 500 INDEX FUND
Mar 98................. 2 S&P 500 Long ($6,075)
Mar 98................. 3 S&P 500 Long 13,400
------
$7,325
======
OPTIONS The Funds (except V.A. Money Market Fund) may purchase options
contracts. Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and
88
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
Liabilities as an asset and corresponding liability. The amount of the liability
will be subsequently marked to market to reflect the current market value of the
written option.
The Funds may use option contracts to manage their exposure to changing
security prices. Writing puts and buying calls will tend to increase the Funds'
exposure to the underlying instrument and buying puts and writing calls will
tend to decrease the Funds' exposure to the underlying instrument, or hedge
other Fund investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Funds in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms, or if the Funds are unable to offset a contract with a counterparty on a
timely basis ("liquidity risk"). Exchange-traded options have minimal credit
risk as the exchanges act as counterparties to each transaction, and only
present liquidity risk in highly unusual market conditions. To minimize credit
and liquidity risks in over-the-counter option contracts, the Funds will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's Statement of
Assets and Liabilities.
There were no written option transactions for the year ended December 31,
1997, for all Funds.
NOTE C --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, each Fund pays a monthly
management fee to the Adviser, for a continuous investment program equivalent,
on an annual basis as follows:
FUND RATE
- ---- ----
V.A. International Fund 0.90% of average daily net assets
V.A. Financial Industries Fund 0.80% of average daily net assets
V.A. Emerging Growth Fund 0.75% of average daily net assets
V.A. Growth Fund 0.75% of average daily net assets
V.A. Independence Equity Fund 0.70% of average daily net assets
V.A. 500 Index Fund 0.10% of average daily net assets
V.A. Sovereign Investors Fund 0.60% of average daily net assets
V.A. World Bond Fund 0.75% of average daily net assets
V.A. Strategic Income Fund 0.60% of average daily net assets
V.A. Sovereign Bond Fund 0.50% of average daily net assets
V.A. Money Market Fund 0.50% of average daily net assets
John Hancock Advisers International Limited ("JHAI") serves as the
sub-adviser to the V.A. International Fund pursuant to a sub-adviser agreement
among the Fund, the Adviser, and JHAI. JHAI was formed in 1987 and is a wholly
owned subsidiary of the Adviser. JHAI provides international investment research
and advisory services to investment companies and institutional clients. The
Adviser pays JHAI a portion of its advisory fee from the V.A. International Fund
to JHAI at the following rate: 70% of the advisory fee payable by the Fund.
The Adviser compensated the V.A. International Fund during the year in the
amount of $435,961 for a loss incurred as a result of an inaccurate execution of
a trade.
Independence Investment Associates, Inc. ("IIA") serves as the sub-adviser
to the V.A. Independence Equity Fund pursuant to a separate sub-adviser
agreement among the Fund, the Adviser, and IIA. IIA was organized in 1982 and is
a wholly owned indirect subsidiary of John Hancock Mutual Life Insurance Company
("JHMLICo"). IIA provides investment advice and advisory services to investment
companies and institutional accounts. The Adviser pays IIA a portion of its
advisory fee from the V.A. Independence Equity Fund to IIA at the following
rate: 55% of the advisory fee payable by the Fund.
Sovereign Asset Management Corporation ("SAMCorp") serves as the
sub-adviser of the V.A. Sovereign Investors Fund pursuant to a sub-advisery
agreement among the Fund, the Adviser, and SAMCorp. SAMCorp was organized in
1992 and is a wholly owned indirect subsidiary of JHMLICo. SAMCorp provides
investment advice and advisory services to investment companies and private and
89
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
institutional accounts. The Adviser pays SAMCorp a portion of its advisory fee
from the V.A. Sovereign Investors Fund to SAMCorp at the following rate: 40% of
the advisory fee payable by the Fund.
The V.A. 500 Index Fund has an agreement with Standard & Poor's ("S & P")
to license certain trademarks and trade names of S & P and of the S & P 500
Index, which is determined, composed and calculated by S & P without regard to
the Adviser or the V.A. 500 Index Fund. (Requisite disclosure regarding the use
of the Standard & Poor's name is included in the Trust's prospectus.)
Effective February 10, 1997, the Adviser agreed to limit its management
fee on the V.A. 500 Index Fund to 0.10% of the Fund's average daily net assets.
The Adviser may terminate this limitation in the future.
The Adviser has voluntarily agreed to limit each of the Fund's expenses,
excluding the management fee, to 0.25% of each Fund's average daily net assets.
Accordingly, the reductions in expenses for the year ended December 31, 1997
were as follows:
FUND FEE REDUCTION
- ---- -------------
V.A. International Fund........................ $26,430
V.A. Financial Industries Fund................. 17,678
V.A. Emerging Growth Fund...................... 33,471
V.A. Growth Fund............................... 30,501
V.A. Independence Equity Fund.................. 21,288
V.A. 500 Index Fund............................ 24,549
V.A. Sovereign Investors Fund.................. 14,303
V.A. World Bond Fund........................... 27,843
V.A. Strategic Income Fund..................... 16,865
V.A. Sovereign Bond Fund....................... 31,793
V.A. Money Market Fund......................... 12,855
The Adviser reserves the right to terminate this limitation in the future.
The Funds have an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of the Funds.
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 Trustees of the Funds. The compensation of unaffiliated Trustees is
borne by the Fund. The Adviser and other subsidiaries of John Hancock Mutual
Life Insurance Company owned the following shares of beneficial interest of the
Funds as of December 31, 1997:
FUND SHARES OF BENEFICIAL INTEREST
- ---- -----------------------------
V.A. International Fund............. 213,604
V.A. Financial Industries Fund...... --
V.A. Emerging Growth Fund........... 100,201
V.A. Growth Fund.................... 100,000
V.A. Independence Equity Fund....... 103,519
V.A. 500 Index Fund................. 830,646
V.A. Sovereign Investors Fund....... 102,343
V.A. World Bond Fund................ 216,509
V.A. Strategic Income Fund.......... 226,576
V.A. Sovereign Bond Fund............ 109,809
V.A. Money Market Fund.............. 105,798
NOTE D --
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities, excluding short-term
securities, during the year ended December 31, 1997, for the Funds were as
follows:
FUND PURCHASES SALES
- ---- --------- -----
V.A. International Fund.................. $ 9,319,894 $7,460,987
V.A. Financial Industries Fund........... 16,107,447 905,236
V.A. Emerging Growth Fund................ 4,077,138 1,440,195
V.A. Growth Fund......................... 5,242,258 2,967,350
V.A. Independence Equity Fund............ 8,026,973 1,775,199
V.A. 500 Index Fund...................... 19,013,544 1,248,907
V.A. Sovereign Investors Fund
U.S. Government Securities.............. 515,734 --
Other Investments....................... 9,345,623 462,178
V.A. World Bond Fund
U.S. Government Securities.............. 2,250,113 982,197
Other Investments....................... 1,518,874 2,553,728
V.A. Strategic Income Fund
U.S. Government Securities.............. 2,423,924 2,394,565
Other Investments....................... 4,377,175 1,677,088
V.A. Sovereign Bond Fund
U.S. Government Securities.............. 3,866,896 2,180,635
Other Investments....................... 1,493,781 936,209
90
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
At December 31, 1997, the cost (excluding the corporate savings account)
and gross unrealized appreciation and depreciation in value of investments owned
by the Funds, as computed on a federal income tax basis, were as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
AGGREGATE GROSS UNREALIZED GROSS UNREALIZED APPRECIATION/
FUND COST APPRECIATION DEPRECIATION DEPRECIATION
- ---- ---- ------------ ------------ ------------
<S> <C> <C> <C> <C>
V.A. International
Fund...................... $ 3,746,400 $ 285,308 $299,701 ($ 14,393)
V.A. Financial
Industries
Fund...................... 16,911,261 1,868,063 322,499 1,545,564
V.A. Emerging
Growth Fund............... 3,536,833 568,582 245,367 323,215
V.A. Growth
Fund...................... 3,276,784 625,832 113,160 512,672
V.A. Independence
Equity Fund............... 8,256,498 816,806 187,746 629,060
V.A. 500 Index
Fund...................... 19,056,716 1,478,926 582,345 896,581
V.A. Sovereign
Investors Fund............ 11,912,095 1,228,310 110,585 1,117,725
V.A. World
Bond Fund................. 2,253,103 39,985 7,729 32,256
V.A. Strategic
Income Fund............... 5,359,429 164,532 90,124 74,408
V.A. Sovereign
Bond Fund................. 3,861,652 55,159 9,516 45,643
V.A. Money
Market Fund............... 8,277,187 -- -- --
</TABLE>
NOTE E --
RECLASSIFICATION OF ACCOUNT
During the year ended December 31, 1997, reclassifications have been made in
each Fund's capital accounts to report these balances on a tax basis, excluding
certain temporary differences, as of December 31, 1997. Additional adjustments
may be needed in subsequent reporting periods. These reclassifications, which
have no impact on the net asset value of the Funds, are primarily attributable
to differences in the treatment of net operating losses, foreign currency gain
and losses and return of capital under federal tax rules versus generally
accepted accounting principle. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
CAPITAL UNDISTRIBUTED NET ACCUMULATED NET
FUND PAID-IN INVESTMENT INCOME/(LOSS) REALIZED GAIN (LOSS)
- ---- ------- ------------------------ --------------------
<S> <C> <C> <C>
V.A. International
Fund....................... $ -- ($10,311) $10,311
V.A. Financial
Industries Fund............ -- ( 169) 169
V.A. Emerging
Growth Fund................ ( 3,072) 3,163 ( 91)
V.A. Growth
Fund....................... ( 8,594) 8,594 --
V.A. Independence
Equity Fund................ -- -- --
V.A. 500 Index
Fund....................... -- -- --
V.A. Sovereign
Investors Fund............. -- 3 ( 3)
V.A. World
Bond Fund.................. (62,240) ( 18,355) 80,595
V.A. Strategic
Income Fund............... -- 6,469 ( 6,469)
V.A. Sovereign
Bond Fund.................. -- -- --
V.A. Money
Market Fund................ -- -- --
</TABLE>
91
<PAGE>
================================================================================
John Hancock Funds - Declaration Trust
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To The Contract owners, Policyholders and Trustees of
John Hancock Declaration Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of John Hancock Declaration Trust (the "Trust")
(comprising, respectively, V.A. International Fund, V.A. Financial Industries
Fund, V.A. Emerging Growth Fund, V.A. Growth Fund (formerly V.A. Discovery
Fund), V.A. Independence Equity Fund, V.A. 500 Index Fund, V.A. Sovereign
Investors Fund, V.A. World Bond Fund, V.A. Strategic Income Fund, V.A. Sovereign
Bond Fund, and V.A. Money Market Fund) (collectively "the Funds") as of December
31, 1997, and the related statements of operations for the year then ended,
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodian
and brokers, and other appropriate auditing procedures where 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
each of the respective Funds constituting John Hancock Declaration Trust as of
December 31, 1997, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 1998
TAX INFORMATION (Unaudited)
The Funds designated the following as long-term capital gain dividends during
the fiscal year ended December 31, 1997. The capital gain dividends are further
broken down into two capital gain tax rates, 28% and 20%, respectively.
Additionally, the following dividend distributions qualify for the
dividends received deduction available to corporations.
TOTAL 28% 20% DIVIDENDS
CAPITAL RATE RATE RECEIVED
GAINS GAINS GAINS DEDUCTION
----- ----- ----- ---------
V.A. International Fund.... $20,365 $20,365 $ -- --%
V.A. Financial Industries
Fund..................... -- -- -- 92.42
V.A. Emerging
Growth Fund.............. -- -- -- 28.42
V.A. Growth Fund........... -- -- -- --
V.A. Independence
Equity Fund.............. 4,084 4,084 -- 32.50
V.A. 500 Index Fund........ 479,305 226,529 252,776 17.22
V.A. Sovereign
Investors Fund........... -- -- -- 65.85
V.A. World Bond Fund....... 6,656 6,656 -- --
V.A. Strategic
Income Fund.............. -- -- -- 4.36
V.A. Sovereign
Bond Fund................ 7,357 7,357 -- --
V.A. Money
Market Fund.............. -- -- -- --
92
<PAGE>
================================================================================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
Dividend Increases (Unaudited)
Listed below are the most recent dividend increases for the common stocks held
in the V.A. Sovereign Investors Fund as of December 31, 1997
- --------------------------------------------------------------------------------
PERCENT OF
COMPANY DIVIDEND INCREASE
- ------- -----------------
AFLAC Corp. .................................................. 15.0
Abbott Laboratories, Inc. .................................... 12.5
Air Products & Chemicals ..................................... 9.1
American Home Products ....................................... 4.9
American International Group ................................. 12.4
Ameritech Corp. .............................................. 6.2
AMP, Inc. .................................................... 4.0
Archer-Daniel Midland Co. .................................... 5.0
Automatic Data Processing, Inc. .............................. 15.2
BB & T Corp. ................................................. 16.3
BankOne Corp. ................................................ 11.7
Baxter International, Inc. ................................... 3.0
Becton Dickinson & Co. ....................................... 11.5
Bemis Company, Inc. .......................................... 11.1
Betz Laboratories ............................................ 1.3
Century Telephone Enterprise, Inc. ........................... 2.8
Chubb Corp. .................................................. 7.4
Conagra, Inc. ................................................ 14.7
Dayton Hudson Corp. .......................................... 12.5
Dover Corp. .................................................. 11.5
DuPont (E.I.) De Nemours & Co. ............................... 10.5
Duke Energy Corp. ............................................ 3.8
Ecolab, Inc. ................................................. 18.8
Emerson Electric Co. ......................................... 9.3
Exxon Corp. .................................................. 3.8
First Tennessee National Corp. ............................... 10.0
First Union Corp. ............................................ 15.6
Gannett Co., Inc. ............................................ 5.6
General Electric Co. ......................................... 15.4
General RE Corp. ............................................. 7.8
Grainger (W.W.), Inc. ........................................ 8.0
Hewlett Packard Co. .......................................... 16.7
Home Depot, Inc. ............................................. 25.0
Honeywell, Inc. .............................................. 3.7
Ikon Office Solutions, Inc. .................................. 24.0
Interpublic Group, Inc. ...................................... 14.7
Johnson & Johnson ............................................ 15.8
Johnson Controls ............................................. 7.0
Key Corp. .................................................... 10.5
Leggett & Platt, Inc. ........................................ 7.7
Lilly (Eli) & Co. ............................................ 11.1
Masco Corp. .................................................. 5.0
McGraw-Hill Companies, Inc. .................................. 9.1
Medtronic, Inc. .............................................. 15.8
Mobil Corp. .................................................. 6.0
National Fuel Gas Co. ........................................ 3.6
NationsBank Corp. ............................................ 15.2
Norwest Corp. ................................................ 10.0
Nucor Corp. .................................................. 25.0
Pentair, Inc. ................................................ 11.1
Pep Boys - Manny, Moe, & Jack (The) .......................... 14.3
PepsiCo, Inc. ................................................ 8.8
Pitney Bowes, Inc. ........................................... 15.9
Questar Corp. ................................................ 3.3
Reliastar Financial Corp. .................................... 10.7
Rockwell International Corp. ................................. 5.2
RPM, Inc. .................................................... 7.7
SBC Communications, Inc. ..................................... 4.1
Schulman A., Inc. ............................................ 10.5
Sigma-Aldrich Corp. .......................................... 12.0
Sonoco Products Corp. ........................................ 9.1
Sysco Corp. .................................................. 13.3
Travelers, Inc. .............................................. 25.0
Wal-Mart Stores, Inc. ........................................ 28.6
Worthington Industries, Inc. ................................. 8.3
----
The average dividend increase for this group was 11.1%
====
Historical Data (Unaudited)
The table below shows the record for the V.A. Sovereign Investors Fund during
the past periods.
- --------------------------------------------------------------------------------
PER SHARE
YEAR -------------------------------------------------------
ENDED SHARES DIVIDENDS NET ASSET CAPITAL GAINS
DEC. 31 OUTSTANDING FROM INCOME VALUE DISTRIBUTION
------- ----------- ----------- ----- ------------
1996 103,482 $.07 $10.74 $.02
1997 896,718 $.18 $13.59 $.01
93
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Declaration Trust
94
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Declaration Trust
95
<PAGE>
================================================================================
------------------
[LOGO] JOHN HANCOCK FUNDS First Class
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Boston, MA
1-800-824-0335 Permit No. 53176
INTERNET: www.jhancock.com/funds ------------------
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Declaration Trust. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[LOGO] Printed on Recycled Paper DEC0A 12/97
2/98
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
<PAGE>
SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC]
Declaration Trust
Growth V.A. International Fund
V.A. Regional Bank Fund
V.A. Financial Industries Fund
V.A. Emerging Growth Fund
V.A. Special Opportunities Fund
V.A. Growth Fund
---------------------------------------------------------------
Growth V.A. Growth & Income Fund
& Income V.A. Independence Equity Fund
V.A. Sovereign Investors Fund
V.A. 500 Index Fund
---------------------------------------------------------------
Income V.A. Sovereign Bond Fund
V.A. Strategic Income Fund
V.A. High Yield Bond Fund
V.A. World Bond Fund
V.A. Money Market Fund
JUNE 30, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
================================Table of Contents===============================
John Hancock Funds - Declaration Trust
Page
1) Chairman's Message....................................................... 3
2) Portfolio Manager Commentary
This commentary reflects the views of the portfolio manager(s) or portfolio
management team through the end of the Fund's period discussed in this report.
Of course, the manager's or team's views are subject to change as market and
other conditions warrant.
Growth
V.A. International Fund................................................ 4
V.A. Regional Bank Fund................................................ 7
V.A. Financial Industries Fund......................................... 10
V.A. Emerging Growth Fund.............................................. 13
V.A. Special Opportunities Fund........................................ 16
V.A. Growth Fund....................................................... 19
Growth & Income
V.A. Growth & Income Fund.............................................. 22
V.A. Independence Equity Fund.......................................... 25
V.A. Sovereign Investors Fund.......................................... 28
V.A. 500 Index Fund.................................................... 31
Income
V.A. Sovereign Bond Fund............................................... 34
V.A. Strategic Income Fund............................................. 37
V.A. High Yield Bond Fund.............................................. 40
V.A. World Bond Fund................................................... 43
V.A. Money Market Fund................................................. 46
3) Financial Statements..................................................... 48
4) Notes To Financial Statements............................................ 117
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
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 and Chief Operating Officer
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
CUSTODIANS
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
V.A. Emerging Growth Fund
V.A. Growth Fund
V.A. Financial Industries Fund
V.A. Growth & Income Fund
V.A. High Yield Bond Fund
V.A. Independence Equity Fund
V.A. Regional Bank Fund
V.A. Sovereign Investors Fund
V.A. Special Opportunities Fund
V.A. Strategic Income Fund
V.A. Sovereign Bond Fund
STATE STREET BANK AND TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
V.A. International Fund
V.A. 500 Index Fund
V.A. World Bond Fund
V.A. Money Market Fund
TRANSFER AGENT
JOHN HANCOCK SERVICING CENTER
P.O. BOX 9298
BOSTON, MASSACHUSETTS 02205-9298
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
SUB-INVESTMENT ADVISERS
JOHN HANCOCK ADVISERS INTERNATIONAL LIMITED
34 DOVER STREET
LONDON, ENGLAND W1X3RA
V.A. International Fund
INDEPENDENCE INVESTMENT ASSOCIATES, INC.
53 STATE STREET
BOSTON, MASSACHUSETTS 02109
V.A. Independence Equity Fund
SOVEREIGN ASSET MANAGEMENT CORP.
1235 WESTLAKES DRIVE
BERWYN, PENNSYLVANIA 19312
V.A. Sovereign Investors Fund
ISSUER
JOHN HANCOCK MUTUAL
LIFE INSURANCE COMPANY
JOHN HANCOCK VARIABLE
LIFE INSURANCE COMPANY*
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02117
*Not Licensed in New York
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
2
<PAGE>
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year wondering
what the market would do for an encore in 1998. The answer through the end of
June was more of the same. But tremors from Asia have also sparked increased
volatility, as corporate earnings and the U.S. economy have shown signs of
slowing. What's more, a good part of the market's advance has come from just a
small group of the largest companies in the major stock market indexes.
- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
- --------------------------------------------------------------------------------
The move ahead has been so narrow that some observers believe that most
stocks have actually been in a bear market this year. The bond market had its
pockets of volatility as well, although U.S. Treasury bonds benefited from their
safe-haven status.
While we don't make a practice of opining on what the market will do next, we
believe that after such a long run up, it would be wise for investors to set
more realistic expectations. Over the long term, the market's historical results
have been more in the 10% per year range, which is still a solid result,
considering it has been produced despite wars, depressions and other social
upheavals along the way.
In addition to adjusting, or at least re-examining, expectations, now could
also be a good time to review with your investment professional how your assets
are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping you keep
your feet on the ground as you pursue your dreams.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
3
<PAGE>
================================================================================
BY MIREN ETCHEVERRY, JOHN L.F. WILLS AND
GERARDO J. ESPINOZA, PORTFOLIO MANAGERS
John Hancock
V.A. International Fund
Europe dominates overseas markets during last six months
"International markets parted ways over the last six months..."
International markets parted ways over the last six months, with Europe taking
the high road and Asia and Latin America the low. In the first quarter of the
year, most markets worldwide were rallying, rebounding from late last year's
Asian currency and financial earthquakes. Even the Southeast Asian countries
that caused the consternation had started to rebound, bringing emerging Latin
American markets along. Japan's market also rose on expectations that the
government was about to jumpstart the barely breathing economy. But the world
divided sharply in the second quarter. As Japan's hopes for recovery faded and
its longstanding problems came to the forefront, particularly in the banking
sector, its currency weakened further and its economy slipped back into
recession. That prompted fears of a second round of regional currency
devaluations and the prospect of global economic slowdowns. As if that weren't
enough, Russia's economy and currency later erupted as further trouble spots. It
was the last straw for all emerging markets, including Latin America, which gave
up all their earlier ground and then some, when investors left in droves for
safer havens. Europe was the clear overseas winner, where markets kept rising
because of both the flight to quality and strong economic forces, not the least
of which was anticipation of the long-awaited formation of the European Monetary
Union (EMU).
Despite the divergence in regional results, international investors fared
well over the last six months. John Hancock V.A. International Fund was no
exception. For the six months ended June 30, 1998, the Fund posted a total
return of 15.81% at net asset value. That was in line with the 16.25% return of
the average variable annuity international fund, according to Lipper Analytical
Services, Inc. See page 6 for historical performance information.
Europe overweighted; Fund restructured
The Fund benefited from its large position in Europe, which rose from 49% to 72%
of the Fund's net assets. We kept building our stake there because of the
compelling investment environment. Inflation and interest rates are at historic
lows, as EMU member countries are putting their economic houses in order. At the
corporate level, restructuring and
- --------------------------------------------------------------------------------
Pie chart at the bottom left column titled "Portfolio Diversification" There are
six listings. Beginning from the top right the first represents Continental
Europe 56%, the second represents U.K. & Ireland 16%, the third represents
Pacific Rim 15%, The fourth represents Latin America 4%, the fifth represents
Canada 5%, the sixth represents Short-Term Investments & Other 4%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: V.A.
International Fund Portfolio managers. (l-r): Gerardo J. Espinoza, Miren
Etcheverry, and John L.F. Wills.]
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
JOHN HANCOCK V.A. INTERNATIONAL FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 5% with 20% at the top and 0% at the
bottom. The first represents the 15.81% total return for John Hancock V.A.
International Fund. The second represents the 16.25% total return for Average
variable annuity international fund. A Footnote below reads "The total return
for John Hancock V.A. International Fund is at net asset value with all
distributions reinvested. The average variable annuity international fund is
tracked by Lipper Analytical Services, Inc. See the following page for
historical performance information."]
- --------------------------------------------------------------------------------
merger activity have increased as companies work to remain competitive in the
more open EMU corporate environment. Earnings outlooks also remain favorable.
France was among our top country weightings, at 13% of the Fund, up from 6% six
months ago, and it was the main contributor to the Fund's performance. Our top
stock there was France Telecom. In the U.K., consumer magazine publishing
company EMAP saw its stock rise on the strength of the British economy and an
economic rebound in France, where EMAP derives a large portion of its revenues.
Our European financial stocks also served us well, top among them Allied Irish
Banks, Netherlands insurer ING Groep and French insurer Axa.
In the last six months, we established positions in several new attractive
markets, including Italy, Spain, Portugal, Finland and Denmark. This growing
list also reflect the results of a gradual Fund restructuring undertaken to
better manage the Fund's risk level by making it more diversified and balanced.
We achieved this by significantly increasing the number of stocks in the
portfolio and by reducing the percentage of the Fund's assets held in the top 10
positions.
Caution on emerging-markets and Japan
We became even more conservative in our approach to emerging markets worldwide,
further cutting our stake in Asia to 15% by the end of June from 20% six months
ago. Latin America has also suffered from the flight to quality, falling
commodity prices and rising interest rates. While we believe in the longer-term
story of privatization and burgeoning growth there, we cut our stake from 12% to
4% for now, until the emerging-market backlash abates.
We've held our underweighted stake in Japan fairly steady at around 10%,
however, reasoning that the unprecedented international pressure on the Japanese
government should result in some steps toward addressing the country's major
structural problems and preventing a greater regional crisis.
Outlook
We remain encouraged about the outlook for European stock markets, particularly
the EMU countries and the single "euro" currency that bodes well for European
businesses. We will keep our focus there, and closely monitor stock valuation
levels and the effects that implementation of the EMU will have on liquidity
flows among various European markets. By contrast, the prospects for Asia and
Japan remain far murkier, given the weak yen and heightened prospects for
further currency woes in the region. Until the signs are more encouraging, we
will stay underweighted in both the developed and emerging countries of Asia,
and in Latin America, given the taint on the entire emerging-market asset class.
"The Fund benefited from its large position in Europe..."
International investing involves special risks such as political, economic and
currency risks and differences in accounting standards and financial reporting.
5
<PAGE>
================================================================================
JOHN HANCOCK V.A. INTERNATIONAL FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 1.22% 29.87%
Average Annual Total Returns(1) 1.22% 15.30%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been (0.65%) and 13.68%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
International Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Morgan Stanley Capital International (MSCI) All Country
World-Ex U.S. Free Index, which measures the performance of securities that are
freely traded in a broad range of developed
and emerging stock markets.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. International Fund, representing the growth of
a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the Morgan Stanley Capital International
(MSCI) All Country World-Ex U.S. Free Index and is equal to $14,441 as of June
30, 1998. The second line represents the hypothetical $10,000 investment made in
the V.A. International Fund on August 29, 1996, before sales charge, and is
equal to $12,987 as of June 30, 1998.
- --------------------------------------------------------------------------------
6
<PAGE>
================================================================================
BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER AND
THOMAS FINUCANE AND THOMAS GOGGINS, PORTFOLIO MANAGERS
John Hancock
V.A. Regional Bank Fund
After strong fourth-quarter finish, small and
mid-sized bank stocks languish in 1998
The stock market posted strong gains in the first six months of 1998, but the
going got tougher as the period progressed. After rebounding in the first
quarter from the Asian financial woes that hit world markets late last year, the
market began to stall again in the spring. Once it became clear that Asia's
problems were not solved, and that the U.S. economy, and corporate profits,
might slow, stocks gave back some ground and mostly moved sideways in the second
quarter. Following last year's pattern, large-company blue chip stocks were the
biggest winners, as investors both foreign and domestic chose them as safe-haven
investments. As a result, the small and mid-sized banks that are the Fund's
focus lagged the market. What's more, some blockbuster mega-mergers took
industry focus temporarily off merger potential among regional banks.
The lag among small and mid-sized banks became greater just as John Hancock
V.A. Regional Bank Fund was launched on May 1, 1998. That, plus
higher-than-average levels of cash as we established positions, caused the Fund
to lose ground. In the two months from inception through June 30, 1998, the Fund
posted a total return of -4.13% at net asset value, compared with the Standard &
Poor's Regional Bank Index's return of -3.28%. In the same period, the average
open-end financial services fund stayed flat, returning 0.00% and the average
variable annuity specialty fund returned -0.31%, according to Lipper Analytical
Services, Inc.
Fund strategy
The Fund seeks capital appreciation by investing primarily in regional bank and
thrift stocks that have healthy fundamentals and may stand in the path of
consolidation -- an ongoing trend in the banking industry. In the Fund's first
two months, we began building positions in a range of banks around the country,
with emphasis on quality banks with assets ranging between $5 billion and $30
billion. This size of institution offers healthy earnings prospects in
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. ALBANK Financial 2.4%
2. Comerica 2.3%
3. Imperial Bancorp 2.3%
4. CCB Financial 2.3%
5. Firstar Corp. 2.2%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
"...the small and mid-sized banks that are the Fund's focus lagged the market."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members. Standing (l-r): Jay McKelvey, Tom
Goggins and Tom Finucane. Sitting (l-r): Lisa Welch, Jim Schmidt and Patricia
Ouimet.]
- --------------------------------------------------------------------------------
7
<PAGE>
================================================================================
JOHN HANCOCK V.A. REGIONAL BANK FUND
"We expect the wave of consolidations sweeping the industry to continue..."
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "From May 1, 1998 to June 30, 1998." The
chart is scaled in increments of 2% with the 6% at the top and -6% at the
bottom. The first represents the -4.13% total return for John Hancock V.A.
Regional Bank Fund. The second represents the 0.00% total return for Average
open-end financial services fund. The third represents the 0.31% total return
for Average variable annuity specialty fund. A Footnote below reads "The total
return for John Hancock V.A. Regional Bank Fund is at net asset value with all
distributions reinvested. The average open-end financial services fund and
variable annuity specialty fund are tracked by Lipper Analytical Services,
Inc."]
- --------------------------------------------------------------------------------
the near term and what we believe will be a high mortality rate over the next
five to seven years. In other words, as the U.S. banking system becomes
dominated by a handful of massive, national players, we believe these regional
banks will be taken out at premium prices. Examples include Compass Bancshares,
FirstMerit Corp. and First Security Corp.
The Fund was initiated immediately following a period of frenzied merger
activity. April 13th became the most dramatic date in the annals of bank
consolidation as two mega-deals were announced. The proposed merger of
NationsBank and BankAmerica would create by far the largest bank in the United
States. The "other" merger of April 13, which would have dominated banking news
on any other day, was between Banc One and First Chicago. This deal will create
a banking company with approximately $240 billion in assets that will rank as
the nation's sixth largest. These deals, coupled with the merger of Citicorp and
Travelers into Citigroup that was announced a week earlier, substantially
increase the pressure for industry consolidation.
Already in the Fund's first two months, one of its holdings, Firstar Corp.,
announced its takeover by Star Bancorp. We also expect numerous transactions in
the coming months, believing that "mergers beget mergers" and that a few
landmark deals serve as incentive to others. The timing of such mergers is
likely to be affected by the need to revamp computer systems for the year 2000
changeover ("Y2K"). For the next six months, activity could increase as
institutions scrambling to meet their Y2K deadlines will be induced to strike
deals and avoid the problem totally. Then in early 1999, we could witness a
brief hiatus in mergers because systems would have to be combined perilously
close to the magic date.
Earnings on track
Following a fruitful 1997, earnings in 1998 have generally equaled or surpassed
expectations even though regional bank stock prices have not reflected this
recently. The nearly ideal economic conditions -- moderate, sustainable growth,
low inflation and stable interest rates -- have enabled our companies to report
12% year-over-year earnings growth in the first quarter and 11% thus far in the
second quarter of 1998. Across the gamut of banks and thrifts, loan quality is
very good, margins, while under pressure, are wide by historic standards,
expense controls have been excellent and stock repurchases continue to counter
capital buildup.
Outlook
There are several factors contributing to our continued positive outlook for
financial stocks. We expect the wave of consolidations sweeping the industry to
continue, both here and starting in earnest abroad. However, there could be a
temporary slowdown as we approach the year 2000 and its attendant technical
issues. Furthermore, with the U.S. economy solid, interest rates low and
inflation invisible, the environment remains right for financial stocks to
advance. Should the U.S. economy slow and corporate profits shrink due to
fallout from Asian economic problems, we'll also be watching for signs of
increasing problem loans, which are currently at very low levels.
- --------------------------------------------------------------------------------
Sector investing is subject to greater risks than the market as a whole.
8
<PAGE>
================================================================================
JOHN HANCOCK V.A. REGIONAL BANK FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
INCEPTION
(5/1/98)
--------
Cumulative Total Return (4.13%)
Average Annual Total Return(1) (4.13%)(2)
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the total return since inception would have been (4.20%).
(2) Not annualized.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Regional Bank Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Standard & Poor's 500 Stock Index--an unmanaged index that
includes 500 widely traded common stocks and is often used as a measure of stock
market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Regional Bank Fund, representing the growth of
a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on May 1, 1998, and is equal to $10,748 as of June
30, 1998. The second line represents the value of the V.A. Regional Bank Fund,
before sales charge, and is equal to $9,587 as of June 30, 1998.
- --------------------------------------------------------------------------------
9
<PAGE>
================================================================================
BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER AND
THOMAS FINUCANE,CFA, AND THOMAS GOGGINS, PORTFOLIO MANAGERS
John Hancock
V.A. Financial Industries Fund
Steady interest rates, solid earnings boost stocks, including financials
"Earnings for financial companies in 1998 have generally met or exceeded
expectations."
In the first three months of 1998, the stock market moved sharply forward,
overcoming both fears that Asia's financial woes would leave their mark on the
U.S. economy and jitters about earnings prospects. The economy surprised many by
its robustness, and inflation remained tame, which sparked the rally, primarily
among the large-company stocks perceived to be safe havens. However, the second
quarter turned more volatile. A second round of Asian fears was not so easily
dismissed and second quarter earnings reports and economic data suggested the
economy could be slowing. Despite the stall, the Standard & Poor's 500 Stock
Index still advanced by 17.71% in the first six months of the year. Banks and
other financial stocks lagged the market somewhat, pausing after a very strong
year-end rally. Mirroring the broader market, the larger banks and financial
companies outperformed their smaller counterparts.
John Hancock V.A. Financial Industries Fund also participated in the market's
advance. For the six months ended June 30, 1998, the Fund posted a total return
of 12.35% at net asset value. That compared to the 12.19% return of the average
open-end financial services fund and the 15.38% return of the average variable
annuity specialty fund, according to Lipper Analytical Services, Inc.
Historical performance information can be found on page 12.
Performance and strategy review
Earnings for financial companies in 1998 have generally met or exceeded
expectations. Among lending institutions, loan volumes have been strong while
the level of non-performing loans has remained low, interest margins have been
relatively stable, expenses have been under control, and stock buy backs have
bolstered returns on equity. Even better conditions have been present for the
securities brokers, where earnings gains of 15% to 30% have been the norm.
Commissions, underwriting volume, and merger and acquisition fees have all been
running at record levels. We are satisfied with the earnings of the real estate
investment trusts (REITs); however, their share prices have generally been flat
or down making
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. Legg Mason 4.4%
2. Fiserv 4.1%
3. American Express Co. 3.9%
4. General Re 3.9%
5. A.G. Edwards 3.8%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members. Standing (l-r): Jay McKelvey, Tom
Goggins and Tom Finucane. Sitting (l-r): Lisa Welch, Jim Schmidt and Patricia
Ouimet.]
- --------------------------------------------------------------------------------
10
<PAGE>
================================================================================
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 5% with the 20% at the top and 0% at the
bottom. The first represents the 12.35% total return for John Hancock V.A.
Financial Industries Fund. The second represents the 12.19% total return for
Average open-end financial services fund. The third represents the 15.38% total
return for Average variable annuity specialty fund. A Footnote below reads "The
total return for John Hancock V.A. Financial Industries Fund is at net asset
value with all distributions reinvested. The average open-end financial services
fund and variable annuity specialty fund are tracked by Lipper Analytical
Services, Inc. See the following page for historical performance information."]
- --------------------------------------------------------------------------------
them our worst performing group of stocks. These stocks appear to offer
unusually good value now as they are selling at low ratios of price to funds
from operations.
We witnessed mixed results from our insurance holdings, which represented our
largest sector concentration at 25% of the Fund's net assets at the end of June.
Two of our larger insurers, Travelers and General Re Corp., advanced in price as
they announced mergers. Companies that derive significant revenue from annuity
sales showed good results, while some of the property and casualty companies
were afflicted with greater than expected losses from weather-related
catastrophies.
Consolidation continues
The most important development this year in the financial services area was the
announcement on April 6 that Travelers and Citicorp would merge to form
Citigroup. This transaction is a low-risk merger that will create the world's
largest financial services company, producing clear cost-cutting opportunities.
It also has enormous implication for the future of the industry, with the
greatest significance lying in the impact it may have on financial reform
legislation. A bill that would allow cross-ownership between banks, securities
brokers and insurance underwriters had been languishing in Congress. This
merger, which ultimately requires such legislation, creates a sense of urgency
to work out the compromises needed to pass the reform.
Europe's potential grows
The process of streamlining the financial services sector in Europe is many
years behind that of the United States. However, with the European Monetary
Union (EMU) coming into effect with 11 initial member countries and the euro as
the common currency, we expect to see changes in the years ahead. As the EMU
promotes further economic cooperation among European nations, we believe
consolidation among financial institutions and the development of globally
competitive, shareholder-oriented dominant firms will be the eventual outcome.
Currently, the Fund's small European investments (less than 5% of the Fund) are
concentrated on the most progressive banks in Ireland, the Netherlands and
Sweden. We intend to increase our allocation as we gain confidence that
U.S.-style restructuring is beginning to take hold.
A look ahead
We remain encouraged about the prospects for financial stocks over the long
term. We expect the wave of consolidations sweeping the industry to continue,
both here and starting in earnest abroad. We could, however, see a temporary
slowdown as we approach the year 2000 and its attendant technical issues.
Furthermore, with the U.S. economy solid, interest rates low and inflation
invisible, the environment remains right for financial stocks to advance. Should
the U.S. economy slow and corporate profits shrink due to fallout from Asian
economic problems, however, we'll be watching for signs of increasing problem
loans, which are currently at very low levels.
"We witnessed mixed results from our insurance holdings..."
- --------------------------------------------------------------------------------
Sector investing is subject to greater risks than the market as a whole.
11
<PAGE>
================================================================================
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (4/30/97)
---- ---------
Cumulative Total Returns 34.99% 51.73%
Average Annual Total Returns(1) 34.99% 43.06%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 34.82% and 42.77%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Financial Industries Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Financial Industries Fund, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the V.A. Financial Industries Fund on April 30, 1997, before sales charge,
and is equal to $15,173 as of June 30, 1998. The second line represents the
value of the S&P 500 Stock Index and is equal to $14,427 as of June 30, 1998.
- --------------------------------------------------------------------------------
12
<PAGE>
================================================================================
BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Emerging Growth Fund
Small-company stocks post moderate gains in first half
in a split personality market
Small-company stocks trudged higher over the past six months, although their
gains were overshadowed by the progress of their larger-company counterparts.
For the first half of 1998, the Russell 2000 Index of small-company stocks
gained only 4.7%, compared to the 17.71% rise of the Standard & Poor's 500 Stock
Index. That divergence confounded many observers, especially given all that
small companies had going for them during the period: double-digit earnings
increases, limited exposure to the turmoil in Asia and historically low stock
prices relative to their large cousins. But several factors conspired to mute
small-company stocks' returns. In light of the economic problems in Asia,
investors increasingly sought out the liquidity -- the ease with which a stock
can be bought or sold -- of large, well-known companies. Furthermore, foreign
buyers bought record amounts of U.S. stocks, but overwhelmingly embraced the
names they knew, like Coca-Cola, General Electric and Gillette.
For the six-month period ended June 30, 1998, John Hancock V.A. Emerging
Growth Fund had a total return of 9.18% at net asset value, compared to the
average variable annuity small-cap fund's return of 7.06%, according to Lipper
Analytical Services, Inc.
Historical performance information can be found on page 15.
Retailers, "CLECS" outperform; health care lags
As U.S. consumer demand boomed, retailers -- whose main business lies in the
U.S. -- were among the biggest contributors to the Fund's performance during the
period. A robust job market helped ignite strong consumer spending and boosted
the performance of department store chain Stage Stores and sporting goods
retailer Hibbetts. Both retailers have found success by serving small-town
America.
Competitive local exchange carriers -- dubbed "CLECs" -- were another of the
Fund's best-performing groups. These telecommunications companies have quickly
grabbed market share away from their regional Bell operating company
competitors, because they provide small and mid-sized businesses with better
services, such as sophisticated data transmission, at reduced prices.
"...gains were overshadowed by the progress of their larger-company
counterparts."
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. Metromedia Fiber Network 1.1%
2. Micromuse 1.1%
3. Medallion Financial 1.0%
4. ProBusiness Services 1.0%
5. VeriSign 1.0%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members (l-r): Anurag Pandit, Bernice Behar
and Lauren Allen.]
- --------------------------------------------------------------------------------
13
<PAGE>
================================================================================
JOHN HANCOCK V.A. EMERGING GROWTH FUND
"...small-cap stocks remain quite cheap."
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 2% with the 10% at the top and 0% at the
bottom. The first represents the 9.18% total return for John Hancock V.A.
Emerging Growth Fund. The second represents the 7.06% total return for the
Average variable annuity small-cap fund. A Footnote below reads "The total
return for John Hancock V.A. Emerging Growth Fund is at net asset value with all
distributions reinvested. The average variable annuity small-cap fund is tracked
by Lipper Analytical Services, Inc. See the following page for historical
performance information."]
- --------------------------------------------------------------------------------
The stock price of industry leader Intermedia Communications, for example, rose
substantially during the period. On the other side of the scale were our
health-care companies, which proved to be disappointing during the period. Often
within the small-stock universe, bad news at one company can taint a larger
group of stocks. In addition, one of our holdings, Respironix, a maker of
respiratory devices, faltered because of changes in insurance reimbursement
schedules. We sold the stock during the period.
Shift in technology holdings
We made some strategic changes among our technology holdings over the past six
months. While we've maintained some hardware holdings that we think are market
leaders, we've reduced our overall hardware stake and shifted our technology
focus more toward software and service companies. While problems in Asia have
dampened global computer sales, we project that the demand for software will
continue to grow. Companies continue to emphasize software as a means to boost
productivity, and that has helped our holdings in Advent Software, a maker of
programs for financial analysis, and CBT group, which teaches businesses how to
use various software programs through its training software. Another favorite is
Aris Corp., a consulting company that provides implementation and training for
Oracle-based programs.
Outlook
We remain optimistic about the prospects for stocks in general, and
small-company stocks in particular. All the factors that have propelled the
stock market over the past several years appear to remain in place -- economic
growth is healthy, inflation is tame and consumer confidence is strong. We
believe that for the balance of the year, interest rates may rise or fall in
fits and starts, but the longer-term trend is for them to go lower. Interest
rates are a critical factor for small growth companies since they tend to borrow
to finance their growth. Lower interest costs, in turn, could translate into
better profitability.
As for small-company stocks, we think they are attractively priced and offer
superior earnings growth rates relative to their large-company counterparts.
Growth rates for small-company stocks are expected to be double those of the S&P
500 in 1998. Although small-cap stocks have the higher growth potential, they
are currently trading at roughly the same price-earnings ratio as large-cap
stocks. From a historical perspective, small-cap stocks remain quite cheap.
We've said it before, and we continue to believe, that it's only a question of
when, not if, the market ultimately rewards small companies for their higher
growth potential and low prices.
14
<PAGE>
================================================================================
JOHN HANCOCK V.A. EMERGING GROWTH FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 16.74% 13.23%
Average Annual Total Returns(1) 16.74% 7.00%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total returns for the one-year period and since
inception would have been 15.50% and 5.08%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Emerging Growth Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Russell 2000 Index and the Russell 2000 Growth Index. The
Russell 2000 Index is an unmanaged small-cap index that is comprised of 2,000
U.S. stocks. The Russell 2000 Growth Index is an unmanaged index that contains
Russell 2000 Index stocks with a greater-than-average growth orientation.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Emerging Growth Fund, 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 Russell 2000 Index and is equal to
$14,850 as of June 30, 1998. The second line represents the value of the Russell
2000 Growth Index and is equal to $13,487 as of June 30, 1998. The third line
represents the value of a hypothetical $10,000 investment made in the V.A.
Emerging Growth Fund on August 29, 1996, before sales charge, and is equal to
$11,323 as of June 30, 1998.
- --------------------------------------------------------------------------------
15
<PAGE>
================================================================================
BY BARBARA FRIEDMAN, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Special Opportunities Fund
Stocks advance amid volatility; mid-caps lag larger stocks
"...three largest concentrations in the financial, technology and health-care
sectors."
Stocks continued their forward march over the last six months, overcoming stiff
headwinds later in the period. In fact, most of the market's gains came in the
first quarter, when the market shrugged off fears of fallout from Asia's
financial ills and the remained ideal. But after rallying to new highs in April,
stocks retrenched amid concerns that prices were too high and in reaction to
renewed concerns about Asian contagion. In this nervous environment, investors
both foreign and domestic flocked to the large, blue-chip stocks that were
viewed as the safest haven. As a result, mid-cap stocks -- which are the Fund's
primary focus -- lagged the overall market, returning 9.13%, as measured by the
Russell Midcap Index, compared to the Standard & Poor's 500 Stock Index's 17.71%
advance, including reinvested dividends.
It was a good environment in which to launch John Hancock V.A. Special
Opportunities Fund on January 2, 1998. Mid-cap stocks were attractively priced
after lagging the market, and as we began initiating positions in January,
stocks were tumbling in reaction to Asian fears. That helped us buy low and
participate fully in the subsequent rally. From inception through June 30, 1998,
the Fund posted a total return of 14.00% at net asset value, compared to the
13.40% return of the average variable annuity mid-cap fund, according to Lipper
Analytical Services, Inc.
Strategy and sector choices
The Fund seeks long-term capital appreciation by investing in stocks within
industry sectors that we believe have the potential for above-average earnings
growth. Under normal circumstances, at least 75% of the Fund will be invested in
five or fewer sectors. Within these sectors, the Fund targets predominately
mid-sized companies with market capitalizations between $750 million and $6
billion that offer solid earnings prospects. In considering our sectors, we
generally view the top three groups as longer-term areas of concentration,
although individual stocks within those sectors will change depending on
specific company fundamentals and stock valuations. The other two sectors could
rotate more frequently, depending on market and economic dynamics.
To date, we have established our three largest concentrations in the
financial, technology and
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. EMC Corp. 1.9%
2. NEXTLINK Communications 1.6%
3. Unisys 1.6%
4. Keane 1.6%
5. Cambridge Technology Partners 1.6%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members (l-r): Barbara Friedman, Ben Hock,
Lisa Welch and John Golden.]
- --------------------------------------------------------------------------------
16
<PAGE>
================================================================================
JOHN HANCOCK V.A. SPECIAL OPPORTUNITIES FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "From January 2, 1998 to June 30, 1998." The
chart is scaled in increments of 5% with the 15% at the top and 0% at the
bottom. The first represents the 14.00% total return for John Hancock V.A.
Special Opportunities Fund. The second represents the 13.40% total return for
Average variable annuity mid-cap fund. A footnote at the bottom reads: The total
return for John Hancock V.A. Special Opportunity Fund is at net asset value with
all distributions reinvested. The average variable annuity mid-cap fund is
tracked by Lipper Analytical Services, Inc."]
- --------------------------------------------------------------------------------
health-care sectors. Together they accounted for more than 65% of the Fund's net
assets. We also focused to a lesser degree on retail and consumer cyclical
stocks, mainly media companies. Across the Fund, we also kept our sights on
domestically oriented stocks that were less vulnerable to Asia's economic
slowdown.
Technology, financials, healthcare
By the end of June, technology was our largest sector, at 31% of net assets. We
focused on software companies and avoided the semiconductor and computer makers
that have suffered from Asia's slowdown, a decline in personal computer demand
and increased pricing pressures. Conversely, software companies continued to
benefit from companies' use of technology software to realize productivity gains
and cost savings. Among our top performers were EMC Corp., a leading computer
storage company and Keane, Inc., a software company helping corporations deal
with year 2000 compliance issues.
In the financial sector, at 22% of the Fund, we had a diverse array of
stocks, including regional banks, insurance companies --both life and property
and casualty -- and financial service companies. We believe the ongoing industry
consolidation bodes well for this sector. Financial stocks lagged the market in
the last six months, taking a breather after a strong year-end run-up and a lack
of takeover activity in the mid-cap arena. But we had a few good performers,
such as Bermuda-based insurer Mid Ocean that was acquired by another company. A
disappointment was Selective Insurance Group, which has yet to gain market
recognition.
Health-care stocks, at 13% of the portfolio, did particularly well. This
sector has strong prospects, given that health-care spending will most likely
rise as baby boomers age. Here, too, we held a broadly diverse basket of stocks,
including pharmaceuticals, hospital companies, vitamin manufacturers and nursing
home companies. One of our top choices was Mylan Laboratories, a generic drug
company whose earnings are reflecting the rise in generic drug prices. Its stock
price has risen by 50% since we bought it.
A look ahead
We are encouraged by the prospects for mid-cap stocks. Their earnings outlook is
better than that of the large-cap universe, where stock prices have risen to
expensive levels. At the same time, mid-cap stocks remain attractively valued,
selling at a modest discount to the broader market. In our view, that
combination represents a compelling scenario bound to attract investors'
attention eventually. No matter what the market does next, we will continue to
look for solid companies that have the potential to generate strong and
consistent earnings growth.
"...mid-cap stocks remain attractively valued..."
- --------------------------------------------------------------------------------
Sector investing is subject to greater risks than the market as a whole.
17
<PAGE>
================================================================================
JOHN HANCOCK V.A. SPECIAL OPPORTUNITIES FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
INCEPTION
(1/2/98)
--------
Cumulative Total Return 14.00%
Average Annual Total Return(1) 14.00%(2)
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the total return since inception would have been 12.49%.
(2) Not annualized.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Special Opportunities Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in both the Standard & Poor's 500 Stock Index and the Russell
Midcap Growth Index. The Standard & Poor's 500 Stock Index is an unmanaged index
that includes 500 widely traded common stocks and is a commonly used measure of
stock market performance. The Russell Midcap Growth Index is an unmanaged index
that contains those securities from the Russell Midcap Index with a
greater-than-average growth orientation.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Special Opportunities Fund, 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 Standard & Poor's 500 Stock Index and
is equal to $14,446 as of June 30, 1998. The second line represents the value of
the Russell Midcap Growth Index and is equal to $13,784 as of June 30, 1998. The
third line represents the value of a hypothetical $10,000 investment made in the
V.A. Special Opportunities Fund on January 2, 1998, before sales charge, and is
equal to $11,400 as of June 30, 1998.
- --------------------------------------------------------------------------------
18
<PAGE>
================================================================================
BY BENJAMIN A. HOCK, JR., PORTFOLIO MANAGER
John Hancock
V.A. Growth Fund
Market advances, with strong first quarter gains
and second quarter strife
Recently, Benjamin A. Hock, Jr. assumed leadership of John Hancock V.A. Growth
Fund's management team. Mr. Hock, a senior vice president at John Hancock Funds
since 1994, has more than 24 years of experience in the investment business.
The stock market kept marching forward over the last six months, again reaching
record highs. The real strides, however, took place mostly in the first quarter
of 1998 in a relief rally that occurred after Asia's ills did not slow the
economy down, as many feared it would. But Asian concerns permeated the second
quarter, and the market moved mostly backward or in side steps instead of its
earlier giant steps. In this period, the market consolidated its first quarter
gains and analysts revised down corporate earnings estimates. Volatility
increased as the dollar strengthened and the Japanese yen plummeted, rekindling
worries that Asia's financial turmoil would indeed slow the U.S. economy and
corporate profits in the second half of the year. Despite the market's
fluctuations, the broad market as measured by the Standard & Poor's 500 Stock
Index returned 17.71%, including reinvested dividends, through June.
For the six months ended June 30, 1998, John Hancock V.A. Growth Fund posted
a total return of 12.49% at net asset value, compared to the 16.23% return of
the average variable annuity growth fund, according to Lipper Analytical
Services, Inc. Historical performance information can be found on page 21. We
attribute the Fund's underperformance to its higher-than-average small-cap stock
weighting. By the period's end, we had decreased the number of small-cap stocks
in the Fund and increased its average capitalization. But having had small-cap
exposure hurt us in the period, because these companies significantly lagged
their larger brethren.
Three key sectors pay off
Over the last six months, the Fund maintained concentrations in three broad
areas: consumer stocks, drug and technology companies, which together accounted
for more than 60% of the Fund's net assets. In hindsight, the Fund would have
benefited from an even bigger weighting in these
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. Cisco Systems 3.4%
2. Microsoft 3.2%
3. American Express 3.2%
4. Schering-Plough 3.1%
5. General Electric 3.0%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
"...concentrations in three broad areas: consumer stocks, drug and technology
companies..."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members (l-r): Lisa welch, Ben Hock, John
Golden and Linda Miller.]
- --------------------------------------------------------------------------------
19
<PAGE>
================================================================================
JOHN HANCOCK V.A. GROWTH FUND
"In this volatile environment, the winners and losers are more likely than ever
to part company."
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 5% with the 20% at the top and 0% at the
bottom. The first represents the 12.49% total return for John Hancock V.A.
Growth Fund. The second represents the 16.23% total return for Average variable
annuity growth fund. A footnote at the bottom reads: The total return for John
Hancock V.A. Growth Fund is at net asset value with all distributions
reinvested. The average variable annuity growth fund is tracked by Lipper
Analytical Services, Inc. See the following page for historical performance
information."]
- --------------------------------------------------------------------------------
sectors. Consumer stocks such as Coca-Cola, PepsiCo., Gillette and
Colgate-Palmolive, as well as retail holdings like department store Dayton
Hudson, rode the crest of the strong U.S. economy, historically low unemployment
and the rise in personal income. Steady consumer buying habits and declining
commodity costs have also helped our food stocks, including Suiza and new
additions Quaker Oats and Flowers Industries. After lagging the market for a
long period, their valuations were also very attractive.
The large drug companies, such as Merck and Schering-Plough, continued to see
their fortunes boosted by an ongoing wave of new product offerings. In addition
to their solid potential for steady earnings growth, these two sectors helped
shelter the Fund from Asian fallout, since our consumer stocks are domestically
oriented and the major drug companies derive much more of their revenues from
the U.S. and Europe than they do from Asia. This focus helped the Fund,
especially in the last two months of the period, both avoid major blowups and
benefit from these sectors' gains.
We kept our technology sights on software companies, avoiding the personal
computer makers and semiconductor companies that are more vulnerable to the
slowing demand for personal computers, pricing pressures from the sub-$1,000
personal computer market and the slowdown in Asia. By contrast, the demand keeps
growing for software technology to help companies increase their productivity.
Companies such as Cisco Systems, an important player in the world of networking;
and Computer Sciences, an information technology consultant and systems
integration specialist, have done well.
Outlook
We remain optimistic about the prospects for the economy, corporate profits and
the stock market this year. The economy shows signs of continued growth, even if
it does so at a slower rate as Asia's slowdown rubs off. Inflation shows no
signs of emerging from hibernation and we believe it will remain that way.
Within this positive context, however, we inject a note of caution. In this
volatile environment, the winners and losers are more likely than ever to part
company. We will keep our focus sharp and our hand selective in our choices both
of individual stocks and sectors.
20
<PAGE>
================================================================================
JOHN HANCOCK V.A. GROWTH FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 28.27% 20.70%
Average Annual Total Returns(1) 28.27% 10.79%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 27.37% and 9.24%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Growth Fund would be worth, assuming all distributions were reinvested for the
period indicated. For comparison, we've shown the same $10,000 investment in the
Standard & Poor's 500 Stock Index--an unmanaged index that includes 500 widely
traded common stocks and is often used as a measure of stock market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Growth Fund, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $18,341 as of
June 30, 1998. The second line represents the value of the V.A. Growth Fund,
before sales charge, and is equal to $12,070 as of June 30, 1998.
- --------------------------------------------------------------------------------
21
<PAGE>
================================================================================
BY TIMOTHY KEEFE, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Growth and Income Fund
Led by large-company stocks, U.S. market
gets off to strong start in 1998
"Among the Fund's top contributors to performance were technology stocks."
Falling interest rates, continued low inflation, and a healthy economy added up
to a near-perfect environment that sent stocks soaring in the first quarter of
1998. With Southeast Asia's financial problems causing few problems for U.S.
companies, investors were optimistic. But volatility increased in the second
quarter, as several companies announced weaker-than-expected earnings forecasts.
Skittish investors once again headed for the safety of large-company stocks with
predictable earnings growth. For the rest of the period, stocks moved sideways.
But gains made early on were enough to push the Standard & Poor's 500 Stock
Index -- a broad measure of market performance -- to a 17.71% return for the
first half of the year.
Value strategy pays off
John Hancock V.A. Growth & Income Fund, which opened on January 2, 1998, also
got off to a good start. A focus on large-company stocks helped the Fund deliver
a 15.09% return, at net asset value, from inception through June 30, 1998. This
was ahead of the average variable annuity growth and income fund, which returned
12.26% for the same period, according to Lipper Analytical Services, Inc.
The key to these results was our disciplined value strategy. In managing the
Fund, we look for companies that are poised to post impressive earnings, whose
stocks are selling for less than we think they're worth. We particularly like
stocks with substantial and sustainable cash flow that have the potential for a
catalyst that would unleash the stock's full potential. Our focus is on stocks
with outstanding shares worth more than $1 billion that we can hold for
long-term appreciation. During the Fund's first six months of operation, new
assets came in quickly. Our discrimination and long-term focus meant we had
higher cash levels than normal throughout the period. While this lowered risk,
it also held back performance somewhat. But our stock picks helped us make up
ground, allowing us to outperform our peers for the six-month period.
Technology and insurance lead
Among the Fund's top contributors to performance were technology stocks. We
focused pri-
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. Triton Energy Ltd. 5.7%
2. KLM Royal Dutch Airlines 5.3%
3. Washington Post Co. 4.8%
4. Camco International 4.7%
5. Niagara Mohawk Power Corp. 4.5%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members (l-r): Tim Keefe, Tim Quinlisk and
Lisa Welch.]
- --------------------------------------------------------------------------------
22
<PAGE>
================================================================================
JOHN HANCOCK V.A. GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "From January 2, 1998 to June 30, 1998." The
chart is scaled in increments of 5% with the 20% at the top and 0% at the
bottom. The first represents the 15.09% total return for John Hancock V.A.
Growth and Income Fund. The second represents the 12.26% total return for
Average variable annuity growth and income fund. A footnote at the bottom reads:
The total return for John Hancock V.A. Growth and Income Fund is at net asset
value with all distributions reinvested. The average variable annuity growth and
income fund is tracked by Lipper Analytical Services, Inc."]
- --------------------------------------------------------------------------------
marily on software and service companies, avoiding hardware companies that faced
problems related to Southeast Asia's turmoil. One of our larger investments was
Electronic Data Systems (EDS), a leading provider of outsourced technology
services. We bought the stock when it was down because of short-term problems
with its largest client. The stock bounced back as the other 75% of its business
continued to hit on all cylinders. Galileo International, another large
position, is a leader in computer airline reservation systems. Fears that
Southeast Asia's troubles would result in fewer bookings temporarily hurt the
stock price. When this never happened, the stock took off.
Insurance stocks -- 17% of the Fund's net assets -- also did well for us. We
focused on strong companies whose stock prices were unfairly hurt by weak
pricing in the industry. Among them were Executive Risk, a specialty insurer
that was spun off from Aetna; Mercury General, a low-cost provider of auto
insurance; and Ace Ltd., a Bermuda-based reinsurer.
Energy stocks turned in disappointing results. However, historically low
valuations -- stock prices relative to earnings and other measures -- along with
the prospect of rising oil prices made the sector attractive from a buying
perspective. We chose companies like Triton Energy Ltd., our number one stock
holding. Triton is an exploration and production company with two major
discovery fields in emerging-market countries. Both emerging-market fears and
the rapid drop in oil prices have hurt the stock's price. But we're optimistic
that investors will recognize the stock's true worth now that the company's
assets are up for sale.
More volatility ahead
We expect the market to remain choppy for the rest of 1998. Business conditions
are becoming more challenging, as price competition stiffens and Asia's problems
spread. And earnings growth -- while still strong -- is not as good as it has
been. With the market near all-time highs, investors are quickly punishing the
stocks of companies that fail to meet earnings expectations. Fortunately,
increased volatility benefits bargain hunters. Short-term events and
industry-wide problems can easily cloud the outlook for companies with great
prospects. But this gives us a chance to acquire these companies at compelling
valuations. Especially in times of heightened uncertainty, we believe our
disciplined value-oriented strategy will help provide shareholders with
above-average returns at below-average risk.
"Fortunately, increased volatility benefits bargain hunters."
23
<PAGE>
================================================================================
JOHN HANCOCK V.A. GROWTH AND INCOME FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
INCEPTION
(1/2/98)
--------
Cumulative Total Return 15.09%
Average Annual Total Return(1) 15.09%(2)
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the total return since inception would have been 14.76%.
(2) Not annualized.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Growth and Income Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Growth and Income Fund, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on January 2, 1998, and is equal to $14,446 as of
June 30, 1998. The second line represents the value of the V.A. Growth and
Income Fund, before sales charge, and is equal to $11,509 as of June 30, 1998.
- --------------------------------------------------------------------------------
24
<PAGE>
================================================================================
BY STEPHEN LANZENDORF, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock V.A. Independence
Equity Fund
Stocks surge forward in the first quarter, stall in the second on Asian fears
The same positive forces that have propelled the stock market for the last
several years remained at work over the last six months. The U.S. economy grew
more strongly than expected, calming investors' concerns about Asia, at least in
the first quarter. Interest rates were stable and inflation was non-existent.
However, the last two months of the period proved to be more challenging. Asian
financial markets had once again become shaky, and U.S. companies with exposure
to Asia began to report disappointing earnings. Between mid-May and mid-June,
the major market indexes fell by 4% to 7%, then rallied briefly to end the
second quarter with only slight advances.
The first quarter rally, however, enabled the Standard & Poor's 500 Stock
Index to return 17.71% in the last six months, including reinvested dividends, a
performance many did not expect for the entire year. John Hancock V.A.
Independence Equity Fund participated fully in the market's advance. In addition
to strong stock selection, the Fund was helped by the fact that the S&P 500
outperformed the Dow Jones Industrial Average, which returned 14.13%. Although
investors still favored large-capitalization stocks, the better relative
performance by the S&P indicated some broadening of investor preferences that
benefited the Fund's diversified holdings.
For the six months ended June 30, 1998, the Fund posted a total return of
19.86% at net asset value, outpacing both the S&P and the 12.26% return of the
average variable annuity growth and income fund, according to Lipper Analytical
Services, Inc. Historical performance information can be found on page 27.
Consumer stocks pay off
The Fund's objectives of growth and income continued to be well served by its
disciplined investment strategy, combining in-depth fundamental analysis with
computer modeling to identify companies with improving fundamentals and
inexpensive stock prices. Many consumer-related companies met these criteria in
the first half of 1998, just as consumer confidence was high. Auto manufacturers
Ford and Chrysler were strong contributors to Fund performance, as were apparel
companies like Tommy Hilfiger and Jones Apparel. Specialty retailers like Home
Depot, Staples and Lowe's benefited not only from strong consumer spending,
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. Procter & Gamble 3.5%
2. Microsoft 2.7%
3. General Electric 2.6%
4. United Technologies 2.3%
5. Travelers Group 2.2%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
High consumer confidence boosted consumer-related stocks.
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members (l-r): Coreen Kraysler, David
Canavan, Jane Shigley, Jeff Saef and Stephen Lanzendorf.]
- --------------------------------------------------------------------------------
25
<PAGE>
================================================================================
JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND
"...we expect the trend of broader participation in market rallies to
continue..."
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 5% with the 20% at the top and 0% at the
bottom. The first represents the 19.86% total return for John Hancock V.A.
Independence Equity Fund. The second represents the 12.26% total return for
Average variable annuity growth and income fund. A footnote at the bottom reads:
The total return for John Hancock V.A. Independence Equity Fund is at net asset
value with all distributions reinvested. The average variable annuity growth and
income fund is tracked by Lipper Analytical Services, Inc. See the following
page for historical performance information."]
- --------------------------------------------------------------------------------
but also from the fact that their revenues are derived mainly in the United
States.
In the technology area, we were able to avoid some of the semiconductor and
other computer hardware companies that might be hurt by the slowdown in Asia.
Instead, we owned software companies like Lucent Technologies, which has
maintained a strong market position in a very competitive environment.
Finally, many of our financial stocks performed well, buoyed by industry
consolidation, including the recently announced mega-merger of Travelers and
Citicorp., both Fund holdings. Other strong performers included merger candidate
General Re, as well as Morgan Stanley, Dean
Witter, Discover.
Energy, chemicals disappoint
The Fund's performance was hurt by our energy investments in such stocks as
Arco, which we sold during the period, and Phillips Petroleum, because of weak
crude oil prices. The chemical industry also suffered from weak commodity
prices. Our interest in the sector was limited to specialty chemical companies,
such as Air Products & Chemicals, which performed well relative to other stocks
in the industry, but was disappointing on an absolute basis.
Regulatory uncertainty clouded the prospects of many telecommunications
companies, including AT&T. Its recently announced merger got a lukewarm
reception and weakened its stock, because it was unclear how quickly regulators
would allow the company to implement its plans to enter the local telephone
service markets.
Outlook
We believe the stock market can continue to do well if the economy continues to
grow and interest rates and inflation stay roughly at current levels. That said,
we expect to see more companies announce lower-than-expected results for the
third quarter and therefore believe it's still too early to buy companies with
significant exposure to Asia. However, the more domestically oriented sectors
that did well in the first half of the year, such as healthcare, specialty
retailing and financial services, should continue that trend in the second half.
We're watching the energy sector. If, as we suspect, the weakness in energy
prices is only temporary, energy stocks might be reaching attractive levels.
Finally, we expect the trend of broader participation in market rallies to
continue, as investors recognize the discrepancy in value between smaller and
mid-sized company stocks and the leading large-company names. This scenario
would be favorable for broadly diversified portfolios like John Hancock V.A.
Independence Equity Fund. Regardless of the market's moves, we will stay focused
on companies whose stock prices are attractive and whose business prospects are
improving.
26
<PAGE>
================================================================================
JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 34.71% 75.08%
Average Annual Total Returns(1) 34.71% 35.68%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 34.34% and 34.70%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Independence Equity Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Independence Equity Fund, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $18,341 as of
June 30, 1998. The second line represents the value of the V.A. Independence
Equity Fund, before sales charge, and is equal to $17,508 as of June 30, 1998.
- --------------------------------------------------------------------------------
27
<PAGE>
================================================================================
BY JOHN F. SNYDER, III, AND BARRY EVANS, CFA, PORTFOLIO MANAGERS
John Hancock
V.A. Sovereign Investors Fund
With difficulty, market moves up on the strength
of a narrow group of stocks
"It's particularly important to own strong companies in the current economic
environment."
The first half of the year has been challenging for both the economy and the
investment markets due to political and economic unrest in Asia, the recession
and corrupt business practices in Japan and Russia, and price deflation for many
commodities. On the positive side, however, high U.S. employment levels and
strong wage growth have driven consumer confidence to high levels.
Despite the volatility, the equity market has provided strong returns for
investors. Since the start of the year, the Standard & Poor's 500 Stock Index
has gained 17.71%. The market's strong upward trend, however, has not been
driven by the broad market, but instead by a narrow group of stocks. Technology
stocks, in particular, have been one of the market's strongest sectors,
rebounding sharply after their dismal fourth-quarter performance. Dell Computer,
for example, is up 120%, Apple Computer, 119%, Lucent Technologies, 108% and
Unisys, 104%.
Performance review
John Hancock V.A. Sovereign Investors Fund turned in solid returns during the
first half of 1998. However, the Fund's performance trailed the average variable
annuity equity income fund, primarily because we own almost no technology
stocks, unlike many of our peers. It's not that we don't like technology stocks,
they simply don't meet our primary investment criterion. The Fund focuses on
companies with a long record of increasing their dividends, and most technology
stocks simply don't meet this criterion.
For the six months ended June 30, 1998, John Hancock V.A. Sovereign Investors
Fund returned 8.43% at net asset value, compared to the 10.64% return of the
average variable annuity equity income fund, according to Lipper Analytical
Services, Inc. Historical performance information can be found on page 30.
Focus on industry leaders
Companies that make up the "dividend performers" universe share one common
characteristic: they dominate the markets in which they compete. As the economy
slows, it will become more difficult for companies with poor fundamentals to
show attractive sales and earnings growth. Conversely, these dominant companies
will be
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. Dayton Hudson 2.9%
2. Unum 2.9%
3. Masco 2.7%
4. Ameritech 2.5%
5. Pentair 2.4%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - V.A. Sovereign Investors Fund management team members
(l-r):.John Snyder, Barry Evans and Jere Estes.]
- --------------------------------------------------------------------------------
28
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 5% with the 15% at the top and 0% at the
bottom. The first represents the 8.43% total return for John Hancock V.A.
Sovereign Investors Fund. The second represents the 10.64% total return for
Average variable annuity equity income fund. A footnote at the bottom reads: The
total return for John Hancock V.A. Sovereign Investors Fund is at net asset
value with all distributions reinvested. The average variable annuity equity
income fund is tracked by Lipper Analytical Services, Inc. See the following
page for historical performance information."]
- --------------------------------------------------------------------------------
able to take market share, control industry pricing, expand into new markets,
acquire new lines of business, develop new products and services, and grow
earnings faster than their industry cohorts. It's particularly important to own
strong companies in the current economic environment. Below are examples of
companies that we believe will be the winners in a slowing economy.
Home Depot is the world's largest home-improvement retailer and is among the
top 10 retailers in the United States Home Depot's dominance is obvious when
compared to its nearest competitor, which had less than half of Home Depot's
sales in 1997. Even with such a dominant market position, Home Depot's market
share is only approximately 25% of the domestic do-it-yourself market, providing
significant growth opportunities.
Interpublic Group is the second largest advertising holding company
worldwide. In addition to owning premier ad agencies like McCann-Erickson,
Interpublic has branched out into non-traditional businesses like direct
marketing, public relations and sports marketing. The U.S. advertising industry
is in the midst of a long expansion, and growth in Europe is also picking up.
Interpublic has achieved an impressive acceleration of new business wins over
the past three years and has grown earnings 14% annually over the past five
years.
Outlook
With the market flirting with new highs, it does not take much courage to
predict that the upward spiral will continue for a while. The economy has been
stronger than expected and so has the flow of funds into stocks from both
domestic and foreign sources. Inflation has been -- and will continue to be --
benign. However, we do believe that the strong economic underpinnings that
provided good corporate earnings last year are disappearing. If this is the
case, the market expansion will not be able to continue. Valuations are already
extended in a number of areas, including those companies that have been driving
the S&P 500 and Nasdaq indexes.
The reasons for benign inflation are the very same reasons for our concern
about corporate profits in the second half of the year. Global competition has
taken almost all of the power to set prices away from corporations and given it
to the consumer. Therefore, growth in corporate profits will have to come from
increased efficiencies. This suggests substantially slower profit growth.
We continue to believe that this is the sweet spot of the economic cycle for
the stable growth companies. As corporate earnings growth abates, the economy is
likely to show signs of slowing in the second half of 1998. We believe companies
that historically have been able to grow their earnings consistently -- that is,
"dividend performers" -- will be able to do so through an economic slowdown.
"...this is the sweet spot of the economic cycle for the stable growth
companies."
29
<PAGE>
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JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
Cumulative Total Returns 21.73% 50.81%
Average Annual Total Returns(1) 21.73% 25.08%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no
guarantee of future results. 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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 21.57% and 24.37%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Sovereign Investors Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index--an unmanaged index
that includes 500 widely traded common stocks and is often used as a measure of
stock market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Sovereign Investors Fund, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $18,341 as of
June 30, 1998. The second line represents the value of the V.A. Sovereign
Investors Fund, before sales charge, and is equal to $15,081 as of June 30,
1998.
- --------------------------------------------------------------------------------
30
<PAGE>
================================================================================
BY BARRY EVANS, CFA, AND ROGER HAMILTON, CFA,
FOR THE RISK MANAGEMENT GROUP
John Hancock
V.A. 500 Index Fund
Index posts strong returns, stocks uneven returns
The S&P 500 Index -- a broad measure of the stock market's performance -- did
extremely well during the first half of 1998, posting a 17.71% gain, including
reinvested dividends. In a repeat of 1997, the environment for S&P 500 stocks
was quite favorable. Inflation remained low, interest rates drifted lower and
the U.S. economy showed impressive resilience in the face of Asian economic
turmoil. In fact, it was a surprise to many observers that the Asian fallout
turned out to be beneficial, rather than harmful, for a handful of stocks that
make up the S&P 500 Index. Investors worried that a slowdown in the Far East
would translate into slower economic growth here at home and slower corporate
earnings. Despite recent evidence that earnings have slowed somewhat, global
investors fleeing overseas stocks increasingly sought out the large, well-known
S&P 500 names in what amounted to a classic "flight to quality." However, there
was a widening gap between the handful of stocks reaping fat rewards --such as
the most liquid, recognizable companies -- and those left behind in a narrowing
market. The companies comprising the largest 10% by market value rose nearly 26%
during the first half, while the remainder gained just 9.5%.
Performance and strategy review
For the six months that ended June 30, 1998, John Hancock V.A. 500 Index Fund
had a total return of 17.59% at net asset value. By comparison, the average
variable annuity S&P 500 Index objective fund had a total return of 17.42%,
according to Lipper Analytical Services, Inc. Historical performance information
can be found on page 33.
Our goal is to have the Fund's holdings closely track that of the S&P 500
Index, and minimize transaction costs -- the costs associated with buying and
selling shares of stock. Shareholders may recall that the Fund's small size
prevented us from buying all 500 stocks contained in the Index in the early
months of its existence last year. To do so would have burdened the Fund with
fairly high transaction costs, potentially curtailing its performance.
By January 1998, however, the Fund had grown enough to invest efficiently in
all 500 component stocks. This more complete basket of stocks meant that the
Fund's performance more closely tracked the S&P 500 Index over the past six
months.
- --------------------------------------------------------------------------------
TOP FIVE COMMON
STOCK HOLDINGS
1. General Electric 2.9%
2. Microsoft 2.6%
3. Coca-Cola 2.0%
4. Exxon 1.7%
5. Merck 1.5%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
"...several computer makers were at the top of the leader board."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Barry Evans (l) and Roger Hamilton (r).]
- --------------------------------------------------------------------------------
31
<PAGE>
================================================================================
JOHN HANCOCK V.A. 500 INDEX FUND
"Our long-term outlook for S&P 500 stocks is fairly optimistic."
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 5% with the 20% at the top and 0% at the
bottom. The first represents the 17.59% total return for John Hancock V.A. 500
Index Fund. The second represents the 17.42% total return for Average variable
annuity S&P 500 Index objective fund. A footnote at the bottom reads: The total
return for John Hancock V.A. 500 Index Fund is at net asset value with all
distributions reinvested. The average variable annuity S&P 500 Index fund is
tracked by Lipper Analytical Services, Inc. See the following page for
historical performance information."]
- --------------------------------------------------------------------------------
Although there are almost daily changes in the Index's composition, we
re-balance the Fund's holdings less frequently to keep our transaction costs at
a minimum. When money comes into the Fund that cannot immediately be deployed
into the S&P 500 components in a cost-effective manner, we buy S&P 500 Stock
Index futures. These securities serve as a proxy for stocks in the Index and
allow us to participate in the Index's performance without the transaction costs
that would be incurred in buying individual stocks.
S&P winners, losers
Despite slowing demand for computers worldwide, several computer makers were at
the top of the leader board. Dell Computer's stock price surged more than 120%
in the first half of 1998, thanks to fast-growing market share gains. A close
second was Apple Computer stock, which saw a 119% rebound after suffering a
miserable 1997. The rising demand for communications equipment helped boost the
number three and five best performers, Lucent Technologies and Ascend
Communications. Rounding out the top 10 were Unisys in fourth place, with
Beneficial, Ford Motor, Gap, Providian Financial and Lowe's in the sixth through
tenth places. The biggest disappointment during the period was National
Semiconductor, which fell almost 50% as a worldwide inventory glut of
semiconductor chips kept a lid on demand. Another bad performer was Cendant,
which was down roughly 40% due in large part to questions about accounting
practices.
Outlook
Our long-term outlook for S&P 500 stocks is fairly optimistic. We expect
interest rates and inflation -- which have been primary ingredients in the
recent bull market -- to remain low. In addition, we believe that baby boomers
will continue to invest money in the market as they prepare for their
retirements. But we wouldn't rule out the chance of a more near-term stock
market correction. It's been a rather long time since we've had one, and history
shows that market corrections do tend to occur with some regularity. As for the
Fund, we'll continue to seek to closely track the performance of the S&P 500
Index -- whether it posts further gains, remains flat or experiences losses.
32
<PAGE>
================================================================================
JOHN HANCOCK V.A. 500 INDEX FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 28.97% 69.78%
Average Annual Total Returns(1) 28.97% 33.43%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 28.72% and 33.10%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A. 500
Index Fund would be worth, assuming all distributions were reinvested for the
period indicated. For comparison, we've shown the same $10,000 investment in the
Standard & Poor's 500 Stock Index--an unmanaged index that includes 500 widely
traded common stocks and is often used as a measure of stock market performance.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. 500 Index Fund, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the S&P 500 Stock Index on August 29, 1996, and is equal to $18,341 as of
June 30, 1998. The second line represents the value of the V.A. 500 Index Fund,
before sales charge, and is equal to $16,978 as of June 30, 1998.
- --------------------------------------------------------------------------------
33
<PAGE>
================================================================================
BY JAMES K. HO, CFA, PORTFOLIO MANAGER
John Hancock
V.A. Sovereign Bond Fund
Pockets of uncertainty challenge the bond market,
but bonds still gain ground
"...we steered the Fund toward a more defensive orientation..."
Investing in fixed-income securities presented some interesting challenges
during the past six months. At a quick glance, the investment environment for
bonds seemed ideal. Indeed, there were many favorable factors at work on the
home front -- inflation was subdued, interest rates remained low, the economy
continued to grow at a healthy pace, corporate earnings were strong, job
creation was high and wage inflation remained moderate.
A closer look, however, revealed pockets of uncertainty amid frequently
unsettled world markets. The ongoing economic and currency woes of many Asian
nations affected bonds across the fixed-income spectrum, both positively and
negatively. Emerging-market bonds around the globe were the most sensitive to
the Far East's volatility, and prices plunged with each new wave of political
unrest and fiscal weakness. U.S. investment-grade corporate bonds and high-yield
issues also experienced spells of downward pressure. Heavy new issuance supply
met at times with lackluster demand as investors grew increasingly concerned
that Asia's troubles might adversely affect corporate profitability and credit
quality down the road. The prices of U.S. Treasury securities soared, on the
other hand, as investors worldwide flocked to the relative safety of U.S. debt.
In fact, near the period's end, the yield on the bellwether 30-year Treasury
bond, which moves in the opposite direction of its price, traded below 5.6% --
the lowest it had been since the mid-1970s.
Against this backdrop, the John Hancock V.A. Sovereign Bond Fund closed the
semiannual period with positive results. For the six months ended June 30, 1998,
the Fund posted a total return of 4.20% at net asset value. In comparison, the
average variable annuity corporate debt A-rated fund returned 3.97%, according
to Lipper Analytical Services, Inc. Historical performance information can be
found on page 36.
Conservative strategies favored
Throughout the period, we steered the Fund toward a more defensive orientation
in several ways. We adopted a relatively neutral duration stance, keeping the
Fund's average duration -- a measure of
- --------------------------------------------------------------------------------
Pie chart at the bottom left column titled "Portfolio Diversification" There are
four listings. Beginning from the top right the first represents Corporate bonds
34%, the second represents U.S. government & agencies 58%, the third represents
Foreign governments 1%, The fourth represents Short-term Investments & other 7%.
A footnote at the bottom states "As a percentage of net assets on June 30,
1998."
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column. The
caption reads Jim ho (seated) and Fund management team members (l-r): Lester
Duke, Beverly Cleathero and Seth Robbins]
- --------------------------------------------------------------------------------
34
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN BOND FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 1% with the 5% at the top and 0% at the bottom.
The first represents the 4.20% total return for John Hancock V.A. Sovereign Bond
Fund. The second represents the 3.97% total return for Average variable annuity
corporate debt A-rated fund. A footnote at the bottom reads: The total return
for John Hancock V.A. Sovereign Bond Fund is at net asset value with all
distributions reinvested. The average variable annuity corporate debt A-rated
fund is tracked by Lipper Analytical Services, Inc. See the following page for
historical performance information."]
- --------------------------------------------------------------------------------
how sensitive a bond's price is to interest rate changes -- in line with its
benchmark and peer group. When an opportunity presented itself, we upgraded our
credit exposure on the corporate bond side, which accounted for 34% of the
Fund's net assets. We also favored corporate bonds in sectors that stand to
perform well regardless of economic swings, such as healthcare, utilities,
media, and telecommunications. Merger and acquisition activity, deregulation,
and consolidation have been the catalysts of change and opportunity in these
industries. Holdings that have performed well for the Fund include Time Warner,
TCI Communications -- the recent beneficiary of a merger with AT&T -- Nextel
Communications, News America Holdings, Integrated Health Services, Cleveland
Electric Illuminating, and Niagara Mohawk Power Corp.
We've also lightened up on capital goods and cyclical credits, maintaining
very little exposure to paper, steel, oil, and gas issues. As the period
progressed, we slightly increased our emphasis on high-quality asset-backed
securities, such as home equity loans, which have performed well. Our focus in
the mortgage-backed securities area was on discount coupon mortgages -- those
whose coupons are below current market rates -- as they tend to be relatively
insulated from price swings in a declining rate environment.
Avoiding minefields
Clearly, the areas we avoided contributed to performance as much as the sectors
in which we chose to invest. In-depth research played a critical role in our
investment decisions and, ultimately, in how the Fund performed. For example, we
had opportunistically sold most of the Fund's Asian positions late last summer
when the turmoil had only just begun, leaving the Fund with very little exposure
to emerging market bonds issued from the Far East as we entered fiscal 1998.
Although the Fund was not immune to the effects of the currency debacle, we were
able to sidestep much of the troubled debt. While the Fund's small investment in
Latin American bonds has come under pressure in sympathy with Asian bonds, our
research suggests that these portfolio holdings are well positioned to fully
recover once investors' fears dissipate.
Outlook
As we enter the second half of fiscal 1998, we are upbeat about the prospects
for fixed-income securities. The crisis in Asia may begin to put a drag on the
domestic economy if exports begin to slow, and this, combined with a strong U.S.
dollar, should help keep inflation low -- always a positive for bond investors.
In fact, we would not be surprised if the Federal Reserve Board moves to cut
short-term rates some time later this year, should the U.S. economy slow and
require stimulation. Given such a possibility, we expect to maintain a duration-
neutral strategy. The wild card continues to be the emerging markets and how
their performance may influence that of domestic investment-grade corporate and
high-yield bonds.
"...we are upbeat about the prospects for fixed-income securities."
35
<PAGE>
================================================================================
JOHN HANCOCK V.A. SOVEREIGN BOND FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 10.82% 18.92%
Average Annual Total Returns(1) 10.82% 9.90%
YIELD
For the period ended June 30, 1998
SEC 30-DAY
YIELD
-----
John Hancock V.A. Sovereign Bond Fund 5.46%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 9.54% and 8.09%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Sovereign Bond Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Corporate Bond Index--an unmanaged index that
mirrors the investment objectives and characteristics of the Fund.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Sovereign Bond Fund, representing the growth of
a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the V.A. Sovereign Bond Fund, before
sales charge on August 29, 1996, and is equal to $11,892 as of June 30, 1998.
The second line represents the value of the hypothetical $10,000 investment made
in the Lehman Brothers Corporate Bond Index and is equal to $11,762 as of June
30, 1998.
- --------------------------------------------------------------------------------
36
<PAGE>
================================================================================
BY FREDERICK CAVANAUGH, PORTFOLIO MANAGER
John Hancock
V.A. Strategic Income Fund
Muted inflation and lower interest rates spur global bonds
U.S. bonds of many types outpaced the global markets during the first six months
of this year. The U.S. Treasury bond market was one of the world's top
performers, thanks in part to low inflation, falling interest rates and strong
demand, as investors increasingly sought them out as a safe haven against
deepening economic problems in Asia. High-yield U.S. corporate bonds also
enjoyed decent success, propelled by low interest rates, a healthy domestic
economy and reasonably healthy corporate earnings. What's more, the demand for
domestic high-yield corporates remained fairly strong even as supply grew to
near-record levels. The period was witness to a historic development when 11
countries united to form the European Monetary Union (EMU) and a unified
European currency -- the euro. And despite concerns to the contrary, EMU proved
to be a positive for many European bonds. At the other end of the spectrum was
emerging-market debt. As the Asian crisis deepened, money fled not only from the
Pacific Rim bond markets, but from all emerging markets, whether linked to Asia
or not.
Performance and strategy review
For the six months ended June 30, 1998, John Hancock V.A. Strategic Income Fund
posted a total return of 4.61% at net asset value, surpassing the 3.58% return
of the average variable annuity general bond fund, according to Lipper
Analytical Services, Inc. For historical performance information, please see
page 39.
Our relatively large stake in high-yield corporate bonds was the main reason
for our outperformance. In particular, Nextel Communications, a
cellular/paging/dispatch company, and Casino America were among our biggest
winners. Despite carrying the burden of being issued in an emerging market,
Colombian cellular company Comunicacion Celular posted strong gains thanks to
huge demand for its products and services. On the flip side, Goss Graphic
Systems bonds suffered losses, despite having a record-breaking backlog for its
products, when the company closed its French operations. Because we believe that
U.S. economic growth could slow in the second half of the year, we've somewhat
reduced our stake in high-yield U.S. corporate bonds. In particular, we've sold
or pared back our holdings in lower-quality companies that we think may suffer
declining profits during an economic downswing.
- --------------------------------------------------------------------------------
TOP FIVE BOND SECTORS
1. Telecommunications 29%
2. U.S. government 20%
3. Media 8%
4. Foreign governments 7%
5. Leisure 5%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
"Our relatively large stake in high-yield corporate bonds was the main reason
for our outperformance."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members. Standing (l-r): Lee Crockett,
Roger Hamilton, Ted Hines and Carolee Bongiovi. Seated (l-r)- Beverly Cleathero
and Fred Cavanaugh.]
- --------------------------------------------------------------------------------
37
<PAGE>
================================================================================
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 1% with the 5% at the top and 0% at the bottom.
The first represents the 4.61% total return for John Hancock V.A. Strategic
Income Fund. The second represents the 3.58% total return for Average variable
annuity general bond fund. A footnote at the bottom reads: The total return for
John Hancock V.A. Strategic Income Fund is at net asset value with all
distributions reinvested. The average variable annuity general bond fund is
tracked by Lipper Analytical Services, Inc. See the following page for
historical performance information."]
- --------------------------------------------------------------------------------
Another positive for the Fund's performance was our small stake in
emerging-market debt. While we didn't dodge all the pain these markets suffered,
we did sidestep a fair amount of the price decline that came this year. We've
eliminated our stake in Brazilian bonds because inflation there is quite high
and there's a lot of uncertainty surrounding the upcoming presidential election.
We did, however, maintain our holdings in Argentina and Mexico, which have
reasonable economic growth and manageable inflation rates. As a result of our
sales of high-yield corporate bonds, our stake in U.S. Treasuries -- where we
deployed the proceeds from the sales -- rose to 20% at the end of the period, up
from 14% six months ago.
Unfortunately, our stake in Western European bonds was limited primarily to
those issued in the United Kingdom. While we saw strong gains from both
corporate and government bonds there, the real action was in EMU countries. As
they cut their deficits and lowered interest rates to meet the conditions of the
monetary union, the prices of bonds in France, Spain and other member countries
posted strong gains. With only one German bond in the portfolio, we missed most
of the action there.
Outlook
In our view, the financial crisis in Asia will continue to plague the emerging
markets. Although emerging-market bond prices have fallen dramatically, we don't
yet see many compelling values arising in either Southeast Asia or Latin
America. Until we do, we'll likely keep our emerging-market holdings at a low
level. We also believe that continued weakness in Asia will ultimately mute
economic growth in the U.S., although we feel that a recession is unlikely.
Slower economic growth here at home will probably mean that inflation will stay
in check. If a weaker-than-expected U.S. economy does materialize, the demand
for high-yield corporate debt will most likely slow. In that event, we'll
probably reduce our stake in high-yield U.S. corporate bonds in favor of further
increasing our stake in U.S. Treasury securities.
"...continued weakness in Asia will ultimately mute economic growth in the
U.S..."
38
<PAGE>
================================================================================
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 10.50% 24.44%
Average Annual Total Returns(1) 10.50% 12.65%
YIELD
For the period ended June 30, 1998
SEC 30-DAY
YIELD
-----
John Hancock V.A. Strategic Income Fund 8.01%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been10.20% and 12.07%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
Strategic Income Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Government/Corporate Bond Index--an unmanaged
index that measures the performance of U.S. government bonds, U.S. corporate
bonds, and Yankee bonds.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. Strategic Income Fund, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the V.A. Strategic Income Fund, before sales charge, and is equal to $12,444
as of June 30, 1998. The second line represents the value of the Lehman
Government/Corporate Bond Index on August 29, 1996, and is equal to $11,963 as
of June 30, 1998.
- --------------------------------------------------------------------------------
39
<PAGE>
================================================================================
BY ARTHUR CALAVRITINOS, CFA, PORTFOLIO MANAGER
John Hancock
V.A. High Yield Bond Fund
High-yield bonds advance in a volatile six months
"...we began establishing positions across many industries..."
High-yield bonds rode a roller coaster over the last six months, but ended the
period posting decent gains. Driving the ups and downs were the Asia currency
and financial woes that began hitting world markets late last year. As 1998
began, investors were just calming down from their year-end jitters, and
high-yield bonds were boosted in February and March by the robust U.S. economy
and tame inflation. With interest rates staying low, and even falling, demand
for high-yield bonds grew as investors sought higher levels of current income.
But high-yield bonds, both foreign and domestic, came under pressure again in
May and June. Asian uncertainties grew, marked by a change in government in
Indonesia and the falling Japanese yen, and Russia emerged as another currency
and economic weak point. With all the turmoil, investors preferred the
safe-haven status of U.S. Treasury bonds. Despite the turbulence, high-yield
bonds returned 4.50% during the period, as measured by the Lehman Brothers
High-Yield Bond Index.
Into this volatile environment, which is often typical in this higher-risk
sector of the bond market, John Hancock V.A. High Yield Bond Fund was launched
on January 2, 1998. From inception through June 30, 1998, the Fund posted a
total return of 1.94% at net asset value, compared to the average variable
annuity high current yield fund's 4.58% return, according to Lipper Analytical
Services, Inc. The Fund's lag can be attributed to higher-than-usual levels of
cash during these early months in the life of the Fund.
Strategy
The Fund seeks a high level of current income and a competitive total return by
investing in companies across the broad high-yield bond market. We look for
companies whose business prospects make them worth the extra risk we're taking.
High-yield companies pay investors a greater yield to compensate for the added
risk of buying bonds rated below investment grade (BB or lower). These companies
receive a lower rating because they are considered more likely to encounter
difficulties servicing their debt.
We take a value-based approach to investing, preferring to buy companies at
times when their bonds are relatively underpriced. We emphasize companies with
real assets and solid earnings potential. We also look for companies and
industries where there
- --------------------------------------------------------------------------------
TOP FIVE SECURITIES
1. P&L Coal Holdings 3.4%
2. Waste Systems International 3.4%
3. Gaylord Container Corp. 3.2%
4. Abitibi-Consolidated 2.7%
5. Nextel Communications 2.6%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Caption reads - Fund management team members. Standing (l-r): Janet Clay, Fred
Cavanaugh, Jamie Kellogg and Lester Duke. Seated (l-r)- Geoff Plume and Arthur
Calavritinos.]
- --------------------------------------------------------------------------------
40
<PAGE>
================================================================================
JOHN HANCOCK V.A. HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "From January 2, 1998 to June 30, 1998." The
chart is scaled in increments of 1% with the 5% at the top and 0% at the bottom.
The first represents the 1.94% total return for John Hancock V.A. High Yield
Bond Fund. The second represents the 4.58% total return for Average variable
annuity high current yield fund. A footnote at the bottom reads: The total
return for John Hancock V.A. High Yield Bond Fund is at net asset value with all
distributions reinvested. The average variable annuity high current yield fund
is tracked by Lipper Analytical Services, Inc."]
- --------------------------------------------------------------------------------
are catalysts at work to help unlock potential, such as mergers and industry
consolidation. Our strength lies in our rigorous fundamental research and our
in-depth knowledge of the industries in which our companies operate. Sometimes,
that leads us to companies that do not issue high-yield bonds, at which point we
may selectively choose to take advantage of the Fund's ability to own stock.
During the Fund's first six months, we began establishing positions across
many industries, including telecommunications, steel, gaming and airlines. An
example of our strategy at work is in our paper holdings, where we believe in
the long-term potential of the group. There, we've focused on two areas: the
world-class, low-cost pulp producers such as Indonesian producer Asia Pulp &
Paper, (APP International Finance) and companies with niche paper products, such
as Repap New Brunswick, a producer of lightweight coated paper for magazines. It
has just the profile we look for: great tangible assets, solid niche positions,
the potential for mergers and acquisitions and increasing cash flow. Another
niche market with perhaps the most attractive fundamentals is newsprint -- a
consolidating industry with no new source of supply. As a result, companies such
as Abitibi-Consolidated have tremendous pricing power. Indeed, shortly after the
period ended, Abitibi announced a strategic alliance with a South Korean
newsprint company that should further enhance its position.
Outlook
We are keeping our outlook cautious for high-yield bonds. We remain encouraged
by the prospects of strong demand for high-yield bonds and by the vibrant U.S
economy. Yet the horizon is not without its potential storm clouds. More
high-yield companies are missing their earnings targets and there has been an
uptick in defaults, albeit off a very low base. We're also monitoring the impact
of Asia on the U.S. economy this year. In this environment, we will continue to
search for solid companies that we can buy at attractive prices and hold, with
an eye toward both high current income and appreciation potential.
"We are keeping our outlook cautious for high-yield bonds."
- --------------------------------------------------------------------------------
See the Fund's prospectus for a detailed discussion of the risks of investing in
high-yield bonds.
41
<PAGE>
================================================================================
JOHN HANCOCK V.A. HIGH YIELD BOND FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
INCEPTION
(1/2/98)
--------
Cumulative Total Return 1.94%
Average Annual Total Return(1) 1.94%(2)
YIELD
For the period ended June 30, 1998
SEC 30-DAY
YIELD
-----
John Hancock V.A. High Yield Bond Fund 9.64%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the total return since inception would have been 1.69%.
(2) Not annualized.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
High Yield Bond Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers High Yield Bond Index--an unmanaged index of
fixed-income securities that are similar, but not identical to the bonds in the
Fund's portfolio. Past performance is not indicative of future results.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. High Yield Bond Fund, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Lehman Brothers High Yield Bond Index and is equal to $13,005 as of June
30, 1998. The second line represents the value of the V.A. High Yield Bond Fund,
before sales charge on January 2, 1998, and is equal to $10,194 as of June 30,
1998.
- --------------------------------------------------------------------------------
42
<PAGE>
================================================================================
BY LAWRENCE J. DALY AND ANTHONY A. GOODCHILD, PORTFOLIO MANAGERS
John Hancock
V.A. World Bond Fund
Global bonds produce mixed results in increasingly volatile environment
World bond markets turned in a mixed performance over the last six months amid
heightened turbulence. Continental Europe surprised investors by gaining
significant ground, even though many expected otherwise after interest rates
fell significantly there last year. But with the imminence of the European
Monetary Union, countries working to gain entry continued lowering rates to spur
their economies. The U.S. bond market also rallied, although not to Europe's
extent. U.S. Treasuries in particular reaped the benefits of the flight to
quality prompted by ongoing Asian financial turmoil. Near-perfect economic
conditions, including a robust economy but tame inflation, also kept U.S. bond
prices and interest rates fairly stable. Emerging-market bonds everywhere had
begun to rebound from their Asian tumble as the year began, but were buffeted
again as the period progressed by further currency problems in Asia, Russia and
South Africa.
Performance and strategy review
Against this mixed backdrop, John Hancock V.A. World Bond Fund posted a total
return of 1.72% at net asset value for the six months ended June 30, 1998,
slightly below the 2.31% return of the average variable annuity global income
fund, according to Lipper Analytical Services, Inc. Historical performance
information can be found on page 45. The Fund's underperformance was mainly
because we were not invested in continental Europe when bonds there rallied in
the first quarter. In addition, because the U.S. economy remained surprisingly
strong, the Federal Reserve Board did not lower interest rates as we had thought
it would in response to Asia. Although U.S. Treasuries -- where we had a good
part of the Fund's assets -- performed well and protected us in the Asian
aftermath, the European rally was greater.
In currency terms, the Fund benefited from keeping the bulk of its assets --
70% at the end of June -- in U.S. dollar-denominated bonds. This boosted
performance as the dollar appreciated against most major currencies in a
volatile time for currency markets. But we lost some ground in
- --------------------------------------------------------------------------------
Pie chart at the bottom left column titled "Portfolio Diversification" There are
five listings. Beginning from the top right the first represents United States
65%, the second represents Europe 15%, the third represents Latin America 11%,
The fourth represents South Africa 2%. The fifth represents Short-Term
Investments & Other 7%. A footnote at the bottom states "As a percentage of net
assets on June 30, 1998."
- --------------------------------------------------------------------------------
"...we kept our emphasis on U.S. bonds, although to a lesser degree than six
months ago."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Anthony Goodchild (l) and Lawrence Daly (R), Portfolio Managers.]
- --------------------------------------------------------------------------------
43
<PAGE>
================================================================================
JOHN HANCOCK V.A. WORLD BOND FUND
"We remain cautious... about emerging markets."
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the six months ended June 30, 1998." The
chart is scaled in increments of 1% with the 4% at the top and 0% at the bottom.
The first represents the 1.72% total return for John Hancock V.A. World Bond
Fund. The second represents the 2.31% total return for Average variable annuity
global income fund. A footnote at the bottom reads: The total return for John
Hancock V.A. World Bond Fund is at net asset value with all distributions
reinvested. The average variable annuity global income fund is tracked by Lipper
Analytical Services, Inc. See the following page for historical performance
information."]
- --------------------------------------------------------------------------------
recent currency trades involving the Japanese yen. Our first position was
against the yen and that served us well as the currency plunged for most of the
period. We gave back all our gains, however, after the Federal Reserve
unexpectedly intervened to prop up Japan's currency. Believing this action
signaled true reform ahead, we established a small stake in yen, only to see no
meaningful plans emerge and the yen start to slide again. We ended the period
with a minimal and hedged yen position.
Bias toward U.S. bonds
Given the volatility in world markets, and the fact that Europe's markets didn't
seem as attractive, with interest rates at low levels and poised to rise, we
kept our emphasis on U.S. bonds, although to a lesser degree than six months
ago. With real interest rates higher here than in Europe, and with the potential
for them to move down further as the economy slows, we're hoping that by
year-end, U.S. bonds will have gained enough ground to compensate us for missing
the short-term opportunity in Europe. At the end of the period, 57% of the
Fund's net assets -- down from 75% six months ago -- were invested in U.S.
Treasuries and mortgage-backed securities issued by several U.S. government
agencies.
Toward the end of the period, we redeployed 18% of the Fund's net assets to
Germany and its currency by buying a government bond and a U.S. bond issued by
Ford Motor Credit Company and denominated in deutschemarks. We did this because
we were able to get interest rates comparable to those of U.S. Treasuries and at
the same time increase our exposure to the deutschmark. We believe that with
German inflation low, and the new euro currency poised to keep European economic
growth strong even as the U.S. potentially weakened, there is an opportunity for
the mark to appreciate versus the dollar. We also kept a stake in the U.K.
because yields there remain higher than in the rest of Europe. Our
emerging-market stake stayed fairly steady at 13%, comprised of only
dollar-denominated government bonds.
Mixed outlook
Our outlook for global bond markets is mixed. As Asia's troubles begin to more
fully register, we expect the U.S. economy to slow, possibly allowing rates to
fall further. Low inflation and interest rates and solid growth appear to remain
the order of the day for Europe, with the new euro potentially posing an
attractive counterpart to the dollar. We remain cautious, however, about
emerging markets. While this year's currency and financial upheavals have
created tremendous opportunities for selective investors, the waters remain very
choppy. Our main concern is whether Japan can, and will, implement real
structural reform to move its economy out of recession and aid the rest of Asia.
Until prospects improve further, we'll maintain a defensive strategy.
- --------------------------------------------------------------------------------
International investing involves special risks such as political, economic and
currency risks and differences in accounting standards and financial reporting.
45
<PAGE>
================================================================================
JOHN HANCOCK V.A. WORLD BOND FUND
A LOOK AT PERFORMANCE
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (8/29/96)
---- ---------
Cumulative Total Returns 3.35% 7.28%
Average Annual Total Returns(1) 3.35% 3.90%
YIELD
For the period ended June 30, 1998
SEC 30-DAY
YIELD
-----
John Hancock V.A. World Bond Fund 5.31%
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested. Performance
figures reflect the effect of investment-related charges on the underlying
funds, but do not include insurance and other charges levied at the separate
account level.
All figures represent past performance and are no guarantee of future results.
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.
Notes to Performance
(1) The Adviser has agreed to limit the Fund's expenses to 0.25% (not including
management fee) of the Fund's daily average net assets. Without the limitation
of expenses, the average annual total return for the one-year period and since
inception would have been 2.20% and 2.51%, respectively.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock V.A.
World Bond Fund would be worth, assuming all distributions were reinvested for
the period indicated. For comparison, we've shown the same $10,000 investment in
the Salomon Brothers World Government Bond Index--an unmanaged index that
provides a benchmark for bond market performance on a worldwide basis.
- --------------------------------------------------------------------------------
Line chart with the heading V.A. World Bond Fund, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
two lines.
The first line represents the value of the hypothetical $10,000 investment made
in the V.A. World Bond Fund, before sales charge, and is equal to $10,729 as of
June 30, 1998. The second line represents the value of the Salomon Brothers
World Government Bond Index on August 29, 1996, and is equal to $10,632 as of
June 30, 1998.
- --------------------------------------------------------------------------------
45
<PAGE>
================================================================================
BY DAWN BAILLIE, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
V.A. Money Market Fund
Dormant inflation, Asia turmoil keep Federal Reserve on the sidelines
"To the extent we were able, we kept the Fund's maturity longer than average..."
When the Fund's semiannual period began in January, the economy was growing at a
healthy clip and seemed to shrug off the effects of financial turmoil in Asia.
As a result, investors grew more concerned that the Federal Reserve would raise
interest rates at its March meeting in order to cool the economy's jets and
prevent an inflation outbreak. But the Fed held back, and chairman Alan
Greenspan later made it clear that he would not make any changes to U.S.
monetary policy without taking worldwide events into account. Indeed, as the
period progressed, conditions in the Far East remained unsettled, including
floundering Asian markets and Japan's plummeting currency and recession-bound
economy. The region became the focal point of market concerns. Fears heightened
that the worst wasn't over yet and that the U.S. economy would slow in the
second half. That scenario would further bolster the Fed's sideline stance.
As a result of the Fed's inaction in the last six months, money market yields
remained fairly steady during the period, as the federal funds rate, which banks
charge each other for overnight loans and which serves as a pricing benchmark
for money market securities, remained at 5.50%. In June, however, money market
yields fell somewhat along with all bonds in a rally prompted by foreign
investors' increasingly seeking the safe haven of U.S. Treasury bonds.
On June 30, 1998, John Hancock V.A. Money Market Fund had a 7-day effective
yield of 5.01%. By comparison, the average taxable money market fund had a 7-day
effective yield of 4.92%, according to Lipper Analytical Services, Inc.
Staying long
To the extent we were able, we kept the Fund's maturity longer than average
throughout the entire six-month period. We took this aggressive stance because
we continued to believe that inflation would remain in check and that the Fed
would not take any action as long as Asia remained a wild card. Because the
Fund's small size limited our ability to buy the full range of money market
securities, we were not always able to maintain a longer-than-average maturity.
Nonetheless, over the last six months we managed to keep the Fund's maturity in
the range of two days shorter to five days longer than average. This strategy
served us well by allowing us to lock in higher rates, especially before last
month's rally when interest rates on longer-maturity bonds tumbled to their
lowest level in years and also put pressure on money market yields.
A look ahead
As long as the economy remains in its near perfect mode -- solid growth, low
interest rates and benign inflation -- and Asia still looms large over the
market and the economy, we believe the Fed
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team at the bottom right column.
Fund management team members (l-r): Jeff Given, Dawn Baillie, Bill Larkin, Jr.
and Barry Evans.]
- --------------------------------------------------------------------------------
46
<PAGE>
================================================================================
JOHN HANCOCK V.A. MONEY MARKET FUND
- --------------------------------------------------------------------------------
["Bar Chart with the heading "7-DAY EFFECTIVE YIELD" at the top of left hand
column. Under the heading is the footnote: "As of June 30, 1998." The chart is
scaled in increments of 2% with the 6% at the top and 0% at the bottom. The
first represents the 5.01% total return for John Hancock V.A. Money Market Fund.
The second represents the 4.92% total return for the Average taxable money
market fund. A footnote at the bottom reads: "The average taxable money market
fund is tracked by Lipper Analytical Services, Inc. Past performance is no
guarantee of future results."]
- --------------------------------------------------------------------------------
will stay on the sidelines. Above all else, further events in Asia and the U.S.
economy's growth rate hold the keys to the Fed's next moves. If the U.S. economy
slows down in the second half of the year, we also could see some further
decline in both interest rates and money market yields.
In this environment, we will keep the Fund's maturity longer than average,
believing the Fed will take no further action this year. Globally, we'll be
watching Japan and the yen, whose continued fall could spell more trouble for
other Asian currencies and economies worldwide. Domestically, we'll take our
cues from the monthly economic data, including the important employment cost
index number, which is an accurate measure of if and how a tight labor market
and wage pressures are translating into inflation. As always, we'll stay focused
on our goal of providing a competitive level of current income, while preserving
stability of principal.
"...further events in Asia and the U.S. economy's growth rate hold the keys to
the Fed's next moves."
- --------------------------------------------------------------------------------
The Fund is neither insured nor guaranteed by the U.S. government. There can be
no assurance that the Fund will be able to maintain a net asset value of $1.00
per share.
47
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Assets and Liabilities
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A.
INTERNATIONAL REGIONAL FINANCIAL
FUND BANK FUND(1) INDUSTRIES FUND
----------- ------------ ---------------
<S> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $4,856,049, $11,105,909, $40,397,984,
$5,428,002, $1,091,350 and $5,538,991, respectively) ............. $5,376,970 $10,872,763 $44,939,742
Preferred stocks and rights (cost - $178,308, none, none, none,
none and none, respectively) ..................................... 177,677 -- --
Joint repurchase agreements (cost - $206,000, $1,420,000,
$3,975,000, $41,000, $54,000 and $284,000, respectively) ......... 206,000 1,420,000 3,975,000
Corporate savings account ......................................... -- 790 661
----------- ------------ -----------
5,760,647 12,293,553 48,915,403
Cash .............................................................. 367 -- --
Foreign currency, at value (cost - $63,048, none, none, none,
none and none, respectively) ..................................... 63,074 -- --
Receivable for investments sold ................................... 7,185 87,906 293,818
Dividends and interest receivable ................................. 8,038 14,178 87,209
Foreign tax receivable ............................................ 8,163 -- --
Receivable from John Hancock Advisers, Inc. and affiliates -
Note C .......................................................... 52,380 -- --
Deferred organization expenses - Note B ........................... 6,766 -- --
Other assets ...................................................... 38 -- 761
----------- ------------ -----------
Total Assets .................................... 5,906,658 12,395,637 49,297,191
---------------------------------------------------------------------------------------------
Liabilities:
Payable for forward foreign currency exchange contracts
sold - Note B ................................................... 108 -- --
Payable for investments purchased ................................. 46,183 861,389 79,945
Payable foreign withholding tax ................................... 766 -- --
Payable to John Hancock Advisers, Inc. and affiliates - Note C .... -- 4,656 32,429
Accounts payable and accrued expenses ............................. 30,062 4,914 4,339
----------- ------------ -----------
Total Liabilities ............................... 77,119 870,959 116,713
---------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ................................................... 5,237,968 11,755,165 44,354,896
Accumulated net realized gain (loss) on investments,
financial futures contracts and foreign
currency transactions ............................................ 33,934 3,050 79,474
Net unrealized appreciation (depreciation) of
investments, financial futures contracts and
foreign currency transactions .................................... 520,392 (233,146) 4,541,762
Undistributed net investment income (distributions
in excess of net investment income) .............................. 37,245 (391) 204,346
----------- ------------ -----------
Net Assets ...................................... $5,829,539 $11,524,678 $49,180,478
=============================================================================================
Net Asset Value Per Share:
(Based on 479,309, 1,204,218, 3,257,688, 582,701, 106,728
and 536,460 shares, respectively, of beneficial interest
outstanding - unlimited number of shares authorized with
no par value) .................................................... $12.16 $9.57 $15.10
=================================================================================================================
<CAPTION>
V.A.
V.A. SPECIAL V.A.
EMERGING OPPORTUNITIES GROWTH
GROWTH FUND FUND(2) FUND
----------- ------------- -----------
<S> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $4,856,049, $11,105,909, $40,397,984,
$5,428,002, $1,091,350 and $5,538,991, respectively) ............. $6,470,129 $1,165,023 $6,272,698
Preferred stocks and rights (cost - $178,308, none, none, none,
none and none, respectively) ..................................... -- -- --
Joint repurchase agreements (cost - $206,000, $1,420,000,
$3,975,000, $41,000, $54,000 and $284,000, respectively) ......... 41,000 54,000 284,000
Corporate savings account ......................................... 211 223 103
----------- ---------- -----------
6,511,340 1,219,246 6,556,801
Cash .............................................................. -- -- --
Foreign currency, at value (cost - $63,048, none, none, none,
none and none, respectively) ..................................... -- -- --
Receivable for investments sold ................................... 94,761 13,121 2,500
Dividends and interest receivable ................................. 967 684 2,889
Foreign tax receivable ............................................ -- -- 7
Receivable from John Hancock Advisers, Inc. and affiliates -
Note C .......................................................... 9,083 --
Deferred organization expenses - Note B ........................... 6,766 -- 6,766
Other assets ...................................................... 22 -- 23
----------- ---------- -----------
Total Assets .................................... 6,614,526 1,242,134 6,568,986
-----------------------------------------------------------------------------------------
Liabilities:
Payable for forward foreign currency exchange contracts
sold - Note B ................................................... -- -- --
Payable for investments purchased ................................. 21,517 12,585 83,042
Payable foreign withholding tax ................................... -- -- --
Payable to John Hancock Advisers, Inc. and affiliates - Note C .... -- -- 1,359
Accounts payable and accrued expenses ............................. 10,119 12,884 8,018
----------- ---------- -----------
Total Liabilities ............................... 31,636 25,469 92,419
-----------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ................................................... 6,076,763 1,129,878 5,627,360
Accumulated net realized gain (loss) on investments,
financial futures contracts and foreign
currency transactions ............................................ (522,962) 11,668 119,322
Net unrealized appreciation (depreciation) of
investments, financial futures contracts and
foreign currency transactions .................................... 1,042,127 73,673 733,707
Undistributed net investment income (distributions
in excess of net investment income) .............................. (13,038) 1,446 (3,822)
----------- ---------- -----------
Net Assets ...................................... $6,582,890 $1,216,665 $6,476,567
=========================================================================================
Net Asset Value Per Share:
(Based on 479,309, 1,204,218, 3,257,688, 582,701, 106,728
and 536,460 shares, respectively, of beneficial interest
outstanding - unlimited number of shares authorized with
no par value) .................................................... $11.30 $11.40 $12.07
=============================================================================================================
</TABLE>
(1) Commenced operations on May 1, 1998.
(2) Commenced operations on January 2, 1998.
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 June 30, 1998. You'll also
find the net asset value per share as of that date.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Assets and Liabilities (continued)
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A. V.A.
GROWTH AND INDEPENDENCE SOVEREIGN 500 INDEX
INCOME FUND(1) EQUITY FUND INVESTORS FUND FUND
------------ ------------ -------------- -----------
<S> <C> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - $7,051,373, $13,498,567, $17,005,817
and $12,298,015, respectively) ................................... $7,401,092 $15,663,409 $19,328,049 $15,610,740
U.S. government obligations (cost - none, none $2,446,719
and none, respectively) ......................................... -- -- 2,459,697 --
Short-term investments (cost - $2,199,670, none, none and
none, respectively) ............................................. 2,199,670 -- -- --
Joint repurchase agreements (cost - $55,000, $676,000,
$2,288,000 and $2,355,000, respectively) ......................... 55,000 676,000 2,288,000 2,355,000
Corporate savings account ......................................... 283 181 524 --
------------ ----------- ------------ -----------
9,656,045 16,339,590 24,076,270 17,965,740
Cash .............................................................. -- -- -- 91,067
Receivable for investments sold ................................... -- 85,941 -- --
Receivable for forward foreign currency exchange contracts
sold - Note B ................................................... 1,027 -- -- --
Dividends and interest receivable ................................. 3,723 19,125 91,714 16,254
Foreign tax receivable ............................................ 9 74 -- 188
Receivable from John Hancock Advisers, Inc. and affiliates -
Note C .......................................................... 734 -- -- 12,472
Deferred organization expenses - Note B ........................... -- 6,766 6,766 6,766
Other assets ...................................................... -- 39 48 113
------------ ----------- ------------ -----------
Total Assets .................................... 9,661,538 16,451,535 24,174,798 18,092,600
--------------------------------------------------------------------------------------------------------------
Payable for investments purchased ................................. 1,288,215 226,697 994,700 --
Payable for variation margin - Note B ............................. -- -- -- 19,125
Payable foreign withholding tax ................................... -- -- -- 17
Payable to John Hancock Advisers, Inc. and affiliates - Note C .... -- 10,548 11,873 --
Accounts payable and accrued expenses ............................. 6,085 5,860 12,773 489
------------ ----------- ------------ -----------
Total Liabilities ............................... 1,294,300 243,105 1,019,346 19,631
--------------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ................................................... 8,001,455 13,452,720 20,936,771 13,509,306
Accumulated net realized gain (loss) on investments, financial
futures contracts and foreign currency transactions .............. 15,199 589,863 (122,002) 1,208,483
Net unrealized appreciation of investments, financial futures
contracts and foreign currency transactions ...................... 350,747 2,164,842 2,335,210 3,354,351
Undistributed net investment income (distributions in excess
of net investment income) ....................................... (163) 1,005 5,473 829
------------ ----------- ------------ -----------
Net Assets ...................................... $8,367,238 $16,208,430 $23,155,452 $18,072,969
==============================================================================================================
Net Asset Value Per Share:
(Based on 729,837, 961,385, 1,582,585 and 1,226,191 shares,
respectively, of beneficial interest outstanding - unlimited
number of shares authorized with no par value) ................... $11.46 $16.86 $14.63 $14.74
==================================================================================================================================
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Assets and Liabilities (continued)
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A. V.A. V.A.
SOVEREIGN STRATEGIC HIGH YIELD WORLD BOND MONEY MARKET
BOND FUND INCOME FUND BOND FUND(1) FUND FUND
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Assets:
Investments at value - Note D:
Common stocks (cost - none, $21,030, $484,148,
none and none, respectively) ............................... $-- $26,240 $395,203 $-- $--
Bonds (cost - $5,947,492, $10,431,144, $4,838,575,
$2,261,749 and none, respectively) ......................... 5,988,229 10,427,284 4,760,648 2,292,968 --
Preferred stocks and warrants (cost - $51, $220,978,
$190,740, none and none, respectively) ..................... 240 242,827 186,093 -- --
Options (cost - none, none, none, $2,450 and none,
respectively) ............................................. -- -- -- 4,774 --
Short-term investments (cost - none, none, none,
none and $9,937,513, respectively) ......................... -- -- -- -- 9,937,513
Joint repurchase agreements (cost - $1,008,000,
$56,000, $650,000, $153,000 and $838,000, respectively) .... 1,008,000 56,000 650,000 153,000 838,000
Corporate savings account ................................... 881 617 107 -- --
----------- ----------- ----------- ------------ -----------
6,997,350 10,752,968 5,992,051 2,450,742 10,775,513
Cash ........................................................ -- -- -- 487 396
Foreign currency, at value (cost - none, none,
$33,460, none and none, respectively) ...................... -- -- 33,248 -- --
Receivable for investments sold ............................. 744,502 174,031 29,344 259,546 --
Receivable for forward foreign currency exchange
contracts purchased - Note B ............................... -- 118 -- 1,468 --
Dividends and interest receivable ........................... 95,897 208,504 110,144 29,875 138,268
Receivable from John Hancock Advisers, Inc. and affiliates -
Note C .................................................... 2,739 -- 1,465 918 --
Deferred organization expenses - Note B ..................... 6,766 6,766 -- 6,766 6,766
Other assets ................................................ 22 41 -- 31 24
----------- ----------- ----------- ------------ -----------
Total Assets .............................. 7,847,276 11,142,428 6,166,252 2,749,833 10,920,967
---------------------------------------------------------------------------------------------------------------
Liabilities:
Distribution payable ........................................ 1,075 2,393 1,796 373 1,465
Payable for closed forward foreign currency exchange
contracts - Note B ........................................ -- -- -- 10,719 --
Payable for forward foreign currency exchange contracts
purchased - Note B ......................................... -- -- -- 8,586 --
Payable for forward foreign currency exchange contracts
sold - Note B ............................................. -- 4,176 39 3,412 --
Payable for investments purchased ........................... 1,383,911 279,531 127,416 260,697 --
Payable to John Hancock Advisers, Inc. and affiliates -
Note C .................................................... -- 3,521 -- -- 3,532
Accounts payable and accrued expenses ....................... 8,987 8,474 7,863 8,440 5,832
----------- ----------- ----------- ------------ -----------
Total Liabilities ......................... 1,393,973 298,095 137,114 292,227 10,829
---------------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ............................................. 6,342,418 10,801,036 6,214,267 2,477,696 10,910,138
Accumulated net realized gain (loss) on investments,
futures contracts and foreign currency transactions ........ 69,341 20,812 (10,239) (12,618) --
Net unrealized appreciation (depreciation) of investments,
financial futures contracts and foreign currency
transactions ............................................... 40,925 16,016 (171,447) 10,883 --
Undistributed net investment income (distributions in
excess of net investment income) ........................... 619 6,469 (3,443) (18,355) --
----------- ----------- ----------- ------------ -----------
Net Assets ................................ $6,453,303 $10,844,333 $6,029,138 $2,457,606 $10,910,138
===============================================================================================================
Net Asset Value Per Share:
(Based on 616,463, 1,032,151, 617,308, 254,904 and
10,910,138 shares, respectively, of beneficial
interest outstanding - unlimited number of shares
authorized with no par value) .............................. $10.47 $10.51 $9.77 $9.64 $1.00
===================================================================================================================================
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Operations
Six months ended June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A. V.A.
INTERNATIONAL REGIONAL FINANCIAL EMERGING
FUND BANK FUND(1) INDUSTRIES FUND GROWTH FUND
--------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of $7,870,
none, $3,767, none, $5 and $134, respectively) ......... $56,458 $20,405 $264,463 $5,072
Interest ................................................ 8,741 11,093 89,694 7,654
--------- --------- ---------- --------
65,199 31,498 354,157 12,726
--------- --------- ---------- --------
Expenses:
Investment management fee - Note C ..................... 21,705 9,742 128,515 19,415
Custodian fee .......................................... 65,775 4,784 11,998 15,811
Auditing fee ........................................... 5,818 2,921 5,818 5,818
Printing ............................................... 1,506 265 1,328 2,366
Organization expense - Note B .......................... 1,059 -- -- 1,059
Financial services fee - Note C ........................ 426 215 2,839 457
Trustees' fee .......................................... 117 16 579 117
Miscellaneous .......................................... 334 135 636 307
Legal fees ............................................. 44 8 161 37
Registration and filing fees ........................... 19 -- 12 12
--------- --------- ---------- --------
Total Expenses ............................ 96,803 18,086 151,886 45,399
Less Expense Reductions - Note C .......... (69,056) (5,300) -- (19,502)
--------- --------- ---------- --------
Net Expenses .............................. 27,747 12,786 151,886 25,897
---------------------------------------------------------------------------------------------------
Net Investment Income (Loss) .............. 37,452 18,712 202,271 (13,171)
---------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions:
Net realized gain (loss) on investments sold ............ 164,705 3,050 78,583 (270,041)
Net realized gain (loss) on foreign currency
transactions .......................................... (65,814) -- (462) 2
Change in net unrealized appreciation/depreciation
of investments ........................................ 534,785 (233,146) 2,986,174 718,734
Change in net unrealized appreciation/depreciation of
foreign currency transactions ......................... (251) -- 16 --
--------- --------- ---------- --------
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions .............................. 633,425 (230,096) 3,064,311 448,695
---------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ................. $670,877 ($211,384) $3,266,582 $435,524
===================================================================================================
<CAPTION>
V.A.
SPECIAL V.A.
OPPORTUNITIES GROWTH
FUND(2) FUND
------------- ---------
<S> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of $7,870,
none, $3,767, none, $5 and $134, respectively) ......... $2,288 $12,675
Interest ................................................ 2,959 7,474
------- ---------
5,247 20,149
------- ---------
Expenses:
Investment management fee - Note C ..................... 2,851 17,970
Custodian fee .......................................... 5,850 5,786
Auditing fee ........................................... 5,743 6,251
Printing ............................................... 1,019 2,434
Organization expense - Note B .......................... -- 1,059
Financial services fee - Note C ........................ 67 423
Trustees' fee .......................................... 10 114
Miscellaneous .......................................... 239 303
Legal fees ............................................. 23 47
Registration and filing fees ........................... -- 3
------- ---------
Total Expenses ............................ 15,802 34,390
Less Expense Reductions - Note C .......... (12,001) (10,419)
------- ---------
Net Expenses .............................. 3,801 23,971
--------------------------------------------------------------------
Net Investment Income (Loss) .............. 1,446 (3,822)
---------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions:
Net realized gain (loss) on investments sold ............ 11,668 327,890
Net realized gain (loss) on foreign currency
transactions .......................................... -- --
Change in net unrealized appreciation/depreciation
of investments ........................................ 73,673 220,735
Change in net unrealized appreciation/depreciation of
foreign currency transactions ......................... -- --
------- ---------
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions .............................. 85,341 548,625
--------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ................. $86,787 $544,803
====================================================================
</TABLE>
(1) Commenced operations on May 1, 1998.
(2) Commenced operations on January 2, 1998.
The Statement of Operations summarizes for each of the Funds the 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.
51
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Operations (continued)
Six months ended June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A. V.A.
GROWTH AND INDEPENDENCE SOVEREIGN 500 INDEX
INCOME FUND(1) EQUITY FUND INVESTORS FUND FUND
-------------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of $41,
$485, none and $762, respectively) ................................. $10,573 $90,525 $130,781 $138,658
Interest ............................................................. 25,065 12,656 104,454 35,415
--------- ---------- ---------- ----------
35,638 103,181 235,235 174,073
--------- ---------- ---------- ----------
Expenses:
Investment management fee - Note C .................................. 9,346 43,378 55,498 9,872
Auditing fee ........................................................ 6,163 5,818 5,818 5,818
Custodian fee ....................................................... 5,743 8,432 7,970 29,362
Printing ............................................................ 1,005 1,813 2,568 2,396
Legal fees .......................................................... 786 61 137 139
Financial services fee - Note C ..................................... 275 1,095 1,634 1,744
Trustees' fee ....................................................... 10 254 535 588
Registration and filing fees ........................................ 3 12 18 --
Miscellaneous ....................................................... 264 335 3,416 9,946
Organization expense - Note B ....................................... -- 1,059 1,059 1,059
--------- ---------- ---------- ----------
Total Expenses ..................................... 23,595 62,257 78,653 60,924
Less Expense Reductions - Note C ................... (10,355) (3,364) -- (26,314)
--------- ---------- ---------- ----------
Net Expenses ....................................... 13,240 58,893 78,653 34,610
-------------------------------------------------------------------------------------------------------------
Net Investment Income .............................. 22,398 44,288 156,582 139,463
-------------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments, Financial
Futures Contracts and Foreign Currency Transactions:
Net realized gain (loss) on investments sold ......................... 15,479 562,546 (139,843) 851,001
Net realized gain on financial futures contracts ..................... -- -- -- 159,600
Net realized loss on foreign currency transactions ................... (280) -- -- --
Change in net unrealized appreciation/depreciation of investments .... 349,720 1,535,478 1,217,485 2,416,146
Change in net unrealized appreciation/depreciation of
financial futures contracts ........................................ 1,027 -- -- 34,300
--------- ---------- ---------- ----------
Net Realized and Unrealized Gain on Investments,
Financial Futures Contracts and Foreign
Currency Transactions .............................. 365,946 2,098,024 1,077,642 3,461,047
-------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $388,344 $2,142,312 $1,234,224 $3,600,510
=============================================================================================================
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Operations (continued)
Six months ended June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. V.A. V.A. V.A. V.A.
SOVEREIGN STRATEGIC HIGH YIELD WORLD BOND MONEY MARKET
BOND FUND INCOME FUND BOND FUND(1) FUND FUND
--------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of none,
none, $127, none and none, respectively) ....................... $-- $12,252 $5,020 $-- $--
Interest ........................................................ 179,374 367,023 181,545 77,088 250,150
--------- --------- --------- --------- ---------
179,374 379,275 186,565 77,088 250,150
--------- --------- --------- --------- ---------
Expenses:
Investment management fee - Note C ............................. 12,919 24,703 11,079 8,879 22,114
Custodian fee .................................................. 16,246 4,838 5,002 5,830 3,137
Auditing fee ................................................... 5,818 5,818 5,689 5,818 5,818
Printing ....................................................... 1,871 2,452 1,476 1,638 1,624
Organization expense - Note B .................................. 1,059 1,059 -- 1,059 1,059
Financial services fee - Note C ................................ 456 728 326 222 781
Registration and filing fees ................................... 391 552 -- 19 10
Legal fees ..................................................... 131 185 897 19 173
Trustees' fee .................................................. 112 172 17 71 227
Miscellaneous .................................................. 297 321 759 409 356
--------- --------- --------- --------- ---------
Total Expenses ................................ 39,300 40,828 25,245 23,964 35,299
Less Expense Reductions - Note C .............. (19,913) (5,817) (9,549) (12,118) (2,112)
--------- --------- --------- --------- ---------
Net Expenses .................................. 19,387 35,011 15,696 11,846 33,187
--------------------------------------------------------------------------------------------------------------
Net Investment Income ......................... 159,987 344,264 170,869 65,242 216,963
--------------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts andForeign Currency Transactions:
Net realized gain (loss) on investments sold .................... 56,346 24,886 (9,951) 23,935 --
Net realized gain (loss) on foreign currency transactions ....... -- 7,312 (288) (33,212) --
Change in net unrealized appreciation/depreciation of
investments ................................................... (6,013) (58,044) (171,519) (1,358) --
Change in net unrealized appreciation/depreciation of
financial futures contracts ................................... -- (7,325) -- --
Change in net unrealized appreciation/depreciation of
foreign currency transactions ................................. -- -- 72 (13,930) --
--------- --------- --------- --------- ---------
Net Realized and Unrealized Gain (Loss)
on Investments, Financial Futures Contracts
and Foreign Currency Transactions ............. 50,333 (33,171) (181,686) (24,565) --
--------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ..................... $210,320 $311,093 ($10,817) $40,677 $216,963
==============================================================================================================
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A REGIONAL
V.A. INTERNATIONAL FUND BANK FUND
----------------------------- --------------
YEAR ENDED SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, JUNE 30, 1998 JUNE 30, 1998
1997 (UNAUDITED) (UNAUDITED)(1)
---------- ---------------- --------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .......................................... $12,662 $37,452 $18,712
Net realized gain on investments sold and foreign
currency transactions ......................................... 140,157 98,891 3,050
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ................. (261,976) 534,534 (233,146)
---------- ---------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations (109,157) 670,877 (211,384)
---------- ---------- -----------
Distributions to Shareholders: *
Dividends from net investment income ........................... (2,558) -- (19,103)
Distributions from net realized gain on investments sold
and foreign currency transactions ............................. (213,871) -- --
---------- ---------- -----------
Total Distributions to Shareholders ........................... (216,429) -- (19,103)
---------- ---------- -----------
From Fund Share Transactions: **
Shares sold .................................................... 1,809,166 1,717,013 11,795,202
Shares issued to shareholders in reinvestment of distributions . 216,428 -- 19,103
---------- ---------- -----------
2,025,594 1,717,013 11,814,305
Less shares repurchased ........................................ (175,125) (350,355) (59,140)
---------- ---------- -----------
Net Increase .................................................. 1,850,469 1,366,658 11,755,165
---------- ---------- -----------
Net Assets:
Beginning of period ............................................ 2,267,121 3,792,004 --
---------- ---------- -----------
End of period (including undistributed net investment income
(distributions in excess) of ($207), $37,245, ($391),
$2,075 and $204,346, respectively) ............................ $3,792,004 $5,829,539 $11,524,678
========== ========== ===========
* Distributions to Shareholders
Per share dividends from net investment income ................. $0.0077 $-- $0.0169
---------- ---------- -----------
Per share distributions from net realized gain on
investments sold and foreign currency transactions ............ $0.6422 $-- $--
---------- ---------- -----------
** Analysis of Fund Share Transactions:
Shares sold ................................................... 152,869 148,755 1,208,351
Shares issued to shareholders in reinvestment of
distributions ............................................... 21,239 -- 2,043
---------- ---------- -----------
174,108 148,755 1,210,394
Less shares repurchased ........................................ (14,965) (30,536) (6,176)
---------- ---------- -----------
Net Increase .................................................. 159,143 118,219 1,204,218
========== ========== ===========
V.A. FINANCIAL INDUSTRIES FUND
PERIOD ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
1997(2) (UNAUDITED)
------------ ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .......................................... $67,678 $202,271
Net realized gain on investments sold and foreign
currency transactions ......................................... 15,861 78,121
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ................. 1,555,572 2,986,190
----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations 1,639,111 3,266,582
----------- -----------
Distributions to Shareholders: *
Dividends from net investment income ........................... (65,434) --
Distributions from net realized gain on investments sold
and foreign currency transactions ............................. (14,677) --
----------- -----------
Total Distributions to Shareholders ........................... (80,111) --
----------- -----------
From Fund Share Transactions: **
Shares sold .................................................... 18,526,866 28,518,012
Shares issued to shareholders in reinvestment of distributions . 80,111 --
----------- -----------
18,606,977 28,518,012
Less shares repurchased ........................................ (1,700,536) (1,069,557)
----------- -----------
Net Increase .................................................. 16,906,441 27,448,455
----------- -----------
Net Assets:
Beginning of period ............................................ -- 18,465,441
----------- -----------
End of period (including undistributed net investment income
(distributions in excess) of ($207), $37,245, ($391),
$2,075 and $204,346, respectively) ............................ $18,465,441 $49,180,478
=========== ===========
* Distributions to Shareholders
Per share dividends from net investment income ................. $0.0518 $--
----------- -----------
Per share distributions from net realized gain on
investments sold and foreign currency transactions ............ $0.0116 $--
----------- -----------
** Analysis of Fund Share Transactions:
Shares sold ................................................... 1,501,742 1,955,822
Shares issued to shareholders in reinvestment of
distributions ............................................... 6,125 --
----------- -----------
1,507,867 1,955,822
Less shares repurchased ........................................ (133,780) (72,221)
----------- -----------
Net Increase .................................................. 1,374,087 1,883,601
=========== ===========
</TABLE>
(1) Commenced operations on May 1, 1998.
(2) Commenced operation on April 30, 1997.
The Statement of Changes in Net Assets shows how the value of each Fund's net
assets have 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, if any, and any increase or decrease
in money shareholders invested in each Fund. The footnotes illustrate the number
of Fund shares sold, reinvested and repurchased during the last two periods,
along with the per share amount of distributions made to shareholders of each
Fund for the period indicated.
SEE NOTES TO FINANCIAL STATEMENTS.
54
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. SPECIAL
OPPORTUNITIES
V.A. EMERGING GROWTH FUND FUND
------------------------------ --------------
YEAR ENDED SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, JUNE 30, 1998 JUNE 30, 1998
1997 (UNAUDITED) (UNAUDITED)(1)
------------ ---------------- --------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ................................. ($3,029) ($13,171) $1,446
Net realized gain (loss) on investments sold and
foreign currency transactions ............................... (181,115) (270,039) 11,668
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ............... 320,418 718,734 73,673
---------- ---------- ----------
Net Increase in Net Assets Resulting from Operations ........ 136,274 435,524 86,787
---------- ---------- ----------
Distributions to Shareholders: *
Dividends from net investment income ......................... (135) -- --
---------- ---------- ----------
From Fund Share Transactions: **
Shares sold .................................................. 2,985,092 2,901,669 1,191,009
Shares issued to shareholders in reinvestment of
distributions ............................................... 135 -- --
---------- ---------- ----------
2,985,227 2,901,669 1,191,009
Less shares repurchased ...................................... (255,471) (595,113) (61,131)
---------- ---------- ----------
Net Increase ................................................ 2,729,756 2,306,556 1,129,878
---------- ---------- ----------
Net Assets:
Beginning of period .......................................... 974,915 3,840,810 --
---------- ---------- ----------
End of period (including undistributed net investment
income (distributions in excess) of $133, ($13,038),
$1,446, none and ($3,822), respectively) .................... $3,840,810 $6,582,890 $1,216,665
========== ========== ==========
* Distributions to Shareholders:
Per share dividends from net investment income ............... $0.0004 $-- $--
---------- ---------- ----------
** Analysis of Fund Share Transactions:
Shares sold ................................................. 291,749 265,175 112,280
Shares issued to shareholders in reinvestment of
distributions .............................................. 14 -- --
---------- ---------- ----------
291,763 265,175 112,280
Less shares repurchased ...................................... (25,147) (53,672) (5,552)
---------- ---------- ----------
Net Increase ................................................ 266,616 211,503 106,728
========== ========== ==========
<CAPTION>
V.A. GROWTH FUND
------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
1997 (UNAUDITED)
------------ ----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ................................. ($8,594) ($3,822)
Net realized gain (loss) on investments sold and
foreign currency transactions ............................... (111,668) 327,890
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ............... 477,636 220,735
---------- ----------
Net Increase in Net Assets Resulting from Operations ........ 357,374 544,803
---------- ----------
Distributions to Shareholders: *
Dividends from net investment income ......................... -- --
---------- ----------
From Fund Share Transactions: **
Shares sold .................................................. 2,597,730 2,450,394
Shares issued to shareholders in reinvestment of
distributions ............................................... -- --
---------- ----------
2,597,730 2,450,394
Less shares repurchased ...................................... (216,250) (251,342)
---------- ----------
Net Increase ................................................ 2,381,480 2,199,052
---------- ----------
Net Assets:
Beginning of period .......................................... 993,858 3,732,712
---------- ----------
End of period (including undistributed net investment
income (distributions in excess) of $133, ($13,038),
$1,446, none and ($3,822), respectively) .................... $3,732,712 $6,476,567
========== ==========
* Distributions to Shareholders:
Per share dividends from net investment income ............... $-- $--
---------- ----------
** Analysis of Fund Share Transactions:
Shares sold ................................................. 263,298 210,406
Shares issued to shareholders in reinvestment of
distributions .............................................. -- --
---------- ----------
263,298 210,406
Less shares repurchased ...................................... (21,325) (21,761)
---------- ----------
Net Increase ................................................ 241,973 188,645
========== ==========
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. GROWTH AND
INCOME FUND V.A. INDEPENDENCE EQUITY FUND
-------------- ------------------------------
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998
(UNAUDITED)(1) 1997 (UNAUDITED)
-------------- ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................... $22,398 $41,598 $44,288
Net realized gain (loss) on investments sold and foreign currency
transactions ............................................................. 15,199 137,167 562,546
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions ............................................ 350,747 544,516 1,535,478
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ..................... 388,344 723,281 2,142,312
------------ ------------ ------------
Distributions to Shareholders: *
Dividends from net investment income ...................................... (22,561) (41,203) (43,678)
Distributions from net realized gain on investments sold and foreign
currency transactions .................................................... -- (135,930) --
------------ ------------ ------------
Total Distributions to Shareholders ...................................... (22,561) (177,133) (43,678)
------------ ------------ ------------
From Fund Share Transactions: **
Shares sold ............................................................... 8,168,750 7,299,605 7,389,950
Shares issued to shareholders in reinvestment of distributions ............ 22,561 177,133 43,678
------------ ------------ ------------
8,191,311 7,476,738 7,433,628
Less shares repurchased ................................................... (189,856) (452,446) (2,042,924)
------------ ------------ ------------
Net Increase ............................................................. 8,001,455 7,024,292 5,390,704
------------ ------------ ------------
Net Assets:
Beginning of period ....................................................... -- 1,148,652 8,719,092
------------ ------------ ------------
End of period (including undistributed net investment income (distributions
in excess) of ($163), $395, $1,005, $804 and $5,473, respectively) ....... $8,367,238 $8,719,092 $16,208,430
============ ============ ============
* Distributions to Shareholders:
Per share dividends from net investment income ............................ $0.0475 $0.1376 $0.0514
------------ ------------ ------------
Per share distributions from net realized gain on investments sold and
foreign currency transactions ............................................ $-- $0.2476 $--
------------ ------------ ------------
** Analysis of Fund Share Transactions:
Shares sold .............................................................. 744,826 534,688 466,379
Shares issued to shareholders in reinvestment of distributions ........... 2,025 13,023 2,647
------------ ------------ ------------
746,851 547,711 469,026
Less shares repurchased ................................................... (17,014) (33,121) (125,606)
------------ ------------ ------------
Net Increase ............................................................. 729,837 514,590 343,420
============ ============ ============
<CAPTION>
V.A. SOVEREIGN INVESTORS FUND
------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
1997 (UNAUDITED)
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................... $84,193 $156,582
Net realized gain (loss) on investments sold and foreign currency
transactions ............................................................. 17,842 (139,843)
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions ............................................ 1,050,550 1,217,485
------------ ------------
Net Increase in Net Assets Resulting from Operations ..................... 1,152,585 1,234,224
------------ ------------
Distributions to Shareholders: *
Dividends from net investment income ...................................... (83,445) (151,914)
Distributions from net realized gain on investments sold and foreign
currency transactions .................................................... (6,096) --
------------ ------------
Total Distributions to Shareholders ...................................... (89,541) (151,914)
------------ ------------
From Fund Share Transactions: **
Shares sold ............................................................... 10,664,200 11,878,429
Shares issued to shareholders in reinvestment of distributions ............ 89,541 151,914
------------ ------------
10,753,741 12,030,343
Less shares repurchased ................................................... (740,977) (2,144,140)
------------ ------------
Net Increase ............................................................. 10,012,764 9,886,203
------------ ------------
Net Assets:
Beginning of period ....................................................... 1,111,131 12,186,939
------------ ------------
End of period (including undistributed net investment income (distributions
in excess) of ($163), $395, $1,005, $804 and $5,473, respectively) ....... $12,186,939 $23,155,452
============ ============
* Distributions to Shareholders:
Per share dividends from net investment income ............................ $0.1769 $0.1061
------------ ------------
Per share distributions from net realized gain on investments sold and
foreign currency transactions ............................................ $0.0072 $--
------------ ------------
** Analysis of Fund Share Transactions:
Shares sold .............................................................. 844,459 821,310
Shares issued to shareholders in reinvestment of distributions ........... 6,966 10,323
------------ ------------
851,425 831,633
Less shares repurchased ................................................... (58,189) (145,766)
------------ ------------
Net Increase ............................................................. 793,236 685,867
============ ============
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. 500 INDEX FUND V.A. SOVEREIGN BOND FUND
---------------------------- ----------------------------
YEAR ENDED SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998
1997 (UNAUDITED) 1997 (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ........................................ $254,757 $139,463 $117,217 $159,987
Net realized gain on investments sold and foreign currency
transactions ................................................ 812,763 1,010,601 30,656 56,346
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ............... 948,655 2,450,446 33,037 (6,013)
------------ ------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ........ 2,016,175 3,600,510 180,910 210,320
------------ ------------ ------------ ------------
Distributions to Shareholders: *
Dividends from net investment income ......................... (253,122) (140,515) (117,208) (159,377)
Distributions from net realized gain on investments sold and
foreign currency transactions ............................... (801,442) -- (22,285) --
------------ ------------ ------------ ------------
Total Distributions to Shareholders ......................... (1,054,564) (140,515) (139,493) (159,377)
------------ ------------ ------------ ------------
From Fund Share Transactions: **
Shares sold .................................................. 15,055,266 7,890,438 2,851,276 3,111,590
Shares issued to shareholders in reinvestment of distributions 1,054,564 140,515 138,885 158,909
------------ ------------ ------------ ------------
16,109,830 8,030,953 2,990,161 3,270,499
Less shares repurchased ...................................... (1,112,317) (13,425,796) (405,240) (550,620)
------------ ------------ ------------ ------------
Net Increase (Decrease) ..................................... 14,997,513 (5,394,843) 2,584,921 2,719,879
------------ ------------ ------------ ------------
Net Assets:
Beginning of period .......................................... 4,048,693 20,007,817 1,056,143 3,682,481
------------ ------------ ------------ ------------
End of period (including undistributed net investment income
of $1,881, $829, $9, $619, $6,469 and $6,469, respectively) . $20,007,817 $18,072,969 $3,682,481 $6,453,303
============ ============ ============ ============
* Distributions to Shareholders:
Per share dividends from net investment income ............... $0.3006 $0.0972 $0.6766 $0.3167
------------ ------------ ------------ ------------
Per share distributions from net realized gain on investments
sold and foreign currency transactions ...................... $0.5445 $-- $0.0653 $--
------------ ------------ ------------ ------------
** Analysis of Fund Share Transactions:
Shares sold .................................................. 1,200,874 561,285 277,867 298,614
Shares issued to shareholders in reinvestment of distributions 86,596 9,739 13,553 15,291
------------ ------------ ------------ ------------
1,287,470 571,024 291,420 313,905
Less shares repurchased ...................................... (90,171) (930,006) (39,559) (52,987)
------------ ------------ ------------ ------------
Net Increase (Decrease) ..................................... 1,197,299 (358,982) 251,861 260,918
============ ============ ============ ============
<CAPTION>
V.A. STRATEGIC INCOME FUND
----------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
1997 (UNAUDITED)
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ........................................ $283,099 $344,264
Net realized gain on investments sold and foreign currency
transactions ................................................ 6,218 32,198
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ............... 53,892 (65,369)
------------ ------------
Net Increase in Net Assets Resulting from Operations ........ 343,209 311,093
------------ ------------
Distributions to Shareholders: *
Dividends from net investment income ......................... (283,099) (344,264)
Distributions from net realized gain on investments sold and
foreign currency transactions ............................... (44,377) --
------------ ------------
Total Distributions to Shareholders ......................... (327,476) (344,264)
------------ ------------
From Fund Share Transactions: **
Shares sold .................................................. 3,436,273 5,481,199
Shares issued to shareholders in reinvestment of distributions 327,029 342,316
------------ ------------
3,763,302 5,823,515
Less shares repurchased ...................................... (370,882) (485,572)
------------ ------------
Net Increase (Decrease) ..................................... 3,392,420 5,337,943
------------ ------------
Net Assets:
Beginning of period .......................................... 2,131,408 5,539,561
------------ ------------
End of period (including undistributed net investment income
of $1,881, $829, $9, $619, $6,469 and $6,469, respectively) . $5,539,561 $10,844,333
============ ============
* Distributions to Shareholders:
Per share dividends from net investment income ............... $0.9083 $0.4359
------------ ------------
Per share distributions from net realized gain on investments
sold and foreign currency transactions ...................... $0.0870 $--
------------ ------------
** Analysis of Fund Share Transactions:
Shares sold .................................................. 326,163 516,438
Shares issued to shareholders in reinvestment of distributions 31,206 32,341
------------ ------------
357,369 548,779
Less shares repurchased ...................................... (35,138) (45,746)
------------ ------------
Net Increase (Decrease) ..................................... 322,231 503,033
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
57
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. HIGH YIELD
BOND FUND V.A. WORLD BOND FUND
------------ ----------------------------
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998
(UNAUDITED)(1) 1997 (UNAUDITED)
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ........................................................... $170,869 $128,346 $65,242
Net realized loss on investments sold and foreign currency transactions ......... (10,239) (87,763) (9,277)
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions .................................................. (171,447) (10,797) (15,288)
------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations ................ (10,817) 29,786 40,677
------------ ------------ ------------
Distributions to Shareholders: *
Dividends from net investment income ............................................ (174,312) (46,497) (65,242)
Distribution in excess of net investment income ................................. -- (19,609) --
Tax return of capital ........................................................... -- (62,240) --
------------ ------------ ------------
Total Distributions to Shareholders ............................................ (174,312) (128,346) (65,242)
------------ ------------ ------------
From Fund Share Transactions: **
Shares sold ..................................................................... 6,286,678 234,407 185,778
Shares issued to shareholders in reinvestment of distributions .................. 172,516 128,137 65,079
------------ ------------ ------------
6,459,194 362,544 250,857
Less shares repurchased ......................................................... (244,927) (43,948) (71,282)
------------ ------------ ------------
Net Increase ................................................................... 6,214,267 318,596 179,575
------------ ------------ ------------
Net Assets:
Beginning of period ............................................................. -- 2,082,560 2,302,596
------------ ------------ ------------
End of period (including distributions in excess of net investment
income of $3,443, $18,355, $18,355, none and none, respectively) ............... $6,029,138 $2,302,596 $2,457,606
============ ============ ============
* Distributions to Shareholders:
Per share dividends from net investment income .................................. $0.4264 $0.2134 $0.2663
------------ ------------ ------------
Per share distributions in excess of net investment income ...................... $-- $0.0900 $--
------------ ------------ ------------
Tax return of capital ........................................................... $-- $0.2857 $--
------------ ------------ ------------
** Analysis of Fund Share Transactions:
Shares sold .................................................................... 624,421 23,767 19,068
Shares issued to shareholders in reinvestment of distributions ................. 17,215 13,037 6,703
------------ ------------ ------------
641,636 36,804 25,771
Less shares repurchased ......................................................... (24,328) (4,441) (7,336)
------------ ------------ ------------
Net Increase ................................................................... 617,308 32,363 18,435
============ ============ ============
<CAPTION>
V.A. MONEY MARKET FUND
----------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
1997 (UNAUDITED)
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ........................................................... $119,827 $216,963
Net realized loss on investments sold and foreign currency transactions ......... -- --
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions .................................................. -- --
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations ................ 119,827 216,963
------------ ------------
Distributions to Shareholders: *
Dividends from net investment income ............................................ (119,827) (216,963)
Distribution in excess of net investment income ................................. -- --
Tax return of capital ........................................................... -- --
------------ ------------
Total Distributions to Shareholders ............................................ (119,827) (216,963)
------------ ------------
From Fund Share Transactions: **
Shares sold ..................................................................... 9,748,620 14,069,444
Shares issued to shareholders in reinvestment of distributions .................. 118,655 216,670
------------ ------------
9,867,275 14,286,114
Less shares repurchased ......................................................... (1,696,845) (11,753,034)
------------ ------------
Net Increase ................................................................... 8,170,430 2,533,080
------------ ------------
Net Assets:
Beginning of period ............................................................. 206,628 8,377,058
------------ ------------
End of period (including distributions in excess of net investment
income of $3,443, $18,355, $18,355, none and none, respectively) ............... $8,377,058 $10,910,138
============ ============
* Distributions to Shareholders:
Per share dividends from net investment income .................................. $0.0478 $0.0244
------------ ------------
Per share distributions in excess of net investment income ...................... $-- $--
------------ ------------
Tax return of capital ........................................................... $-- $--
------------ ------------
** Analysis of Fund Share Transactions:
Shares sold .................................................................... 9,748,620 14,069,444
Shares issued to shareholders in reinvestment of distributions ................. 118,655 216,670
------------ ------------
9,867,275 14,286,114
Less shares repurchased ......................................................... (1,696,845) (11,753,034)
------------ ------------
Net Increase ................................................................... 8,170,430 2,533,080
============ ============
</TABLE>
(1) Commenced operations on January 2, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. INTERNATIONAL FUND
------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
--------- --------- ---------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................................... $10.00 $11.23 $10.50
--------- --------- ---------
Net Investment Income (2) ...................................................... 0.07 0.05 0.09
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency
Transactions ................................................................. 1.20 (0.13) 1.57
--------- --------- ---------
Total from Investment Operations ............................................ 1.27 (0.08) 1.66
--------- --------- ---------
Less Distributions:
Dividends from Net Investment Income .......................................... (0.04) (0.01) --
Distributions from Net Realized Gain on Investments Sold ...................... -- (0.64) --
--------- --------- ---------
Total Distributions ......................................................... (0.04) (0.65) --
--------- --------- ---------
Net Asset Value, End of Period ................................................. $11.23 $10.50 $12.16
========= ========= =========
Total Investment Return at Net Asset Value (3) ................................. 12.75%(5) (0.54%) 15.81%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) ...................... 12.07%(5) (1.43%) 14.39%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ....................................... $2,267 $3,792 $5,830
Ratio of Expenses to Average Net Assets ........................................ 1.15%(6) 1.15% 1.15%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ........................... 3.13%(6) 2.04% 4.01%(6)
Ratio of Net Investment Income to Average Net Assets ........................... 2.03%(6) 0.43% 1.56%(6)
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (7) ....... 0.05%(6) (0.46%) (1.30%)(6)
Portfolio Turnover Rate ........................................................ 14% 273% 64%
Fee Reduction Per Share (2) .................................................... $0.07 $0.10 $0.16
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
distributions 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.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
V.A. REGIONAL BANK FUND
-----------------------
PERIOD ENDED
JUNE 30, 1998
(UNAUDITED)(1)
--------------
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $10.00
----------
Net Investment Income (2) ................................ 0.02
Net Realized and Unrealized Loss on Investments .......... (0.43)
----------
Total from Investment Operations ...................... (0.41)
----------
Less Distributions:
Dividends from Net Investment Income .................... (0.02)
----------
Net Asset Value, End of Period ........................... $9.57
==========
Total Investment Return at Net Asset Value (3) ........... (4.13%)(5)
Total Adjusted Investment Return at Net Asset
Value (3,4) ............................................ (4.20%)(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $11,525
Ratio of Expenses to Average Net Assets .................. 1.05%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ..... 1.49%(6)
Ratio of Net Investment Income to Average Net Assets ..... 1.54%(6)
Ratio of Adjusted Net Investment Income to Average
Net Assets (7) ......................................... 1.10%(6)
Portfolio Turnover Rate .................................. 5%
Fee Reduction Per Share (2) .............................. $0.01
(1) Commenced operations on May 1, 1998.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. FINANCIAL INDUSTRIES FUND
------------------------------
PERIOD SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30, 1998
1997(1) (UNAUDITED)
---------- ----------
<S> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................... $10.00 $13.44
---------- ----------
Net Investment Income (2) ................................. 0.11 0.09
Net Realized and Unrealized Gain on Investments and Foreign
Currency Transactions ................................... 3.39 1.57
---------- ----------
Total from Investment Operations ....................... 3.50 1.66
---------- ----------
Less Distributions:
Dividends from Net Investment Income ..................... (0.05) --
Distributions from Net Realized Gain on Investments Sold . (0.01) --
---------- ----------
Total Distributions .................................... (0.06) --
---------- ----------
Net Asset Value, End of Period ............................ $13.44 $15.10
========== ==========
Total Investment Return at Net Asset Value (3) ............ 35.05%(5) 12.35%(5)
Total Adjusted Investment Return at Net Asset Value (3,4).. 34.71%(5) --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................. $18,465 $49,180
Ratio of Expenses to Average Net Assets ................... 1.05%(6) 0.95%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ...... 1.39%(6) --
Ratio of Net Investment Income to Average Net Assets ...... 1.32%(6) 1.26%(6)
Ratio of Adjusted Net Investment Income to Average Net
Assets (7) .............................................. 0.98%(6) --
Portfolio Turnover Rate ................................... 11% 22%
Fee Reduction Per Share (2) ............................... $0.03 --
</TABLE>
(1) Commenced operations on April 30, 1997.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
V.A. EMERGING GROWTH FUND
---------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
------------ ------------ -------------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ......................................... $10.00 $9.32 $10.35
--------- --------- ---------
Net Investment Income (Loss) (2) ............................................. 0.02 (0.02) (0.03)
Net Realized and Unrealized Gain (Loss) on Investments ....................... (0.68) 1.05 0.98
--------- --------- ---------
Total from Investment Operations .......................................... (0.66) 1.03 0.95
--------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ........................................ (0.02) (0.00)(3) --
--------- --------- ---------
Net Asset Value, End of Period ............................................... $9.32 $10.35 $11.30
========= ========= =========
Total Investment Return at Net Asset Value (4) ............................... (6.62%)(6) 11.06% 9.18%(6)
Total Adjusted Investment Return at Net Asset Value (4,5) .................... (8.05%)(6) 9.34% 8.81%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................................... $975 $3,841 $6,583
Ratio of Expenses to Average Net Assets ...................................... 1.00%(7) 1.00% 1.00%(7)
Ratio of Adjusted Expenses to Average Net Assets (8) ......................... 5.19%(7) 2.72% 1.75%(7)
Ratio of Net Investment Income (Loss) to Average Net Assets .................. 0.62%(7) (0.16%) (0.51%)(7)
Ratio of Adjusted Net Investment Loss to Average Net Assets (8) .............. (3.57%)(7) (1.88%) (1.26%)(7)
Portfolio Turnover Rate ...................................................... 31% 79% 48%
Fee Reduction Per Share (2) .................................................. $0.14 $0.17 $0.04
</TABLE>
(1) Commenced operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(6) Not annualized.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
V.A. SPECIAL
OPPORTUNITIES FUND
------------------
PERIOD ENDED
JUNE 30, 1998
(UNAUDITED)(1)
-------------
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................... $10.00
---------
Net Investment Income (2) .................................. 0.02
Net Realized and Unrealized Gain on Investments ............ 1.38
---------
Total from Investment Operations ........................ 1.40
---------
Net Asset Value, End of Period ............................. $11.40
=========
Total Investment Return at Net Asset Value (3) ............. 14.00%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) .. 12.49%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $1,217
Ratio of Expenses to Average Net Assets .................... 1.00%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ....... 4.14%(6)
Ratio of Net Investment Income to Average Net Assets ....... 0.38%(6)
Ratio of Adjusted Net Investment Loss to Average Net
Assets (7) (2.76%)(6)
Portfolio Turnover Rate .................................... 40%
Fee Reduction Per Share (2) ................................ $0.16
(1) Commenced operations on January 2, 1998.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
63
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. GROWTH FUND
------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
--------- --------- ---------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $10.00 $9.39 $10.73
--------- --------- ---------
Net Investment Loss (2) ....................................... (0.01) (0.04) (0.01)
Net Realized and Unrealized Gain (Loss) on Investments ........ (0.60) 1.38 1.35
--------- --------- ---------
Total from Investment Operations ........................... (0.61) 1.34 1.34
--------- --------- ---------
Net Asset Value, End of Period ................................ $9.39 $10.73 $12.07
========= ========= =========
Total Investment Return at Net Asset Value (3) ................ (6.10%)(5) 14.27% 12.49%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) ..... (7.39%)(5) 12.90% 12.27%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $994 $3,733 $6,477
Ratio of Expenses to Average Net Assets ....................... 1.00%(6) 1.00% 1.00%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) .......... 4.76%(6) 2.37% 1.43%(6)
Ratio of Net Investment Loss to Average Net Assets ............ (0.23%)(6) (0.39%) (0.16%)(6)
Ratio of Adjusted Net Investment Loss to Average
Net Assets (7) .............................................. (3.99%)(6) (1.76%) (0.59%)(6)
Portfolio Turnover Rate ....................................... 68% 136% 108%
Fee Reduction Per Share (2) ................................... $0.13 $0.13 $0.02
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
64
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
V.A. GROWTH &
INCOME FUND
-----------
PERIOD ENDED
JUNE 30, 1998
(UNAUDITED)(1)
--------------
Per Share Operating Performance
Net Asset Value, Beginning of Period ......................... $10.00
---------
Net Investment Income (2) .................................... 0.05
Net Realized and Unrealized Gain on Investments and
financial futures contracts ................................ 1.46
---------
Total from Investment Operations .......................... 1.51
---------
Less Distributions:
Dividends from Net Investment Income ........................ (0.05)
---------
Net Asset Value, End of Period ............................... $11.46
=========
Total Investment Return at Net Asset Value (3) ............... 15.09%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) .... 14.77%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................... $8,367
Ratio of Expenses to Average Net Assets ...................... 0.85%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ......... 1.51%(6)
Ratio of Net Investment Income to Average Net Assets ......... 1.42%(6)
Ratio of Adjusted Net Investment Income to Average Net
Assets (7) ................................................. 0.76%(6)
Portfolio Turnover Rate ...................................... 62%
Fee Reduction Per Share (2) .................................. $0.03
(1) Commenced operations on January 2, 1998.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
65
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. INDEPENDENCE EQUITY FUND
-------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................... $10.00 $11.11 $14.11
---------- ---------- ----------
Net Investment Income (2) .............................................. 0.06 0.16 0.05
Net Realized and Unrealized Gain on Investments ........................ 1.12 3.23 2.75
---------- ---------- ----------
Total from Investment Operations .................................... 1.18 3.39 2.80
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income .................................. (0.06) (0.14) (0.05)
Distributions from Net Realized Gain on Investments Sold .............. (0.01) (0.25) --
---------- ---------- ----------
Total Distributions ................................................. (0.07) (0.39) (0.05)
---------- ---------- ----------
Net Asset Value, End of Period ......................................... $11.11 $14.11 $16.86
========== ========== ==========
Total Investment Return at Net Asset Value (3) ......................... 11.78%(5) 30.68% 19.86%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) .............. 10.66%(5) 30.04% 19.83%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $1,149 $8,719 $16,208
Ratio of Expenses to Average Net Assets ................................ 0.95%(6) 0.95% 0.95%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ................... 4.23%(6) 1.59% 1.00%(6)
Ratio of Net Investment Income to Average Net Assets ................... 1.60%(6) 1.24% 0.71%(6)
Ratio of Adjusted Net Investment Income (Loss) to Average Net
Assets (7) ........................................................... (1.68%)(6) 0.60% 0.66%(6)
Portfolio Turnover Rate ................................................ 24% 53% 32%
Fee Reduction Per Share (2) ............................................ $0.12 $0.08 $0.00(8)
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
66
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. SOVEREIGN INVESTORS FUND
-------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................... $10.00 $10.74 $13.59
---------- ---------- ----------
Net Investment Income (2) .............................................. 0.07 0.22 0.12
Net Realized and Unrealized Gain on Investments ........................ 0.76 2.82 1.03
---------- ---------- ----------
Total from Investment Operations .................................... 0.83 3.04 1.15
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income .................................. (0.07) (0.18) (0.11)
Distributions from Net Realized Gain on Investments Sold .............. (0.02) (0.01) --
---------- ---------- ----------
Total Distributions ................................................. (0.09) (0.19) (0.11)
---------- ---------- ----------
Net Asset Value, End of Period ......................................... $10.74 $13.59 $14.63
========== ========== ==========
Total Investment Return at Net Asset Value (3) ......................... 8.30%(5) 28.43% 8.43%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) .............. 7.30%(5) 28.12% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $1,111 $12,187 $23,155
Ratio of Expenses to Average Net Assets ................................ 0.85%(6) 0.85% 0.85%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ................... 3.78%(6) 1.16% --
Ratio of Net Investment Income to Average Net Assets ................... 1.90%(6) 1.81% 1.69%(6)
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (7) (1.03%)(6) 1.50% --
Portfolio Turnover Rate ................................................ 17% 11% 12%
Fee Reduction Per Share (2) ............................................ $0.11 $0.04 --
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
67
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. 500 INDEX FUND
-------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................................... $10.00 $10.44 $12.62
---------- ---------- ----------
Net Investment Income (2) ..................................................... 0.17 0.30 0.10
Net Realized and Unrealized Gain on Investments and Financial Futures Contracts 0.98 2.72 2.12
---------- ---------- ----------
Total from Investment Operations ........................................... 1.15 3.02 2.22
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ......................................... (0.16) (0.30) (0.10)
Distributions from Net Realized Gain on Investments Sold ..................... (0.55) (0.54) --
---------- ---------- ----------
Total Distributions ........................................................ (0.71) (0.84) (0.10)
---------- ---------- ----------
Net Asset Value, End of Period ................................................ $10.44 $12.62 $14.74
========== ========== ==========
Total Investment Return at Net Asset Value (3) ................................ 11.49%(5) 29.51% 17.59%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) ..................... 11.25%(5) 29.27% 17.46%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................................... $4,049 $20,008 $18,073
Ratio of Expenses to Average Net Assets ....................................... 0.60%(6) 0.36% 0.35%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) .......................... 1.31%(6) 0.60% 0.62%(6)
Ratio of Net Investment Income to Average Net Assets .......................... 4.57%(6) 2.45% 1.41%(6)
Ratio of Adjusted Net Investment Income to Average Net Assets (7) ............. 3.86%(6) 2.21% 1.14%(6)
Portfolio Turnover Rate ....................................................... -- 9% 13%
Fee Reduction Per Share (2) ................................................... $0.03 $0.03 $0.02
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
68
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. SOVEREIGN BOND FUND
-------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................ $10.00 $10.19 $10.36
--------- --------- ---------
Net Investment Income (2) ....................................... 0.23 0.68 0.32
Net Realized and Unrealized Gain on Investments ................. 0.21 0.24 0.11
--------- --------- ---------
Total from Investment Operations ............................. 0.44 0.92 0.43
--------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ........................... (0.23) (0.68) (0.32)
Distributions from Net Realized Gain on Investments Sold ....... (0.02) (0.07) --
--------- --------- ---------
Total Distributions .......................................... (0.25) (0.75) (0.32)
--------- --------- ---------
Net Asset Value, End of Period .................................. $10.19 $10.36 $10.47
========= ========= =========
Total Investment Return at Net Asset Value (3) .................. 4.42%(5) 9.30% 4.20%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) ....... 3.25%(5) 7.52% 3.82%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $1,056 $3,682 $6,453
Ratio of Expenses to Average Net Assets ......................... 0.75%(6) 0.75% 0.75%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ............ 4.15%(6) 2.53% 1.52%(6)
Ratio of Net Investment Income to Average Net Assets ............ 6.69%(6) 6.57% 6.19%(6)
Ratio of Adjusted Net Investment Income to Average Net Assets (7) 3.29%(6) 4.79% 5.42%(6)
Portfolio Turnover Rate ......................................... 45% 193% 201%
Fee Reduction Per Share (2) ..................................... $0.12 $0.18 $0.04
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. STRATEGIC INCOME FUND
-------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................................... $10.00 $10.30 $10.47
---------- ---------- ----------
Net Investment Income (2) ..................................................... 0.27 0.91 0.44
Net Realized and Unrealized Gain on Investments and financial
futures contracts ........................................................... 0.36 0.26 0.04
---------- ---------- ----------
Total from Investment Operations ........................................... 0.63 1.17 0.48
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ......................................... (0.27) (0.91) (0.44)
Distributions from Net Realized Gain on Investments Sold ..................... (0.06) (0.09) --
---------- ---------- ----------
Total Distributions ........................................................ (0.33) (1.00) (0.44)
---------- ---------- ----------
Net Asset Value, End of Period ................................................ $10.30 $10.47 $10.51
========== ========== ==========
Total Investment Return at Net Asset Value (3) ................................ 6.45%(5) 11.77% 4.61%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) ..................... 5.96%(5) 11.25% 4.54%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................................... $2,131 $5,540 $10,844
Ratio of Expenses to Average Net Assets ....................................... 0.85%(6) 0.85% 0.85%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) .......................... 2.28%(6) 1.37% 0.99%(6)
Ratio of Net Investment Income to Average Net Assets .......................... 7.89%(6) 8.77% 8.36%(6)
Ratio of Adjusted Net Investment Income to Average Net Assets (7) ............. 6.46%(6) 8.25% 8.22%(6)
Portfolio Turnover Rate ....................................................... 73% 110% 53%
Fee Reduction Per Share (2) ................................................... $0.05 $0.05 $0.01
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
V.A. HIGH YIELD
BOND FUND
---------------
PERIOD
ENDED
JUNE 30, 1998
(UNAUDITED)(1)
---------------
Per Share Operating Performance
Net Asset Value, Beginning of Period ......................... $10.00
---------
Net Investment Income (2) .................................... 0.43
Net Realized and Unrealized Loss on Investments and foreign
currency transactions ...................................... (0.23)
---------
Total from Investment Operations .......................... 0.20
---------
Less Distributions:
Dividends from Net Investment Income ........................ (0.43)
---------
Net Asset Value, End of Period ............................... $9.77
=========
Total Investment Return at Net Asset Value (3) ............... 1.94%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) .... 1.69%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................... $6,029
Ratio of Expenses to Average Net Assets ...................... 0.85%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ......... 1.37%(6)
Ratio of Net Investment Income to Average Net Assets ......... 9.25%(6)
Ratio of Adjusted Net Investment Income to Average Net
Assets (7) ................................................. 8.73%(6)
Portfolio Turnover Rate ...................................... 92%
Fee Reduction Per Share (2) .................................. $0.03
(1) Commenced operations on January 2, 1998.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. WORLD BOND FUND
-------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
--------- --------- ---------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................................... $10.00 $10.20 $9.74
--------- --------- ---------
Net Investment Income (2) ..................................................... 0.20 0.59 0.27
Net Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions ............................................... 0.20 (0.46) (0.10)
--------- --------- ---------
Total from Investment Operations ........................................... 0.40 0.13 0.17
--------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ......................................... (0.20) (0.21) (0.27)
Distributions in Excess of Net Investment Income ............................. -- (0.09) --
Tax Return of Capital ........................................................ -- (0.29) --
--------- --------- ---------
Total Distributions ........................................................ (0.20) (0.59) (0.27)
--------- --------- ---------
Net Asset Value, End of Period ................................................ $10.20 $9.74 $9.64
========= ========= =========
Total Investment Return at Net Asset Value (3) ................................ 4.05%(5) 1.37% 1.72%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) ..................... 3.30%(5) 0.07% 1.21%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................................... $2,083 $2,303 $2,458
Ratio of Expenses to Average Net Assets ....................................... 1.00%(6) 1.00% 1.00%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) .......................... 3.19%(6) 2.30% 2.02%(6)
Ratio of Net Investment Income to Average Net Assets .......................... 5.83%(6) 5.98% 5.51%(6)
Ratio of Adjusted Net Investment Income to Average Net Assets (7) ............. 3.64%(6) 4.68% 4.49%(6)
Portfolio Turnover Rate ....................................................... 30% 176% 53%
Fee Reduction Per Share (2) ................................................... $0.08 $0.13 $0.05
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust
Financial Highlights (continued)
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>
V.A. MONEY MARKET FUND
---------------------------------------------
PERIOD YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, 1998
1996(1) 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................... $1.00 $1.00 $1.00
---------- ---------- ----------
Net Investment Income (2) .............................................. 0.02 0.05 0.02
Less Distributions:
Dividends from Net Investment Income .................................. (0.02) (0.05) (0.02)
---------- ---------- ----------
Net Asset Value, End of Period ......................................... $1.00 $1.00 $1.00
========== ========== ==========
Total Investment Return at Net Asset Value (3) ......................... 1.61%(5) 4.88% 2.47%(5)
Total Adjusted Investment Return at Net Asset Value (3,4) .............. (7.55%)(5) 4.36% 2.45%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $207 $8,377 $10,910
Ratio of Expenses to Average Net Assets ................................ 0.75%(6) 0.75% 0.75%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ................... 27.48%(6) 1.27% 0.80%(6)
Ratio of Net Investment Income to Average Net Assets ................... 4.68%(6) 4.86% 4.91%(6)
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets (7) ............................................... (22.05%)(6) 4.34% 4.86%(6)
Fee Reduction Per Share (2) ............................................ $0.08 $0.00(8) $0.00(8)
</TABLE>
(1) Commenced operations on August 29, 1996.
(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) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
73
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. International Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. International Fund on June 30, 1998. It's divided into four main
categories: common stocks, preferred stocks, rights and short-term investments.
Common stocks, preferred stocks and rights are further broken down by country.
Short-term investments, which represent the Fund's "cash" position, are listed
last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Australia (1.80%)
Australia & New Zealand Banking Group Ltd.,
American Depositary Receipts (ADR)
(Banks - Foreign) ....................................... 2 $68
National Australia Bank Ltd. (Banks - Foreign) ........... 1,794 23,720
News Corp. Ltd. (The) (Media) ............................ 2,000 16,363
News Corp. Ltd. (The) (ADR) (Media) ...................... 476 15,292
Normandy Mining Ltd. (Metal) ............................. 15,439 12,651
Telstra Corp., Ltd. (Telecommunications) ................. 9,508 24,435
Westpac Banking Corp. (Banks - Foreign) .................. 2,000 12,229
----------
104,758
----------
Belgium (2.60%)
Electrabel SA (Utilities) ................................ 141 39,999
Fortis AG (Insurance) .................................... 84 21,457
PetroFina SA (Oil & Gas) ................................. 70 28,751
Tractebel SA (Utilities) ................................. 420 61,549
----------
151,756
----------
Brazil (0.02%)
Telecomunicacoes Brasileiras S/A (ADR)
(Telecommunications) .................................... 10 1,092
----------
Canada (4.60%)
BCE, Inc. (Telecommunications) ........................... 315 13,507
Bombardier Inc. (Diversified Operations) ................. 1,613 43,955
Northern Telecom Ltd. (Telecommunications) ............... 845 47,890
Royal Bank of Canada (Banks - Foreign) .................. 1,156 69,794
Toronto-Dominion Bank (Banks - Foreign) .................. 2,055 93,117
----------
268,263
----------
Denmark (1.11%)
Novo Nordisk A/S (Medical) ............................... 330 45,540
Tele Danmark A/S (Telecommunications) .................... 200 19,215
----------
64,755
----------
Finland (1.38%)
Nokia AB (Telecommunications) ............................ 1,090 80,243
----------
France (13.34%)
Accor SA (Leisure) ....................................... 95 26,587
Alcatel Alsthom SA (Telecommunications) .................. 332 67,600
Alstom SA (Machinery)* ................................... 1,362 44,832
Axa SA (Insurance) ....................................... 531 59,725
Cap Gemini SA (Computers) ................................ 462 72,597
Carrefour SA (Retail) .................................... 46 29,103
Compagnie de Saint Gobain SA (Building) .................. 85 15,761
Compagnie Generale des Eaux (Diversified Operations) ..... 263 56,161
Danone SA (Food) ......................................... 139 38,327
Elf Aquitaine SA (Oil & Gas) ............................. 494 69,454
France Telecom SA (ADR) (Telecommunications)* ............ 750 52,172
L'Air Liquide SA (Chemicals) ............................. 74 12,240
L'Oreal SA (Cosmetics & Personal Care) .................. 51 28,369
Legrand SA (Electronics) ................................. 55 14,556
Paribas SA (Banks - Foreign) ............................. 339 36,279
Pinault-Printemps-Redoute SA (Retail) .................... 17 14,228
Schneider SA (Machinery) ................................. 165 13,158
Suez Lyonnaise des Eaux (Diversified Operations) ......... 320 52,666
Synthelabo SA (Medical) .................................. 174 29,356
Total SA (Oil & Gas) ..................................... 101 13,131
Valeo SA (Automobile / Trucks) ........................... 308 31,484
----------
777,786
----------
Germany (6.87%)
Allianz AG (Insurance) ................................... 170 56,700
Allianz AG (New shares) (Insurance)* ..................... 5 1,654
Bayerische Motoren Werke AG (Automobile / Trucks) ........ 60 60,717
Bayerische Motoren Werke AG (New shares)
(Automobile / Trucks)* .................................. 19 19,227
Bayerische Vereinsbank AG (Banks - Foreign) .............. 328 27,827
Daimler-Benz AG (Automobile / Trucks) .................... 150 14,763
Deutsche Bank AG (Banks - Foreign) ....................... 888 75,139
Deutsche Telekom AG (Telecommunications) ................. 1,043 28,570
Fresenius AG (Medical) ................................... 59 10,142
Mannesmann AG (Machinery) ................................ 370 38,058
Muenchener Rueckversicherungs-Gesellschaft
AG (Insurance) .......................................... 45 22,357
Siemens AG (Diversified Operations) ...................... 419 25,591
VEBA AG (Diversified Operations) ......................... 293 19,715
----------
400,460
----------
Hong Kong (2.64%)
Cheung Kong Holdings Ltd. (Real Estate Operations) ....... 4,000 19,670
China Telecom Ltd. (Telecommunications)* ................. 18,000 31,247
China Telecom Ltd. (ADR) (Telecommunications)* ........... 225 7,777
Hong Kong Telecommunications Ltd.
(Telecommunications) .................................... 13,921 26,142
HSBC Holdings Ltd. (Banks - Foreign) ..................... 800 19,566
Hutchison Whampoa Ltd. (Diversified Operations) .......... 4,554 24,040
Sun Hung Kai Properties Ltd. (Real Estate Operations) .... 6,000 25,478
----------
153,920
----------
India (0.35%)
State Bank of India, Global Depositary Receipts
(Banks - Foreign) ....................................... 1,721 20,394
----------
Ireland (2.37%)
Allied Irish Banks PLC (ADR) (Banks - Foreign) ........... 1,472 126,316
CRH PLC (Building) ....................................... 840 11,922
----------
138,238
----------
Italy (4.45%)
Assicurazioni Generali SpA (Insurance) .................. 450 14,639
Banca Popolare di Brescia SpA (Banks - Foreign) .......... 1,400 26,475
Credito Italiano SpA (Banks - Foreign) .................. 8,670 45,406
Ente Nazionale Idrocarburi SpA (Oil & Gas) ............... 3,773 24,739
Istituto Nazionale delle Assicurazioni SpA (Insurance) ... 11,876 33,755
Telecom Italia Mobile SpA (Telecommunications) ........... 7,379 45,144
Telecom Italia SpA (Telecommunications) .................. 9,405 69,264
----------
259,422
----------
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. International Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Japan (9.85%)
Bank of Tokyo-Mitsubishi, Ltd. (Banks - Foreign) ......... 3,000 $31,872
Bridgestone Corp. (Rubber - Tires & Misc.) ............... 1,000 23,722
Fuji Photo Film Co., Ltd. (Leisure) ...................... 1,000 34,932
Fujitsu Ltd. (Computers) ................................. 2,000 21,118
Honda Motor Co., Ltd. (Automobile / Trucks) .............. 2,000 71,454
Ito-Yokado Co., Ltd. (Retail) ............................ 1,000 47,226
Kansai Electric Power Co., Inc. (Utilities) .............. 2,000 34,859
Matsushita Electric Industrial Co., Ltd. (Electronics) ... 3,000 48,384
Nippon Telephone & Telegraph Corp.
(Telecommunications) .................................... 6 49,902
Nomura Securities Co., Ltd. (Finance) .................... 4,000 46,720
Shin-Etsu Chemical Co., Ltd. (Chemicals) ................. 2,000 34,715
Sony Corp. (Electronics) ................................. 400 34,570
TDK Corp. (Electronics) .................................. 1,000 74,130
Tokio Marine & Fire Insurance Co. (Insurance) ............ 2,000 20,626
----------
574,230
----------
Mexico (1.61%)
Panamerican Beverages, Inc. (Beverages) .................. 2,978 93,621
----------
Netherlands (6.28%)
ABN AMRO Holding NV (ADR) (Banks - Foreign) .............. 3,489 81,773
AEGON NV (Insurance) ..................................... 402 35,004
Akzo Nobel NV (Chemicals) ................................ 130 28,919
ING Groep NV (ADR) (Banks - Foreign) ..................... 1,125 73,547
KPN NV (Utilities) ....................................... 500 19,260
Royal Dutch Petroleum Co. (Oil & Gas) .................... 1,037 57,545
Royal Philips Electronics NV (Electronics) ............... 684 57,540
TNT Post groep NV (Transport)* ........................... 500 12,791
----------
366,379
----------
Norway (1.14%)
Norsk Hydro ASA (Oil & Gas) .............................. 500 22,017
Orkla ASA (Diversified Operations) ....................... 1,900 44,249
----------
66,266
----------
Portugal (1.46%)
Cimpor-Cimentos de Portugal SA (Building) ................ 1,000 35,157
Electricidade de Portugal SA (Utilities) ................. 821 19,097
Portugal Telecom SA (Telecommunications) ................. 577 30,600
----------
84,854
----------
Singapore (0.30%)
Oversea-Chinese Banking Corp., Ltd. (Banks - Foreign) .... 3,050 10,408
Singapore Telecommunications, Ltd.
(Telecommunications) .................................... 5,000 7,122
----------
17,530
----------
Spain (3.80%)
Argentaria Corp. BC (Banks - Foreign) .................... 1,020 22,881
Banco Bilbao Vizcaya SA (Banks - Foreign) ................ 806 41,364
Banco Santander SA (Banks - Foreign) ..................... 1,634 41,822
Endesa SA (Utilities) .................................... 2,543 55,636
Iberdrola SA (Utilities) ................................. 742 12,048
Repsol SA (Oil & Gas) .................................... 227 12,508
Telefonica de Espana SA (Telecommunications) ............. 762 35,230
----------
221,489
----------
Sweden (3.39%)
Astra AB (Medical) ....................................... 986 20,150
Ericsson (LM) Telefonaktiebolaget
(Telecommunications) .................................... 2,006 58,601
Investor AB (Diversified Operations) ..................... 1,364 79,607
Sweden (continued)
Nordbanken Holding AB (Banks - Foreign) .................. 4,912 36,027
Saab AB (Aerospace)* ..................................... 278 2,928
----------
197,313
----------
Switzerland (9.10%)
Adecco SA (Business Services - Misc.) .................... 63 28,457
Alusuisse-Lonza Holding AG (Containers)* ................. 10 12,706
Barry Callebaut AG (Food)* ............................... 73 15,764
Credit Suisse Group (Banks - Foreign) .................... 266 59,285
Nestle SA (Food) ......................................... 43 92,173
Novartis AG (Medical) .................................... 52 86,672
Roche Holding AG (Medical) ............................... 2 19,672
Schweizerische Rueckversicherungs-Gesellschaft
(Insurance) ............................................. 20 50,664
Union Bank of Switzerland AG (Banks - Foreign) ........... 207 77,097
Zurich Versicherungs-Gesellschaft (Insurance) ............ 138 88,215
----------
530,705
----------
United Kingdom (13.78%)
B.A.T. Industries PLC (Tobacco) .......................... 1,667 16,700
British Petroleum Co. PLC (Oil & Gas) .................... 3,506 51,164
British Telecommunications PLC (Telecommunications) ...... 2,500 30,889
Diageo PLC (Beverages) ................................... 1,593 18,885
EMAP PLC (Media) ......................................... 1,498 30,315
Glaxo Wellcome PLC (Medical) ............................. 2,018 60,616
Granada Group PLC (Diversified Operations) ............... 3,000 55,200
Kingfisher PLC (Retail) .................................. 1,500 24,169
Lloyds TSB Group PLC (Banks - Foreign) .................. 5,622 78,710
Marks & Spencer PLC (Retail) ............................. 3,041 27,698
Pearson PLC (Media) ...................................... 1,584 29,040
Regal Hotel Group PLC (Leisure) .......................... 50,000 35,899
Royal & Sun Alliance Insurance Group PLC (Insurance) ..... 3,665 37,910
Royal Bank of Scotland Group PLC (Banks - Foreign) ....... 2,306 40,043
SmithKline Beecham PLC (Medical) ......................... 4,247 51,872
Thames Water PLC (Utilities) ............................. 1,000 18,216
Unilever PLC (Consumer Products - Misc.) ................. 7,900 84,156
WPP Group PLC (Advertising) .............................. 9,000 59,020
Zeneca Group PLC (Medical) ............................... 1,234 52,994
----------
803,496
----------
TOTAL COMMON STOCKS
(Cost $4,856,049) (92.24%) 5,376,970
------- ----------
PREFERRED STOCKS
Brazil (2.08%)
Compania Riograndense de Telecomunicacoes
SA (Telecommunications) ................................. 11,971 13,052
Petroleo Brasileiro SA (Oil & Gas) ....................... 242,000 44,987
Telecomunicacoes de Sao Paulo
SA (Telecommunications) ................................. 197,897 46,542
Telesp Celular SA (Telecommunications)* .................. 197,897 16,427
----------
121,008
----------
Germany (0.97%)
Henkel KGaA (Chemicals) .................................. 173 17,123
SAP AG (Computers) ....................................... 58 39,397
----------
56,520
----------
TOTAL PREFERRED STOCKS
(Cost $178,308) (3.05%) 177,528
------- ----------
SEE NOTES TO FINANCIAL STATEMENTS.
75
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. International Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
RIGHT
Brazil (0.00%)
Telecomunicacoes de Sao Paulo
SA (Telecommunications)* ................................ 9,300 $149
----------
TOTAL RIGHT
(Cost $0) (0.00%) 149
------- ----------
TOTAL PREFERRED STOCKS AND RIGHT
(Cost $178,308) (3.05%) 177,677
------- ----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.53%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities USA, Inc. -
Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Notes,
5.00% thru 7.50% due 02-15-99
thru 11-15-01) - Note B.................... 5.750% $206 206,000
----------
TOTAL SHORT-TERM INVESTMENTS (3.53%) 206,000
-------- ----------
TOTAL INVESTMENTS (98.82%) 5,760,647
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (1.18%) 68,892
-------- ----------
TOTAL NET ASSETS (100.00%) $5,829,539
======== ==========
* 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.
Industry Diversification (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in securities issued by companies of other countries.
The performance of the Fund is closely tied to the economic conditions within
the countries in which it invests. The concentration of investments by country
for individual securities held by the Fund is shown in the schedule of
investments. In addition, the concentration of investments can be aggregated by
various industry groups. The table below shows the percentages of the Fund's
investments at June 30, 1998 assigned to the various investment categories.
MARKET VALUE
INVESTMENT CATEGORIES AS A % OF FUND NET ASSETS
- --------------------- -------------------------
Advertising................................ 1.01%
Aerospace ................................. 0.05
Automobiles / Trucks....................... 3.39
Banks - Foreign............................ 20.09
Beverages.................................. 1.93
Building .................................. 1.08
Business Services - Misc. ................. 0.49
Chemicals.................................. 1.60
Computers.................................. 2.28
Consumer Products - Misc. ................. 1.44
Containers................................. 0.22
Cosmetics & Personal Care.................. 0.49
Diversified Operations..................... 6.88
Electronics................................ 3.93
Finance ................................... 0.80
Food....................................... 2.51
Insurance.................................. 7.59
Leisure.................................... 1.67
Machinery.................................. 1.65
Media...................................... 1.56
Medical.................................... 6.47
Metal ..................................... 0.22
Oil & Gas.................................. 5.56
Real Estate Operations..................... 0.78
Retail..................................... 2.44
Rubber - Tire & Misc. ..................... 0.41
Telecommunications......................... 13.77
Tobacco.................................... 0.29
Transport ................................. 0.22
Utilities.................................. 4.47
Short-Term Investments..................... 3.53
-----
TOTAL INVESTMENTS 98.82%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Regional Bank Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Regional Bank Fund on June 30, 1998. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Superregional Banks (4.17%)
KeyCorp. (OH ) .......................................... 2,200 $78,375
Mellon Bank Corp. (PA ) ................................. 1,300 90,512
NationsBank Corp. (NC ) ................................. 2,000 153,000
Norwest Corp. (MN ) ..................................... 4,250 158,844
----------
480,731
----------
Banks - United States (81.79%)
Associated Banc-Corp. (WI ) ............................. 5,719 215,168
BancFirst Corp. (OK ) ................................... 3,800 176,700
BancorpSouth, Inc. (MS ) ................................ 9,325 195,825
Bank of the Ozarks, Inc. (AR ) .......................... 5,700 176,700
BB&T Corp. (NC ) ........................................ 3,650 246,831
CCB Financial Corp. (NC ) ............................... 2,450 260,312
Centura Banks, Inc. (NC ) ............................... 3,350 209,375
Chittenden Corp. (VT ) .................................. 6,250 218,750
City National Corp. (CA ) ............................... 6,700 247,481
CNB Bancshares, Inc. (IN ) .............................. 5,000 240,000
Colonial BancGroup, Inc. (AL ) .......................... 6,350 204,787
Comerica, Inc. (MI ) .................................... 4,000 265,000
Commerce Bancshares, Inc. (MO ) ......................... 3,800 185,487
Community First Bankshares, Inc. (ND ) .................. 7,600 199,025
Compass Bancshares, Inc. (AL ) .......................... 5,425 244,803
Crestar Financial Corp. (VA ) ........................... 3,800 207,338
Cullen / Frost Bankers, Inc. (TX ) ...................... 4,000 217,000
First Hawaiian, Inc. (HI ) .............................. 4,300 156,412
First Security Corp. (UT ) .............................. 11,600 248,312
First Tennessee National Corp. (TN ) .................... 6,875 216,992
First Virginia Banks, Inc. (VA ) ........................ 4,750 242,844
First Western Bancorp., Inc. (PA ) ...................... 6,150 181,041
Firstar Corp. (WI ) ..................................... 6,750 256,500
FirstMerit Corp. (OH ) .................................. 8,225 239,553
HUBCO, Inc. (NJ ) ....................................... 6,500 232,781
Imperial Bancorp. * (CA ) ............................... 8,700 261,000
Marshall & Ilsley Corp. (WI ) ........................... 4,200 214,463
Mercantile Bankshares Corp. (MD ) ....................... 6,450 224,541
Mississippi Valley Bancshares, Inc. (MO ) ............... 4,700 185,650
North Fork Bancorp., Inc. (NY ) ......................... 3,750 91,641
Old Kent Financial Corp. (MI ) .......................... 1,288 46,310
Regions Financial Corp. (AL ) ........................... 5,625 230,977
Santa Barbara Bancorp. (CA ) ............................ 8,650 248,688
Security Bank Holding Co. (OR ) ......................... 4,000 40,000
Silicon Valley Bancshares* (CA ) ........................ 2,950 105,001
SouthTrust Corp. (AL ) .................................. 4,250 184,875
Southwest Bancorp. of Texas, Inc.* (TX ) ................ 6,950 130,747
Star Banc Corp. (OH ) ................................... 2,800 178,850
Sterling Bancshares, Inc. (TX ) ......................... 10,400 163,800
Summit Bancshares, Inc. (TX ) ........................... 10,525 223,656
TCF Financial Corp. (MN ) ............................... 7,600 224,200
Texas Regional Bancshares, Inc. (Class A) (TX ) ......... 5,700 186,675
UST Corp. (MA ) ......................................... 9,050 239,825
Westamerica Bancorp. (CA ) .............................. 5,150 165,444
West Coast Bancorp. (OR ) ............................... 7,600 187,150
Whitney Holding Corp. (LA ) ............................. 3,850 195,388
Zions Bancorp. (UT ) .................................... 4,000 212,500
----------
9,426,398
----------
Thrifts (8.38%)
ALBANK Financial Corp. (NY ) ............................ 4,000 $282,250
Charter One Financial, Inc. (OH ) ....................... 4,975 167,595
First Financial Holdings, Inc. (SC ) .................... 7,600 180,500
InterWest Bancorp., Inc. (WA ) .......................... 4,250 184,344
Washington Mutual, Inc. (WA ) ........................... 3,475 150,945
----------
965,634
----------
TOTAL COMMON STOCKS
(Cost $11,105,909) (94.34%) 10,872,763
------- ----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (12.32%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities
USA, Inc. Dated 06-30-98,
due 07-01-98 (Secured by U.S.
Treasury Bond, 9.125% due
05-15-18, and U.S. Treasury
Notes, 5.00% thru 8.75% due
12-31-98 thru 04-30-03) -
Note B........................................ 5.750% $1,420 1,420,000
-----------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%............................ 790
-----------
TOTAL SHORT-TERM INVESTMENTS (12.33%) 1,420,790
-------- -----------
TOTAL INVESTMENTS (106.67%) 12,293,553
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (6.67%) (768,875)
-------- -----------
TOTAL NET ASSETS (100.00%) $11,524,678
======== ===========
*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.
77
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Financial Industries Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Financial Industries Fund on June 30, 1998. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Banks - Foreign (6.22%)
Allied Irish Banks PLC, (American Depositary
Receipt), (ADR) (Ireland) ............................. 9,500 $815,219
Anglo Irish Bank Corp., PLC (Ireland) .................. 5,000 13,431
Corporacion Bancaria de Espana S.A.
(ADR) (Spain) ......................................... 10,430 470,654
ING Groep N.V. (ADR) (Netherlands) ..................... 8,000 523,000
Nordbanken Holding AB (Sweden) ......................... 20,200 148,175
Royal Bank of Canada (Canada) .......................... 18,000 1,086,750
----------
3,057,229
----------
Banks - Money Center (1.54%)
Chase Manhattan Corp. .................................. 10,040 758,020
----------
Banks - Southeast (1.30%)
First Tennessee National Corp. ......................... 20,300 640,719
----------
Banks - Super Regional (5.85%)
BankBoston Corp. ....................................... 19,450 1,081,906
Norwest Corp. .......................................... 48,000 1,794,000
----------
2,875,906
----------
Banks - West (1.75%)
Westamerica Bancorp .................................... 26,700 857,737
----------
Broker Services (15.94%)
Edwards (A.G.), Inc. ................................... 43,725 1,866,511
Freedom Securities Corp.* .............................. 10,000 181,250
Friedman, Billings, Ramsey Group, Inc. (Class A)* ...... 3,000 43,313
Legg Mason, Inc. ....................................... 37,166 2,139,368
McDonald & Co., Investments ............................ 16,350 536,484
Morgan Stanley, Dean Witter, Discover & Co. ............ 17,500 1,599,062
Stifel Financial Corp. ................................. 17,100 259,706
Travelers Group, Inc. .................................. 20,000 1,212,500
----------
7,838,194
----------
Computer - Services (4.96%)
BISYS Group, Inc. (The)* ............................... 10,000 410,000
Fiserv, Inc.* .......................................... 47,737 2,027,328
Fundtech Ltd.* ......................................... 200 3,775
----------
2,441,103
----------
Finance - Consumer Loans (6.29%)
American Express Co. ................................... 16,990 1,936,860
MBNA Corp. ............................................. 35,100 1,158,300
----------
3,095,160
----------
Finance - Investment Management (10.15%)
Affiliated Managers Group, Inc.* ....................... 7,500 278,438
Conning Corp. .......................................... 10,500 204,750
Federated Investors, Inc. (Class B)* ................... 7,500 138,750
Franklin Resources, Inc. ............................... 24,690 1,333,260
John Nuveen Co. (The) (Class A) ........................ 13,000 515,938
Price (T. Rowe) Associates, Inc. ....................... 41,000 1,540,062
Waddell & Reed Financial, Inc. (Class A) ............... 41,000 981,437
----------
4,992,635
----------
Finance - Savings & Loan (0.50%)
InterWest Bancorp., Inc. ............................... 5,700 247,238
----------
Finance - SBIC & Commercial (1.13%)
CIT Group, Inc. (The) (Class A) ........................ 14,825 555,937
----------
Insurance - Accident & Health (1.71%)
Provident Cos., Inc. ................................... 24,350 840,075
----------
Insurance - Brokers (1.84%)
Marsh & McLennan Cos., Inc. ............................ 15,000 906,562
----------
Insurance - Diversified (2.01%)
Aetna, Inc. ............................................ 13,000 989,625
----------
Insurance - Life (2.80%)
Annuity and Life Re (Holdings), Ltd.* .................. 150 3,319
ARM Financial Group, Inc. (Class A) .................... 15,000 331,875
Reinsurance Group of America, Inc.* .................... 10,010 513,638
Torchmark Corp. ........................................ 11,500 526,125
----------
1,374,957
----------
Insurance - Multi Line (2.00%)
Allmerica Financial Corp. .............................. 15,100 981,500
----------
Insurance - Property & Casualty (15.06%)
Commerce Group, Inc. ................................... 17,475 677,156
Donegal Group, Inc. .................................... 24,633 461,863
Frontier Insurance Group, Inc. ......................... 9,735 219,646
General Re Corp. ....................................... 7,500 1,901,250
Penn-America Group, Inc. ............................... 16,000 216,000
RLI Corp. .............................................. 22,469 914,197
SAFECO Corp. ........................................... 31,340 1,424,011
St. Paul Cos., Inc. .................................... 18,200 765,538
Summit Holdings Southeast, Inc.* ....................... 1,900 60,563
Travelers Property Casualty Corp. (Class A) ............ 17,900 767,462
----------
7,407,686
----------
Leasing Companies (0.46 %)
Newcourt Credit Group, Inc. (Canada) ................... 4,600 226,263
----------
Mortgage & RE Services (1.24%)
Fannie Mae ............................................. 10,000 607,500
----------
REIT - Equity Trust (8.63%)
Brandywine Realty Trust ................................ 35,225 788,159
Corporate Office Properties Trust, Inc. ................ 700 6,213
Excel Realty Trust, Inc. ............................... 12,000 345,750
General Growth Properties .............................. 24,000 897,000
Glenborough Realty Trust, Inc. ......................... 11,500 303,313
Macerich Co. (The) ..................................... 11,000 322,438
Prentiss Properties Trust .............................. 26,440 642,823
SL Green Realty Corp. .................................. 12,500 281,250
Spieker Properties, Inc. ............................... 17,000 658,750
----------
4,245,696
----------
TOTAL COMMON STOCKS
(Cost $40,397,984) (91.38%) 44,939,742
------- ----------
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Financial Industries Fund
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (8.08%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc.
Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Bond,
9.125% due 05-15-18, and U.S
Treasury Notes, 5.00% thru 8.75%
due 12-31-98 thru 04-30-03) -
Note B................................... 5.750% $3,975 $3,975,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%....................... 661
-----------
TOTAL SHORT-TERM INVESTMENTS (8.08%) 3,975,661
-------- -----------
TOTAL INVESTMENTS (99.46%) 48,915,403
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.54%) 265,075
-------- -----------
TOTAL NET ASSETS (100.00%) $49,180,478
======== ===========
*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.
79
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Emerging Growth Fund on June 30, 1998. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (1.44%)
Getty Images, Inc.* .................................... 2,200 $48,950
Outdoor Systems, Inc.* ................................. 1,012 28,336
Princeton Video Image, Inc.* ........................... 3,800 17,575
----------
94,861
----------
Aerospace (0.34%)
AAR Corp. .............................................. 750 22,172
----------
Agricultural Operations (0.35%)
Scheid Vineyards, Inc. (Class A)* ...................... 3,300 22,894
----------
Automobile / Trucks (1.76%)
Gentex Corp.* .......................................... 1,800 32,625
Special Devices, Inc.* ................................. 800 28,300
United Rentals, Inc. * ................................. 1,300 54,600
----------
115,525
----------
Beverages (0.34%)
Beringer Wine Estates Holdings, Inc. (Class B)* ........ 500 22,031
----------
Broker Services (1.13%)
Dain Rauscher Corp. .................................... 400 21,900
E*TRADE Group, Inc.* ................................... 2,300 52,756
----------
74,656
----------
Building (1.50%)
Crossmann Communities, Inc.* ........................... 1,100 33,412
D R Horton, Inc. ....................................... 1,300 27,138
SMED International, Inc.* (Canada) ..................... 1,700 30,600
Vari-Lite International, Inc.* ......................... 1,200 7,500
----------
98,650
----------
Business Services - Misc. (8.97%)
Abacus Direct Corp.* ................................... 700 36,356
Charles River Associates, Inc.* ........................ 1,800 45,000
Coinstar, Inc.* ........................................ 4,000 37,000
Forrester Research, Inc.* .............................. 1,100 43,725
Hagler Bailly, Inc.* ................................... 1,500 38,812
ICON PLC, (American Depositary Receipts),
(ADR) (United Kingdom) * .............................. 100 2,525
INSpire Insurance Solutions, Inc.* ..................... 1,300 43,225
Lason, Inc.* ........................................... 1,000 54,500
Mac-Gray Corp.* ........................................ 1,600 20,400
MAXIMUS, Inc.* ......................................... 100 2,875
META Group, Inc. * ..................................... 1,800 39,825
Metamor Worldwide, Inc.* ............................... 750 26,390
Metzler Group, Inc. (The)* ............................. 1,600 58,600
On Assignment, Inc.* ................................... 1,100 38,431
ProBusiness Services, Inc.* ............................ 1,400 65,450
Professional Detailing, Inc.* .......................... 1,500 37,313
----------
590,427
----------
Computers (22.78%)
Advent Software, Inc.* ................................. 1,300 54,600
AnswerThink Consulting Group * ......................... 2,500 53,750
Aris Corp.* ............................................ 1,800 50,400
Aspect Development, Inc.* .............................. 600 45,375
BARRA, Inc.* ........................................... 1,400 34,300
CBT Group PLC Ltd., ADR (Ireland) ...................... 800 42,800
CCC Information Services Group, Inc. * ................ 1,800 29,700
CheckFree Holdings Corp.* .............................. 1,400 41,212
Cognizant Technology Solutions Corp. * ................ 3,300 39,806
Concord Communications, Inc.* .......................... 100 2,556
Dendrite International, Inc.* .......................... 1,500 56,437
Exodus Communications, Inc.* ........................... 600 26,850
Fundtech Ltd. * ........................................ 2,700 50,963
Hyperion Software Corp.* ............................... 600 17,100
IDX Systems Corp. ...................................... 1,100 50,668
Information Management Resources, Inc.* ................ 1,475 49,873
Inktomi Corp.* ......................................... 100 3,975
International Integration, Inc. * ...................... 200 3,450
International Network Services, Inc.* .................. 1,300 53,300
JDA Software Group, Inc.* .............................. 500 21,875
Manhattan Associates, Inc. * ........................... 1,600 33,300
Micromuse, Inc. * ...................................... 1,800 73,462
MicroStrategy, Inc. (Class A) * ........................ 300 8,475
MIPS Technologies, Inc. * .............................. 200 2,687
National Computer Systems, Inc. ........................ 1,900 45,600
National Instruments Corp.* ............................ 1,300 46,475
Network Appliance, Inc.* ............................... 1,400 54,512
Pegasystems, Inc. * .................................... 1,200 32,550
Real Networks, Inc. * .................................. 1,100 41,043
SCM Microsystems, Inc.* ................................ 600 37,500
Software.net Corp.* .................................... 2,800 53,550
SPR, Inc.* ............................................. 1,000 31,125
Symantec Corp.* ........................................ 1,500 39,187
THINK New Ideas, Inc.* ................................. 500 13,062
Transition Systems, Inc. * ............................. 1,900 20,187
Verio, Inc.* ........................................... 1,800 44,775
VeriSign, Inc.* ........................................ 1,700 63,537
Visio Corp.* ........................................... 1,100 52,525
Whittman-Hart, Inc. * .................................. 700 33,862
Wind River Systems* .................................... 1,200 43,050
----------
1,499,454
----------
Containers (0.39%)
Ivex Packaging Corp.* .................................. 1,100 25,575
----------
Electronics (2.71%)
Aavid Thermal Technologies, Inc.* ...................... 800 23,400
ATMI, Inc.* ............................................ 2,000 30,000
Flextronics International Ltd. * ....................... 800 34,800
Level One Communications, Inc.* ........................ 1,700 39,950
MMC Networks, Inc. ..................................... 100 3,187
Rambus, Inc.* .......................................... 600 36,675
Semtech Corp.* ......................................... 600 10,612
----------
178,624
----------
Finance (3.37%)
AmeriCredit Corp.* ..................................... 1,600 57,100
Financial Federal Corp.* ............................... 1,500 40,218
FIRSTPLUS Financial Group, Inc.* ....................... 800 28,800
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Finance (continued)
Medallion Financial Corp. .............................. 2,400 $66,000
Waddell & Reed Financial, Inc. (Class A) ............... 1,250 29,922
----------
222,040
----------
Food (2.07%)
American Italian Pasta Co. (Class A)* .................. 1,500 55,875
Dreyer's Grand Ice Cream, Inc. ......................... 1,900 38,238
Suiza Foods Corp.* ..................................... 710 42,378
----------
136,491
----------
Funeral Services & Related (0.87%)
Carriage Services, Inc. (Class A)* ..................... 1,400 35,175
Rock of Ages Corp.* .................................... 1,400 21,700
----------
56,875
----------
Insurance (2.29%)
AmerUs Life Holdings, Inc. (Class A) ................... 600 19,425
Capital Re Corp. ....................................... 200 14,325
CMAC Investment Corp. .................................. 500 30,750
Hartford Life, Inc. (Class A) .......................... 800 45,550
Life Re Corp. .......................................... 500 41,000
----------
151,050
----------
Leasing Companies (1.05%)
LINC Capital, Inc.* .................................... 2,000 34,500
Rollins Truck Leasing Corp. ............................ 2,800 34,650
----------
69,150
----------
Leisure (3.25%)
Cinar Films, Inc. (Class B)* (Canada) .................. 2,600 50,700
Premier Parks, Inc.* ................................... 700 46,637
ResortQuest International, Inc. * ...................... 300 4,894
Silverleaf Resorts, Inc.* .............................. 1,500 22,875
Steiner Leisure Ltd.* .................................. 1,750 52,938
Travel Services International, Inc.* ................... 1,100 36,163
----------
214,207
----------
Machinery (1.69%)
Applied Power, Inc. (Class A) .......................... 1,200 41,250
Gardner Denver Machinery, Inc.* ........................ 1,200 33,150
Terex Corp.* ........................................... 1,300 37,050
----------
111,450
----------
Media (4.66%)
Adelphia Communications Corp. (Class A)* ............... 1,600 59,400
Central Newspapers, Inc. (Class A) ..................... 500 34,875
Clear Channel Communications, Inc.* .................... 201 21,934
Heftel Broadcasting Corp. (Class A)* ................... 900 40,275
Jacor Communications, Inc.* ............................ 400 23,600
Network Event Theater, Inc.* ........................... 5,500 23,375
Petersen Cos., Inc. (The) (Class A)* ................... 1,500 38,438
Univision Communications, Inc. (Class A)* .............. 600 22,350
Wiley (John) & Sons, Inc. (Class A) .................... 700 42,612
----------
306,859
----------
Medical (6.04%)
Alkermes, Inc. * ....................................... 1,000 17,875
American Healthcorp, Inc.* ............................. 2,100 20,738
Hanger Orthopedic Group, Inc. * ........................ 2,300 46,863
Human Genome Sciences, Inc. * .......................... 500 17,844
IDEC Pharmaceuticals Corp.* ............................ 900 21,206
Impath, Inc. * ......................................... 900 21,881
Incyte Pharmaceuticals, Inc.* .......................... 600 20,475
MiniMed, Inc.* ......................................... 700 36,663
Ocular Sciences, Inc.* ................................. 900 29,250
Perclose, Inc.* ........................................ 800 22,600
Renal Care Group, Inc. * ............................... 800 35,250
Res-Care, Inc.* ........................................ 1,800 33,188
Symphonix Devices, Inc.* ............................... 2,300 26,450
Ventana Medical Systems, Inc.* ......................... 1,700 47,600
----------
397,883
----------
Metal (0.43%)
CompX International, Inc.* ............................. 1,300 28,113
----------
Oil & Gas (2.15%)
Core Laboratories N.V.* (Netherlands) .................. 1,600 34,600
Dril-Quip, Inc.* ....................................... 1,100 28,875
National-Oilwell, Inc.* ................................ 1,000 26,813
Stone Energy Corp.* .................................... 600 21,338
Tuboscope, Inc.* ....................................... 1,500 29,625
----------
141,251
----------
Pollution Control (2.71%)
American Disposal Services, Inc.* ...................... 1,000 46,875
Eastern Environmental Services, Inc.* .................. 1,500 51,000
ITEQ, Inc.* ............................................ 2,800 20,825
Newpark Resources, Inc.* ............................... 2,100 23,363
Superior Services, Inc.* ............................... 1,200 36,075
----------
178,138
----------
Printing - Commercial (0.56%)
Mail-Well, Inc.* ....................................... 1,700 36,869
----------
Real Estate Investment Trust (0.52%)
Glenborough Realty Trust, Inc. ......................... 1,000 26,375
Hanover Capital Mortgage Holdings, Inc. ................ 800 7,600
----------
33,975
----------
Real Estate Operations (0.62%)
Central Parking Corp. * ................................ 900 40,950
----------
Retail (10.88%)
99 Cents Only Stores* .................................. 1,075 44,613
Abercrombie & Fitch Co. (Class A)* ..................... 1,000 44,000
Brylane, Inc.* ......................................... 500 23,000
CDnow, Inc.* ........................................... 1,400 28,175
CSK Auto Corp.* ........................................ 1,600 40,400
Dominick's Supermarkets, Inc.* ......................... 900 40,106
Duane Reade, Inc.* ..................................... 1,600 48,000
Eagle Hardware & Garden, Inc. * ........................ 1,600 37,000
Ethan Allen Interiors, Inc. ............................ 500 24,969
Furniture Brands International, Inc.* .................. 1,200 33,675
Garden Fresh Restaurant Corp.* ......................... 2,000 36,000
Genovese Drug Stores, Inc. (Class A) ................... 1,760 34,540
Hibbett Sporting Goods, Inc.* .......................... 1,300 52,000
Linens `N Things, Inc.* ................................ 1,000 30,563
Meyer (Fred), Inc. * ................................... 650 27,625
Proffitt's, Inc.* ...................................... 800 32,300
Stage Stores, Inc.* .................................... 1,300 58,825
White Cap Industries, Inc.* ............................ 2,100 37,800
Wild Oats Markets, Inc.* ............................... 1,400 42,525
----------
716,116
----------
Schools / Education (1.27%)
EduTrek International, Inc. (Class A)* ................ 1,300 31,850
ITI Education Corp.* (Canada) .......................... 2,000 11,968
Strayer Education, Inc. ................................ 1,100 39,875
----------
83,693
----------
SEE NOTES TO FINANCIAL STATEMENTS.
81
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Emerging Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Service (0.78%)
Interim Services, Inc. * .............................. 1,600 $51,400
----------
Telecommunications (6.65%)
Com21, Inc.* .......................................... 200 4,250
Concentric Network Corp. * ............................ 1,600 48,500
Global TeleSystems Group, Inc.* ....................... 1,000 48,750
Hyperion Telecommunications, Inc. (Class A) * ......... 1,300 20,394
ICG Communications, Inc.* ............................. 1,200 43,875
Intermedia Communications, Inc.* ...................... 1,200 50,325
L-3 Communications Holdings, Inc.* .................... 200 6,538
Metromedia Fiber Network, Inc. (Class A)* ............. 1,600 74,600
NEXTLINK Communications, Inc. (Class A)* .............. 700 26,513
Primus Telecommunications Group, Inc. * ............... 2,400 45,450
STAR Telecommunications, Inc. * ....................... 1,335 29,871
WinStar Communications, Inc.* ......................... 900 38,644
----------
437,710
----------
Textile (2.43%)
Ashworth, Inc.* ....................................... 2,300 31,913
Cutter & Buck, Inc.* .................................. 1,800 48,600
Interface, Inc. ....................................... 2,200 44,413
Tefron Ltd.* (Israel) ................................. 1,600 35,200
----------
160,126
----------
Transport (1.75%)
Carey International, Inc.* ............................ 1,400 39,200
MotivePower Industries, Inc.* ......................... 1,700 41,650
Westinghouse Air Brake Co. ............................ 1,300 34,288
----------
115,138
----------
Waste Disposal Service & Equip (0.54%)
Waste Connections, Inc.* .............................. 1,800 35,776
----------
TOTAL COMMON STOCKS
(Cost $5,428,002) (98.29%) 6,470,129
------- ----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.62%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. Dated
06-30-98, due 07-01-98 (Secured by
U.S. Treasury Bond, 9.125% due
05-15-18, and U.S. Treasury Notes,
5.00% thru 8.75% due 12-31-98 thru
04-30-03) - Note B................... 5.750% $41 $41,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%............................... 211
----------
TOTAL SHORT-TERM INVESTMENTS (0.62%) 41,211
-------- ----------
TOTAL INVESTMENTS (98.91%) 6,511,340
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (1.09%) 71,550
-------- ----------
TOTAL NET ASSETS (100.00%) $6,582,890
======== ==========
*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.
82
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Special Opportunities Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Special Opportunities Fund on June 30, 1998. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (2.06%)
Lamar Advertising Co.* ................................ 250 $8,969
Outdoor Systems, Inc.* ................................ 575 16,100
----------
25,069
----------
Automobile / Trucks (1.78%)
Avis Rent-A-Car, Inc.* ................................ 570 14,107
Tower Automotive, Inc.* ............................... 175 7,503
----------
21,610
----------
Banks - United States (4.13%)
First American Corp. .................................. 250 12,031
Northern Trust Corp. .................................. 175 13,344
Regions Financial Corp. ............................... 300 12,319
Republic New York Corp. ............................... 200 12,587
----------
50,281
----------
Business Services - Misc (2.08%)
Personnel Group of America, Inc. * .................... 600 12,000
Select Appointments Holdings PLC, (American
Depositary Receipts), (ADR) (United Kingdom) ......... 450 13,275
----------
25,275
----------
Computers (19.88%)
Ascend Communications, Inc.* .......................... 225 11,151
Aspen Technologies, Inc.* ............................. 210 10,605
BEA Systems, Inc.* .................................... 665 15,253
Cambridge Technology Partners, Inc.* .................. 350 19,119
Citrix Systems, Inc.* ................................. 225 15,384
Compuware Corp.* ...................................... 275 14,059
EMC Corp.* ............................................ 525 23,526
Excite, Inc.* ......................................... 155 14,492
Gartner Group, Inc. (Class A)* ........................ 400 14,000
Keane, Inc.* .......................................... 350 19,600
Lexmark International Group, Inc. (Class A)* .......... 270 16,470
Network Associates, Inc. * ............................ 325 15,559
Quantum Corp. * ....................................... 150 3,112
Saville Systems Ireland PLC (ADR) (Ireland)* .......... 275 13,784
Sterling Commerce, Inc.* .............................. 250 12,125
Sungard Data Systems, Inc. ............................ 100 3,837
Unisys Corp.* ......................................... 700 19,775
----------
241,851
----------
Containers (0.68%)
EarthShell Corp.* ..................................... 50 487
Owens-Illinois, Inc.* ................................. 175 7,831
----------
8,318
----------
Cosmetics & Personal Care (2.09%)
Rexall Sundown, Inc.* ................................. 350 12,337
Twinlab Corp.* ........................................ 300 13,106
----------
25,443
----------
Electronics (3.79%)
Artesyn Technologies, Inc.* ........................... 600 9,600
Berg Electronics Corp.* ............................... 600 11,737
Jabil Circuit, Inc.* .................................. 350 11,572
Waters Corp.* ......................................... 225 13,261
----------
46,170
----------
Finance (4.51%)
Charter One Financial, Inc. ........................... 340 11,454
CIT Group, Inc. (The) (Class A) ....................... 350 13,125
Price (T. Rowe) Associates, Inc. ...................... 300 11,269
Sovereign Bancorp., Inc. .............................. 710 11,604
TCF Financial Corp. ................................... 250 7,375
----------
54,827
----------
Food (2.08%)
Aurora Foods, Inc. * .................................. 200 4,225
International Home Foods, Inc.* ....................... 400 9,100
Suiza Foods Corp.* .................................... 200 11,937
----------
25,262
----------
Furniture (0.92%)
Leggett & Platt, Inc. ................................. 450 11,250
----------
Insurance (10.43%)
Ace, Ltd. (Bermuda) ................................... 325 12,675
Allmerica Financial Corp. ............................. 225 14,625
CMAC Investment Corp. ................................. 225 13,838
Executive Risk, Inc. .................................. 200 14,750
Life Re Corp. ......................................... 200 16,400
Mid Ocean Ltd. (Bermuda) .............................. 200 15,700
Mutual Risk Management Ltd. ........................... 350 12,753
Reinsurance Group of America, Inc. * .................. 100 5,131
ReliaStar Financial Corp. ............................. 300 14,400
Selective Insurance Group, Inc. ....................... 200 4,481
Vesta Insurance Group, Inc. ........................... 100 2,131
----------
126,884
----------
Leisure (0.52%)
Hasbro, Inc. .......................................... 160 6,290
----------
Media (4.03%)
Central Newspapers, Inc. (Class A) .................... 200 13,950
Clear Channel Communications, Inc.* ................... 100 10,913
Sinclair Broadcast Group, Inc. (Class A)* ............. 450 12,938
Univision Communications, Inc. (Class A)* ............. 300 11,175
----------
48,976
----------
Medical (11.26%)
Dura Pharmaceuticals, Inc.* ........................... 250 5,594
Elan Corp., PLC (ADR) (Ireland)* ...................... 250 16,078
Forest Laboratories, Inc.* ............................ 500 17,875
Genesis Health Ventures, Inc.* ........................ 200 5,000
Genzyme Corp.* ........................................ 450 11,503
Health Care & Retirement Corp.* ....................... 60 2,366
Health Management Associates, Inc. (Class A)* ......... 475 15,883
HEALTHSOUTH Corp.* .................................... 475 12,677
Manor Care, Inc. ...................................... 150 5,766
Mylan Laboratories, Inc. .............................. 525 15,783
Omnicare, Inc. ........................................ 260 9,913
Quorum Health Group, Inc.* ............................ 375 9,938
Sofamor Danek Group, Inc.* ............................ 100 8,656
----------
137,032
----------
SEE NOTES TO FINANCIAL STATEMENTS.
83
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Special Opportunities Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Office (1.08%)
OfficeMax, Inc. * ..................................... 800 $13,200
----------
Oil & Gas (3.02%)
BJ Services Co.* ...................................... 200 5,813
Columbia Energy Group ................................. 225 12,516
Cooper Cameron Corp.* ................................. 125 6,375
El Paso Natural Gas Co. ............................... 150 5,738
Mitchell Energy & Development Corp.* .................. 200 4,000
Santa Fe International Corp. .......................... 75 2,269
----------
36,711
----------
Pollution Control (1.12%)
USA Waste Services, Inc.* ............................. 275 13,578
----------
Real Estate Investment Trust (2.47%)
FelCor Suite Hotels, Inc. ............................. 275 8,628
Spieker Properties, Inc. .............................. 150 5,813
Starwood Hotels & Resorts ............................. 200 9,663
Vornado Realty Trust .................................. 150 5,953
----------
30,057
----------
Retail (6.96%)
Costco Cos., Inc.* .................................... 75 4,730
CVS Corp. ............................................. 300 11,681
Furniture Brands International, Inc.* ................. 380 10,664
Meyer (Fred), Inc. * .................................. 325 13,813
Pier 1 Imports, Inc. .................................. 500 11,938
Rite Aid Corp. ........................................ 350 13,147
Ruddick Corp. ......................................... 250 4,531
Safeway, Inc.* ........................................ 350 14,241
----------
84,745
----------
Service (1.32%)
Interim Services, Inc. * .............................. 500 16,063
----------
Telecommunications (7.44%)
Advanced Fibre Communications* ........................ 220 8,814
American Tower Corp. (Class A)* ....................... 300 7,481
ICG Communications, Inc.* ............................. 400 14,625
Intermedia Communications, Inc.* ...................... 390 16,356
McLeodUSA, Inc. (Class A)* ............................ 375 14,578
NEXTLINK Communications, Inc. (Class A)* ............. 525 19,884
Tel-Save Holdings, Inc.* .............................. 600 8,850
----------
90,588
----------
Utilities (2.10%)
KN Energy Inc. ........................................ 225 12,192
MCN Energy Group, Inc. ................................ 300 7,463
Questar Corp. ......................................... 300 5,888
----------
25,543
----------
TOTAL COMMON STOCKS
(Cost $1,091,350) (95.75%) 1,165,023
------- ----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (4.44%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion
Securities USA, Inc. Dated 06-30-98,
due 07-01-98 (Secured by U.S. Treasury
Bond, 9.125% due 05-15-18, and U.S.
Treasury Notes, 5.00% thru 8.75% due
12-31-98 thru 04-30-03) -
Note B................................. 5.750% $54 $54,000
----------
Corporate Savings Account (0.02%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%................................ 223
----------
TOTAL SHORT-TERM INVESTMENTS (4.46%) 54,223
-------- ----------
TOTAL INVESTMENTS (100.21%) 1,219,246
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (0.21%) (2,581)
-------- ----------
TOTAL NET ASSETS (100.00%) $1,216,665
======== ==========
*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.
84
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Growth Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Growth Fund on June 30, 1998. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (1.10%)
Interpublic Group of Companies, Inc. (The) ............ 500 $30,344
Outdoor Systems, Inc.* ................................ 1,462 40,936
----------
71,280
----------
Agricultural Operations (1.02%)
Pioneer Hi-Bred International, Inc. ................... 1,600 66,200
----------
Banks - United States (1.24%)
Chase Manhattan Corp. ................................. 600 45,300
Mellon Bank Corp. ..................................... 500 34,813
----------
80,113
----------
Beverages (3.23%)
Coca-Cola Co. (The) ................................... 1,000 85,500
PepsiCo, Inc. ......................................... 3,000 123,562
----------
209,062
----------
Building (0.75%)
Masco Corp. ........................................... 800 48,400
----------
Business Services - Misc (0.81%)
Paychex, Inc. ......................................... 600 24,412
Robert Half International, Inc.* ...................... 500 27,938
----------
52,350
----------
Computers (21.73%)
Automatic Data Processing, Inc. ....................... 600 43,725
BMC Software, Inc.* ................................... 1,800 93,487
CBT Group PLC, American Depositary Receipts
(ADR) (Ireland)* ..................................... 800 42,800
Cisco Systems, Inc.* .................................. 2,400 220,950
Computer Sciences Corp.* .............................. 1,200 76,800
Compuware Corp.* ...................................... 2,000 102,250
EMC Corp.* ............................................ 2,600 116,512
HBO & Co. ............................................. 2,400 84,600
International Business Machines Corp. ................. 1,200 137,775
Microsoft Corp.* ...................................... 1,900 205,913
Novell, Inc.* ......................................... 8,000 102,000
Unisys Corp.* ......................................... 6,300 177,975
Verio Inc.* ........................................... 100 2,488
----------
1,407,275
----------
Cosmetics & Personal Care (1.93%)
Gillette Co. .......................................... 2,200 124,712
----------
Diversified Operations (2.19%)
Du Pont (E.I.) de Nemours & Co. ....................... 1,900 141,787
----------
Electronics (2.95%)
General Electric Co. .................................. 2,100 191,100
----------
Finance (3.17%)
American Express Co. .................................. 1,800 205,200
----------
Food (6.87%)
Flowers Industries, Inc. .............................. 9,200 188,025
Quaker Oats Co. ....................................... 2,500 137,344
Suiza Foods Corp.* .................................... 2,000 119,375
----------
444,744
----------
Furniture (0.46%)
Leggett & Platt, Inc. ................................. 1,200 30,000
----------
Insurance (3.30%)
Progressive Corp. ..................................... 1,000 141,000
Travelers Group, Inc. ................................. 1,200 72,750
----------
213,750
----------
Leisure (1.84%)
Carnival Corp. (Class A) .............................. 1,600 63,400
Royal Caribbean Cruises Ltd. .......................... 700 55,650
----------
119,050
----------
Media (4.80%)
CBS Corp.* ............................................ 4,100 130,175
Clear Channel Communications, Inc.* ................... 500 54,562
Gannett Co., Inc. ..................................... 1,100 78,169
Tribune Co. ........................................... 700 48,169
----------
311,075
----------
Medical (11.00%)
Abbott Laboratories ................................... 2,300 94,012
Johnson & Johnson ..................................... 1,000 73,750
Medtronic, Inc. ....................................... 800 51,000
Merck & Co., Inc. ..................................... 1,200 160,500
Schering-Plough Corp. ................................. 2,200 201,575
SmithKline Beecham PLC (ADR) (United Kingdom) ......... 800 48,400
Warner-Lambert Co. .................................... 1,200 83,250
----------
712,487
----------
Office (0.74%)
Pitney Bowes, Inc. .................................... 1,000 48,125
----------
Oil & Gas (2.47%)
Enron Corp. ........................................... 1,400 75,687
Williams Cos., Inc. (The) ............................. 2,500 84,375
----------
160,062
----------
Retail (19.77%)
Costco Cos., Inc.* .................................... 1,300 81,981
Dayton Hudson Corp. ................................... 3,700 179,450
Dollar General Corp. .................................. 2,062 81,578
Home Depot, Inc. (The) ................................ 1,450 120,441
Meyer (Fred), Inc.* ................................... 1,600 68,000
Penney (J.C.) Co., Inc. ............................... 1,800 130,162
Rite Aid Corp. ........................................ 5,000 187,813
Sears, Roebuck & Co. .................................. 2,600 158,763
Starbucks Corp.* ...................................... 1,600 85,500
Wal-Mart Stores, Inc. ................................. 2,400 145,800
Walgreen Co. .......................................... 1,000 41,312
----------
1,280,800
----------
SEE NOTES TO FINANCIAL STATEMENTS.
85
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Growth Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Soap & Cleaning Preparations (2.72%)
Colgate-Palmolive Co. ................................. 2,000 $176,000
----------
Telecommunications (2.76%)
Nokia Corp. (ADR) (Finland) ........................... 1,000 72,563
WorldCom, Inc.* ....................................... 2,200 106,563
----------
179,126
----------
TOTAL COMMON STOCKS
(Cost $5,538,991) (96.85%) 6,272,698
------- ----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (4.39%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. -
Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Bond, 9.125%
due 05-15-18, and U.S. Treasury Notes,
5.00% thru 8.75% due 12-31-98
thru 04-30-03) - Note B.................. 5.750% $284 284,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%................................ 103
----------
TOTAL SHORT-TERM INVESTMENTS (4.39%) 284,103
-------- ----------
TOTAL INVESTMENTS (101.24%) 6,556,801
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (1.24%) (80,234)
-------- ----------
TOTAL NET ASSETS (100.00%) $6,476,567
======== ==========
* Non-income producing security.
The percentage shown for each investment category is the total of that category
as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Growth & Income Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Growth & Income Fund on June 30, 1998. 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Aerospace (0.35%)
Northrop Grumman Corp. ................................ 148 $15,263
United Technologies Corp. ............................. 152 14,060
----------
29,323
----------
Automobile / Trucks (0.07%)
Lear Corp.* ........................................... 119 6,106
----------
Banks - United States (3.40%)
Citicorp .............................................. 102 15,223
PNC Bank Corp. ........................................ 5,000 269,062
----------
284,285
----------
Beverages (0.31%)
Anheuser-Busch Cos., Inc. ............................. 557 26,283
----------
Building (2.00%)
Hussmann International, Inc. .......................... 9,000 167,062
----------
Business Services - Misc (0.89%)
ACNielsen Corp. * ..................................... 1,091 27,548
Block, H & R, Inc. .................................... 434 18,282
Diebold, Inc. ......................................... 1,000 28,875
----------
74,705
----------
Chemicals (3.56%)
Solutia, Inc. ......................................... 10,375 297,633
----------
Computers (6.11%)
Bay Networks, Inc.* ................................... 292 9,417
Computer Associates International, Inc. ............... 1,509 83,844
Computer Sciences Corp.* .............................. 452 28,928
Electronic Data Systems Corp. ......................... 9,000 360,000
International Business Machines Corp. ................. 255 29,277
----------
511,466
----------
Electronics (2.73%)
SCI Systems, Inc.* .................................... 6,070 228,384
----------
Energy (0.14%)
CalEnergy Co., Inc.* .................................. 399 11,995
----------
Finance (4.59%)
Astoria Financial Corp. ............................... 373 19,955
Charter One Financial, Inc. ........................... 1,212 40,829
FIRSTPLUS Financial Group, Inc.* ...................... 116 4,176
Heller Financial, Inc.* ............................... 100 3,000
Morgan Stanley, Dean Witter, Discover & Co. ........... 286 26,133
Safeguard Scientifics, Inc.* .......................... 4,200 175,087
Sovereign Bancorp., Inc. .............................. 1,348 22,031
TCF Financial Corp. ................................... 3,150 92,925
----------
384,136
----------
Food (0.07%)
IBP, Inc. ............................................. 306 5,546
----------
Insurance (16.66%)
Ace, Ltd. (Bermuda) ................................... 5,094 198,666
Allstate Corp. (The) .................................. 282 25,821
Everest Reinsurance Holdings, Inc. .................... 4,000 153,750
Executive Risk, Inc. .................................. 3,000 221,250
Financial Security Assurance Holdings Ltd. ............ 260 15,275
Lincoln National Corp. ................................ 1,600 146,200
Mercury General Corp. ................................. 3,437 221,472
Mitsui Marine and Fire Insurance Co, Ltd. (Japan) ..... 18,000 90,398
PMI Group, Inc. (The) ................................. 1,200 88,050
Progressive Corp. ..................................... 405 57,105
Reinsurance Group of America, Inc. .................... 2,500 147,812
Travelers Group, Inc. ................................. 466 28,251
----------
1,394,050
----------
Leisure (2.83%)
Galileo International, Inc. ........................... 5,185 233,649
Hilton Hotels Corp. ................................... 100 2,850
----------
236,499
----------
Media (12.80%)
Cable Michigan, Inc. * ................................ 784 30,576
Central Newspapers, Inc. (Class A) .................... 2,300 160,425
Harcourt General, Inc. ................................ 2,349 139,765
Scripps (E.W.) Co. (The) (Class A) .................... 6,000 328,875
Viacom, Inc. (Class B)* ............................... 148 8,621
Washington Post Co. (The) (Class B) ................... 700 403,200
----------
1,071,462
----------
Medical (2.88%)
American Home Products Corp. .......................... 522 27,013
Becton, Dickinson & Co. ............................... 172 13,351
Johnson & Johnson ..................................... 186 13,718
Lilly (Eli) & Co. ..................................... 318 21,008
Pharmacia & Upjohn, Inc. .............................. 325 14,991
Shire Pharmaceuticals Group PLC (United Kingdom)* ..... 4,000 28,164
Warner-Lambert Co. .................................... 678 47,036
Wellpoint Health Networks, Inc.* ...................... 1,020 75,480
----------
240,761
----------
Mortgage Banking (0.30%)
Fannie Mae ............................................ 201 12,211
Federal Home Loan Mortgage Corp. ...................... 267 12,566
----------
24,777
----------
Oil & Gas (11.17%)
British Petroleum Co. PLC, American Depositary
Receipts (ADR) (United Kingdom) ...................... 242 21,357
Camco International, Inc. ............................. 5,000 389,375
El Paso Natural Gas Co. ............................... 240 9,180
Mobil Corp. ........................................... 272 20,842
Phillips Petroleum Co. ................................ 174 8,385
Triton Energy Ltd.* ................................... 13,300 474,644
YPF Sociedad Anonima (ADR) (Argentina) ................ 352 10,582
----------
934,365
----------
Retail (3.03%)
McDonald's Corp. ...................................... 493 34,017
Penney (J.C.) Co., Inc. ............................... 191 13,812
Sysco Corp. ........................................... 544 13,940
Tiffany & Co. ......................................... 3,500 168,000
Wal-Mart Stores, Inc. ................................. 389 23,632
----------
253,401
----------
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Growth & Income Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Telecommunications (1.34%)
Commonwealth Telephone Enterprises, Inc.* ............. 1,500 $39,562
Lucent Technologies, Inc. ............................. 382 31,778
MCI Communications Corp. .............................. 406 23,599
Southern New England Telecommunications Corp. ......... 125 8,188
360(degree) Communications Co.* ....................... 275 8,800
----------
111,927
----------
Tobacco (0.24%)
Philip Morris Cos., Inc. .............................. 520 20,475
----------
Transport (7.91%)
Burlington Northern Santa Fe Corp. .................... 133 13,059
GATX Corp. ............................................ 4,336 190,242
KLM Royal Dutch Airlines N.V. (Netherlands) ........... 10,900 446,219
Northwest Airlines Corp. (Class A)* ................... 328 12,649
----------
662,169
----------
Utilities (5.07%)
CMS Energy Corp. ...................................... 370 16,280
Duke Energy Corp. ..................................... 283 16,768
MarketSpan Corp.* ..................................... 463 13,861
New England Electric System ........................... 91 3,936
Niagara Mohawk Power Corp.* ........................... 25,000 373,437
----------
424,282
----------
TOTAL COMMON STOCKS
(Cost $7,051,373) (88.45%) 7,401,092
------- ---------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.66%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion
Securities USA, Inc. Dated 06-30-98,
due 07-01-98 (Secured by U.S. Treasury
Bond, 9.125% due 05-15-18, and U.S.
Treasury Notes, 5.00% thru 8.75% due
12-31-98 thru 04-30-03) - Note B.......... 5.750% $55 $55,000
----------
Short-Term Note (26.29%)
Federal Home Loan Bank
due 07-01-98............................. 5.400 2,200 2,199,670
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%................................ 283
----------
TOTAL SHORT-TERM INVESTMENTS (26.95%) 2,254,953
-------- ----------
TOTAL INVESTMENTS (115.40%) 9,656,045
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (15.40%) (1,288,807)
-------- ----------
TOTAL NET ASSETS (100.00%) $8,367,238
======== ==========
* Non-income producing security.
The percentage shown for each investment category is the total of that category
as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
88
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Independence Equity Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Independence Equity Fund on June 30, 1998. It is divided into two main
catagories: common stocks and short-term investments. Common stocks are further
broken down by industry group. Short-term investments, which represent the
Fund's "cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (0.22%)
Omnicom Group, Inc. ................................... 700 $34,913
----------
Aerospace (3.57%)
Goodrich (B.F.) Co. ................................... 2,100 104,213
Northrop Grumman Corp. ................................ 200 20,625
Sundstrand Corp. ...................................... 1,300 74,425
United Technologies Corp. ............................. 4,100 379,250
----------
578,513
----------
Automobile / Trucks (2.81%)
Chrysler Corp. ........................................ 900 50,737
Dana Corp. ............................................ 800 42,800
Ford Motor Co. ........................................ 4,300 253,700
Lear Corp.* ........................................... 1,300 66,706
Ryder System, Inc. .................................... 1,300 41,031
----------
454,974
----------
Banks - United States (7.98%)
BankAmerica Corp. ..................................... 1,900 164,231
Chase Manhattan Corp. ................................. 600 45,300
Citicorp .............................................. 900 134,325
Comerica, Inc. ........................................ 3,400 225,250
First Union Corp. ..................................... 4,900 285,425
NationsBank Corp. ..................................... 3,000 229,500
Norwest Corp. ......................................... 5,600 209,300
----------
1,293,331
----------
Beverages (1.96%)
PepsiCo, Inc. ......................................... 7,700 317,144
----------
Building (0.49%)
Masco Corp. ........................................... 1,300 78,650
----------
Chemicals (1.84%)
Air Products & Chemicals, Inc. ........................ 6,200 248,000
Millennium Chemicals, Inc. ............................ 1,500 50,813
----------
298,813
----------
Computers (7.11%)
Autodesk, Inc. ........................................ 1,800 69,525
Cadence Design Systems, Inc.* ......................... 1,000 31,250
Cisco Systems, Inc.* .................................. 2,100 193,331
Computer Associates International, Inc. ............... 1,700 94,456
Hewlett-Packard Co. ................................... 1,500 89,813
International Business Machines Corp. ................. 600 68,888
Microsoft Corp.* ...................................... 4,000 433,500
Oracle Corp.* ......................................... 1,650 40,528
Parametric Technology Corp.* .......................... 2,100 56,963
Sun Microsystems, Inc.* ............................... 1,700 73,844
----------
1,152,098
----------
Cosmetics & Personal Care (1.34%)
Avon Products, Inc. ................................... 1,500 116,250
Dial Corp. (The) ...................................... 3,100 80,406
Revlon, Inc. (Class A)* ............................... 400 20,550
----------
217,206
----------
Diversified Operations (2.53%)
National Service Industries, Inc. ..................... 700 35,613
Ogden Corp. ........................................... 2,600 71,988
Textron, Inc. ......................................... 800 57,350
Tyco International Ltd. ............................... 3,900 245,700
----------
410,651
----------
Electronics (5.42%)
General Electric Co. .................................. 4,700 427,700
Honeywell, Inc. ....................................... 400 33,425
Intel Corp. ........................................... 3,700 274,263
Linear Technology Corp. ............................... 900 54,281
Maxim Intergrated Products, Inc.* ..................... 1,500 47,531
Parker Hannifin Corp. ................................. 1,100 41,938
----------
879,138
----------
Finance (2.00%)
American Express Co. .................................. 300 34,200
Associates First Capital Corp. (Class A) .............. 1,400 107,625
Morgan Stanley, Dean Witter, Discover & Co. ........... 2,000 182,750
----------
324,575
----------
Food (1.68%)
Flowers Industries, Inc. .............................. 1,900 38,831
General Mills, Inc. ................................... 900 61,537
Heinz (H.J.) Co. ...................................... 1,900 106,638
Quaker Oats Co. ....................................... 1,200 65,925
----------
272,931
----------
Household (0.23%)
Tupperware Corp. ...................................... 1,300 36,562
----------
Instruments - Scientific (0.27%)
Perkin-Elmer Corp. .................................... 700 43,531
----------
Insurance (9.38%)
Allstate Corp. (The) .................................. 2,300 210,594
American International Group, Inc. .................... 1,750 255,500
CIGNA Corp. ........................................... 600 41,400
Equitable Companies., Inc. (The) ...................... 600 44,962
General Re Corp. ...................................... 300 76,050
Hartford Financial Services Group, Inc. (The) ......... 2,500 285,938
Marsh & McLennan Companies., Inc. ..................... 2,700 163,181
Travelers Group, Inc. ................................. 5,900 357,687
Travelers Property Casualty Corp. (Class A) ........... 2,000 85,750
----------
1,521,062
----------
Machinery (0.57%)
Cooper Industries, Inc. ............................... 1,000 54,937
Deere & Co. ........................................... 700 37,012
----------
91,949
----------
Media (0.76%)
Viacom, Inc. (Class B)* ............................... 2,100 122,325
----------
Medical (11.38%)
Abbott Laboratories ................................... 3,600 147,150
Becton Dickinson & Co. ................................ 1,400 108,675
Bristol-Myers Squibb Co. .............................. 2,200 252,862
Cardinal Health, Inc. ................................. 2,300 215,625
Glaxo Wellcome PLC, (American Depositary
Receipts), (ADR) (United Kingdom) .................... 500 29,906
Guidant Corp. ......................................... 1,600 114,100
SEE NOTES TO FINANCIAL STATEMENTS.
89
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Independence Equity Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Medical (continued)
Health Management Associates, Inc. (Class A)* ......... 1,400 $46,813
HEALTHSOUTH Corp.* .................................... 4,100 109,419
Johnson & Johnson ..................................... 1,000 73,750
Merck & Co., Inc. ..................................... 1,200 160,500
Mylan Laboratories, Inc. .............................. 1,400 42,088
Pfizer, Inc. .......................................... 2,000 217,375
Schering-Plough Corp. ................................. 1,300 119,112
Tenet Healthcare Corp.* ............................... 1,200 37,500
Universal Health Services, Inc. (Class B)* ............ 600 35,025
Warner-Lambert Co. .................................... 1,200 83,250
Wellpoint Health Networks, Inc.* ...................... 700 51,800
----------
1,844,950
----------
Mortgage Banking (1.57%)
Fannie Mae ............................................ 4,200 255,150
----------
Office (3.17%)
Avery Dennison Corp. .................................. 500 26,875
Pitney Bowes, Inc. .................................... 5,900 283,938
Xerox Corp. ........................................... 2,000 203,250
----------
514,063
----------
Oil & Gas (5.15%)
Baker Hughes, Inc. .................................... 1,400 48,387
British Petroleum Co. PLC (ADR) (United Kingdom) ...... 1,500 132,375
Dresser Industries, Inc. .............................. 3,400 149,812
El Paso Natural Gas Co. ............................... 2,000 76,500
Halliburton Co. ....................................... 2,100 93,581
Mobil Corp. ........................................... 800 61,300
Phillips Petroleum Co. ................................ 2,100 101,194
Schlumberger, Ltd. .................................... 800 54,650
Sun Co., Inc. ......................................... 1,600 62,100
USX - Marathon Group .................................. 1,600 54,900
----------
834,799
----------
Paper & Paper Products (0.41%)
Fort James Corp. ...................................... 1,500 66,750
----------
Pollution Control (1.08%)
Browning-Ferris Industries, Inc. ...................... 1,200 41,700
USA Waste Services, Inc.* ............................. 2,700 133,312
----------
175,012
----------
Retail (4.80%)
Albertson's, Inc. ..................................... 3,100 160,619
Costco Cos., Inc.* .................................... 500 31,531
Dayton Hudson Corp. ................................... 1,200 58,200
Home Depot, Inc. (The) ................................ 4,100 340,556
Lowe's Companies., Inc. ............................... 2,400 97,350
Staples, Inc.* ........................................ 1,100 31,831
TJX Companies., Inc. .................................. 2,400 57,900
----------
777,987
----------
Rubber - Tires & Misc. (1.19%)
Goodyear Tire & Rubber Co. (The) ...................... 3,000 193,313
----------
Soap & Cleaning Preparations (3.48%)
Procter & Gamble Co. (The) ............................ 6,200 564,588
----------
Telecommunications (4.61%)
AT&T Corp. ............................................ 3,500 199,937
Bell Atlantic Corp. ................................... 4,000 182,500
Harris Corp. .......................................... 1,000 44,688
Lucent Technologies, Inc. ............................. 3,300 274,519
Northern Telecom Ltd. (Canada) ........................ 800 45,400
----------
747,044
----------
Textile (0.92%)
Jones Apparel Group, Inc.* ............................ 1,400 51,188
Liz Claiborne, Inc. ................................... 900 47,025
Tommy Hilfiger Corp.* ................................. 800 50,000
----------
148,213
----------
Tobacco (0.68%)
Philip Morris Companies., Inc. ........................ 2,800 110,250
----------
Transport (2.77%)
Burlington Northern Santa Fe Corp. .................... 1,800 176,737
Delta Air Lines, Inc. ................................. 500 64,625
Northwest Airlines Corp. (Class A)* ................... 1,000 38,563
Southwest Airlines Co. ................................ 2,300 68,137
UAL Corp.* ............................................ 1,300 101,400
----------
449,462
----------
Utilities (5.27%)
Baltimore Gas & Electric Co. .......................... 700 21,744
Carolina Power & Light Co. ............................ 700 30,362
Consolidated Natural Gas Co. .......................... 400 23,550
Dominion Resources, Inc. .............................. 2,000 81,500
Florida Progress Corp. ................................ 2,600 106,925
FPL Group, Inc. ....................................... 1,800 113,400
GTE Corp. ............................................. 4,900 272,562
New Century Energies, Inc. ............................ 2,100 95,419
SBC Communications, Inc. .............................. 2,700 108,000
----------
853,462
----------
TOTAL COMMON STOCKS
(Cost $13,498,567) (96.64%) 15,663,409
------- ----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (4.17%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. -
Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Bond, 9.125%
due 05-15-18, and U.S. Treasury Notes,
5.00% thru 8.75% due 12-31-98
thru 04-30-03) - Note B.................. 5.750% $676 676,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%....................... 181
-----------
TOTAL SHORT-TERM INVESTMENTS (4.17%) 676,181
-------- -----------
TOTAL INVESTMENTS (100.81%) 16,339,590
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.81%) (131,160)
-------- -----------
TOTAL NET ASSETS (100.00%) $16,208,430
======== ===========
* 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.
90
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
Schedule of Investments
June 30, 1998 (Unaudited)
Per share earnings and dividends and their compound growth rates are shown for
the most recently reported ten year periods on common stocks.
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Sovereign Investors Fund on June 30, 1998. It is divided into three main
catagories: common stocks, U.S. government and agencies obligations and
short-term investments. Common stocks are further broken down by industry group.
Short-term investments, which represent the Fund's "cash" position, are listed
last.
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
- --------- ---- -----
<C> <S> <C> <C>
COMMON STOCKS (83.47%)
Advertising (0.89%)
3,400 Interpublic Group, Inc. @ 60 11/16................................................ $206,338
----------
One of the largest advertising agencies in the world
Earnings P/S...............$ .70, .79, .78, .88, .93, 1.13, 1.26, 1.12, 1.79, 2.00 12.4%
Dividends P/S...................$ .17, .21, .25, .27, .30, .33, .36, .40, .44, .50 12.7%
Price/Earnings Ratio..........................................................30.4
Banks (8.05%)
5,860 Banc One Corp. @ 55 13/16......................................................... 327,061
Ohio-based bank holding company
Earnings P/S..........$ 1.29, 1.37, 1.51, 1.75, 1.96, 2.09, 1.80, 2.20, 2.52, 1.99 4.9%
Dividends P/S...............$ .46, .52, .57, .63, .73, .89, 1.02, 1.12, 1.24, 1.38 13.0%
Price/Earnings Ratio..........................................................16.3
2,000 BankAmerica Corp. @ 86 7/16....................................................... 172,875
Third largest bank holding company in the U.S.
Earnings P/S...........$ .76, 1.03, 2.08, 2.39, 2.12, 2.44, 2.78, 3.42, 3.86, 4.60 22.1%
Dividends P/S................$ .30, .50, .60, .65, .70, .80, .92, 1.08, 1.22, 1.38 18.5%
Price/Earnings Ratio..........................................................20.8
1,300 BB&T Corp. @ 67 5/8............................................................... 87,912
Operates the second largest banking network in North Carolina
Earnings P/S...........$ 1.13, 1.19, 1.06, 1.51, 2.03, .13, 1.61, 2.45, 2.55, 2.87 10.9%
Dividends P/S.................$ .36, .38, .42, .46, .50, .64, .74, .86, 1.00, 1.16 13.9%
Price/Earnings Ratio..........................................................24.3
9,000 First Tennessee National Corp. @ 31 9/16.......................................... 284,062
Tennessee-based bank holding company
Earnings P/S................$ .31, .50, .61, .75, .81, .88, 1.04, 1.24, 1.36, 1.60 20.0%
Dividends P/S...................$ .21, .24, .27, .29, .32, .38, .43, .49, .55, .62 12.8%
Price/Earnings Ratio..........................................................20.4
3,200 First Union Corp. @ 58 1/4........................................................ 186,400
North Carolina-based bank holding company
Earnings P/S..........$ 1.38, 1.20, 1.26, 1.28, 1.86, 2.09, 2.25, 2.38, 2.59, 2.99 9.0%
Dividends P/S.................$ .43, .50, .54, .56, .64, .75, .86, .98, 1.10, 1.22 12.3%
Price/Earnings Ratio..........................................................38.0
5,000 KeyCorp. @ 35 5/8................................................................. 178,125
Bank holding company with offices from coast to coast
Earnings P/S..........$ 1.05, 1.16, 1.18, 1.23, 1.20, 1.43, 1.70, 1.71, 1.67, 2.07 7.8%
Dividends P/S...................$ .34, .40, .44, .46, .49, .56, .64, .72, .76, .84 10.6%
Price/Earnings Ratio..........................................................16.1
6,500 NationsBank Corp. @ 76 1/2........................................................ 497,250
Largest superregional bank in the Southeast
Earnings P/S............$ 2.22, 1.31, .38, .70, 2.21, 2.71, 3.10, 3.63, 4.05, 3.83 6.2%
Dividends P/S................$ .47, .55, .71, .74, .76, .82, .94, 1.04, 1.20, 1.37 12.6%
Price/Earnings Ratio..........................................................22.2
3,500 Norwest Corp. @ 37 3/8............................................................ 130,813
The 12th largest bank holding company in the U.S.
Earnings P/S...............$ .63, .22, .23, .74, .77, 1.00, 1.26, 1.43, 1.60, 1.83 12.6%
Dividends P/S...................$ .16, .19, .21, .24, .27, .32, .38, .45, .53, .62 16.2%
Price/Earnings Ratio..........................................................20.9
----------
1,864,498
----------
Beverages (0.80%)
4,500 PepsiCo, Inc. @ 41 3/16........................................................... 185,344
----------
Second largest soft drink company
Earnings P/S................$ .57, .69, .70, .69, .82, 1.00, 1.14, 1.05, .72, 1.02 6.7%
Dividends P/S...................$ .12, .15, .18, .21, .23, .28, .32, .36, .41, .47 16.4%
Price/Earnings Ratio..........................................................41.5
Building (2.72%)
10,400 Masco Corp. @ 60 1/2.............................................................. 629,200
----------
Manufactures buildings, home improvement and consumer products
Earnings P/S.......$ 2.03, 1.42, .91, .57, .46, 1.30, 1.48, 1.14, 1.20, 2.01, 2.53 2.5%
Dividends P/S...................$ .44, .50, .54, .57, .61, .65, .69, .73, .77, .81 7.0%
Price/Earnings Ratio..........................................................25.0
Chemicals (5.61%)
14,000 Air Products & Chemicals, Inc. @ 40............................................... 560,000
Producer of industrial gases
Earnings P/S...........$ 1.01, 1.04, 1.11, 1.16, 1.25, .63, 1.42, 1.87, 1.80, 2.31 9.6%
Dividends P/S...................$ .28, .32, .35, .38, .42, .45, .48, .51, .54, .58 8.4%
Price/Earnings Ratio..........................................................16.9
27,000 RPM, Inc. @ 17.................................................................... 459,000
Manufacturer of specialty chemicals and coatings to waterproof and rustproof structures
Earnings P/S....................$ .37, .34, .32, .40, .35, .58, .65, .71, .66, .84 9.5%
Dividends P/S...................$ .20, .22, .24, .27, .29, .31, .34, .36, .39, .42 8.6%
Price/Earnings Ratio..........................................................19.2
8,000 Sigma - Aldrich Corp. @ 35 1/8.................................................... 281,000
Manufacturer of biochemical and organic products used for research and diagnostics
Earnings P/S...............$ .65, .72, .59, .84, .99, 1.11, 1.14, 1.36, 1.52, 1.69 12.8%
Dividends P/S...................$ .08, .09, .10, .11, .13, .15, .17, .19, .23, .26 14.0%
Price/Earnings Ratio..........................................................20.5
----------
1,300,000
----------
Computers (3.07%)
4,000 Automatic Data Processing, Inc. @ 72 7/8.......................................... 291,500
Largest independent computing services firm in the U.S.
Earnings P/S..............$ .63, .72, .79, .90, 1.01, 1.15, 1.34, 1.53, 1.74, 1.94 13.3%
Dividends P/S...................$ .13, .15, .17, .20, .23, .26, .29, .35, .42, .48 15.6%
Price/Earnings Ratio..........................................................38.1
7,000 Hewlett-Packard Co. @ 59 7/8...................................................... 419,125
Manufactures and services electronic measurement, analysis and computation instruments
Earnings P/S...............$ .88, .77, .83, .93, .86, 1.31, 1.92, 2.63, 2.69, 2.88 14.1%
Dividends P/S...................$ .07, .10, .11, .13, .20, .24, .29, .38, .46, .54 25.5%
Price/Earnings Ratio..........................................................20.7
----------
710,625
----------
Containers (3.90%)
10,700 Bemis Company, Inc. @ 40 7/8...................................................... 437,362
Producer of a broad range of flexible packaging and equipment and pressure sensitive materials
Earnings P/S..............$ .90, .99, .97, 1.08, 1.10, .94, 1.45, 1.73, 1.86, 2.05 9.6%
Dividends P/S...................$ .22, .30, .36, .42, .46, .50, .54, .64, .72, .80 15.4%
Price/Earnings Ratio..........................................................19.4
15,400 Sonoco Products Corp. @ 30 1/4.................................................... 465,850
Leading manufacturer of containers, paper products and packaging
Earnings P/S............$ 1.05, 1.12, .55, 1.05, .89, 1.29, 1.33, 1.72, 1.81, 1.81 6.2%
Dividends P/S...................$ .28, .35, .39, .40, .43, .46, .48, .54, .59, .64 9.6%
Price/Earnings Ratio..........................................................16.5
----------
903,212
----------
Diversified Operations (2.05%)
3,300 DuPont (E.I.) De Nemours & Co. @ 74 5/8........................................... 246,263
Nation's largest chemical manufacturer
Earnings P/S.............$ 1.77, 1.70, 1.69, .92, .76, .52, 2.23, 2.90, 3.35, 2.02 1.5%
Dividends P/S................$ .62, .73, .81, .84, .87, .88, .91, 1.02, 1.12, 1.23 7.9%
Price/Earnings Ratio..........................................................33.7
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
91
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
- --------- ---- -----
<C> <S> <C> <C>
Diversified Operations (continued)
4,000 Johnson Controls, Inc. @ 57 3/16.................................................. $228,750
Manufactures automotive systems and building controls
Earnings P/S..........$ 1.28, 1.07, 1.04, 1.22, 1.50, 1.72, 2.03, 2.35, 2.21, 3.25 10.9%
Dividends P/S...................$ .56, .59, .61, .63, .65, .69, .74, .79, .83, .88 5.2%
Price/Earnings Ratio..........................................................17.3
----------
475,013
----------
Electronics (6.54%)
8,700 Emerson Electric Co. @ 60 3/8..................................................... 525,262
Produces and sells electrical/electronic products and systems
Earnings P/S..........$ 1.32, 1.38, 1.40, 1.44, 1.53, 1.91, 1.95, 2.15, 2.39, 2.66 8.1%
Dividends P/S.................$ .52, .58, .64, .67, .70, .74, .80, .92, 1.01, 1.11 8.8%
Price/Earnings Ratio..........................................................23.4
600 General Electric Co. @ 91......................................................... 54,600
Dominant force in home appliances, electrical power and financial services
Earnings P/S..........$ 1.09, 1.21, 1.26, 1.28, 1.12, 1.57, 1.84, 2.08, 2.34, 2.67 10.5%
Dividends P/S..................$ .35, .41, .47, .51, .56, .63, .72, .82, .92, 1.04 12.9%
Price/Earnings Ratio..........................................................35.1
11,200 Grainger (W.W.), Inc. @ 49 13/16.................................................. 557,900
Leading distributor of electrical equipment
Earnings P/S..........$ 1.10, 1.15, 1.16, 1.19, 1.35, 1.52, 1.31, 1.85, 2.07, 2.37 8.9%
Dividends P/S...................$ .22, .25, .28, .31, .33, .35, .39, .45, .49, .53 10.3%
Price/Earnings Ratio..........................................................21.6
4,500 Honeywell, Inc. @ 83 9/16......................................................... 376,031
Makes automation and control systems
Earnings P/S..........$ 3.12, 2.45, 2.39, 2.66, 2.52, 2.34, 2.22, 2.70, 3.27, 3.87 2.4%
Dividends P/S................$ .51, .55, .69, .77, .84, .91, .97, 1.01, 1.06, 1.09 8.8%
Price/Earnings Ratio..........................................................22.9
----------
1,513,793
----------
Food (1.74%)
9,300 Archer Daniels Midland Co. @ 19 3/8............................................... 180,188
Processes and merchandises agricultural products
Earnings P/S..................$ .65, .74, .70, .75, .83, .77, 1.19, 1.33, .69, .83 2.8%
Dividends P/S.........$ .028, .033, .046, .048, .050, .053, .063, .110, .184, .193 23.9%
Price/Earnings Ratio..........................................................21.9
4,000 Sara Lee Corp. @ 55 15/16......................................................... 223,750
Manufactures brand name packaged foods and consumer products
Earnings P/S...........$ .88, .31, 1.03, 1.49, 1.36, 1.47, .52, 1.76, 1.99, (1.20) NMF
Dividends P/S....................$ .32, .38, .43, .48, .52, .60, .65, .70 .78, .86 11.6%
Price/Earnings Ratio..........................................................N.A.
----------
403,938
----------
Furniture (1.73%)
16,000 Leggett & Platt, Inc. @ 25........................................................ 400,000
----------
Produces intermediate products for the home furnishings industry
Earnings P/S...................$ .33, .21, .17, .32, .44, .56, .73, .81, .90, 1.13 14.7%
Dividends P/S.................$ .08, .095, .105, .11, .12, .14, .16, .19, .23, .27 14.5%
Price/Earnings Ratio..........................................................24.3
Insurance (9.73%)
7,400 AFLAC Corp. @ 30 5/16............................................................. 224,312
Global specialty insurer
Earnings P/S................$ .27, .39, .41, .52, .63, .82, 1.00, 1.20, 1.44, 2.42 27.6%
Dividends P/S...................$ .07, .08, .09, .10, .12, .13, .15, .17, .20, .23 14.1%
Price/Earnings Ratio..........................................................15.4
300 American International Group @ 146................................................ 43,800
Broadly based property-casualty insurance organization
Earnings P/S..........$ 1.97, 2.05, 2.06, 2.20, 2.36, 2.73, 3.15, 3.67, 4.27, 4.91 10.7%
Dividends P/S...................$ .08, .10, .12, .14, .16, .17, .19, .22, .25, .28 14.9%
Price/Earnings Ratio..........................................................30.4
5,000 Chubb Corp. @ 80 3/8.............................................................. 401,875
Property and casualty insurance
Earnings P/S..........$ 2.46, 3.04, 3.15, 3.22, 3.49, 1.55, 3.39, 3.91, 3.09, 4.51 7.0%
Dividends P/S.................$ .54, .58, .66, .74, .80, .86, .92, .98, 1.08, 1.16 8.9%
Price/Earnings Ratio..........................................................22.0
350 General RE Corp. @ 253 1/2........................................................ 88,725
Broadly based re-insurance organization
Earnings P/S.......$ 6.52, 6.89, 6.96, 7.44, 7.07, 7.38, 9.02, 10.59, 11.08, 12.56 7.6%
Dividends P/S.........$ 1.20, 1.36, 1.52, 1.68, 1.80, 1.88, 1.92, 1.96, 2.04, 2.20 7.0%
Price/Earnings Ratio..........................................................20.4
10,000 Reliastar Financial Corp. @ 48.................................................... 480,000
Financial services company engaged in life/health insurance and consumer finance
Earnings P/S.............$ 1.00, .98, .98, .83, 1.13, 1.42, 1.74, 2.32, 2.55, 2.66 11.5%
Dividends P/S...................$ .29, .30, .32, .35, .37, .39, .44, .49, .55, .61 8.6%
Price/Earnings Ratio..........................................................18.9
5,750 Travelers Group, Inc. @ 60 5/8.................................................... 348,594
Diversified financial services company
Earnings P/S.............$ .91, .71, .82, 1.07, 1.67, 1.94, 1.93, 2.75, 3.50, 3.00 14.2%
Dividends P/S.................$ .045, .048, .06, .08, .12, .16, .19, .27, .30, .40 27.5%
Price/Earnings Ratio..........................................................23.6
12,000 UNUM Corp. @ 55 1/2............................................................... 666,000
Holding company for UNUM Life Insurance Company of America
Earnings P/S............$ .98, 1.15, 1.40, 1.65, 1.87, 2.01, .96, 1.99, 1.94, 2.52 11.1%
Dividends P/S...................$ .12, .14, .19, .25, .31, .38, .46, .52, .55, .57 18.9%
Price/Earnings Ratio..........................................................23.4
----------
2,253,306
----------
Leisure (1.19%)
7,000 Hasbro, Inc. @ 39 5/16............................................................ 275,188
----------
Designs, manufactures and markets toys, games and interactive software
Earnings P/S...............$ .55, .68, .70, .63, 1.36, 1.48, 1.32, 1.21, 1.56, .91 5.8%
Dividends P/S...................$ .05, .07, .08, .10, .13, .15, .18, .21, .25, .31 22.5%
Price/Earnings Ratio..........................................................43.9
Machinery (3.92%)
10,000 Dover Corp. @ 34 1/4.............................................................. 342,500
Manufactures a variety of specialized industrial products
Earnings P/S.................$ .57, .64, .61, .54, .58, .73, .97, 1.30, 1.73, 1.87 14.1%
Dividends P/S...................$ .16, .18, .19, .21, .22, .23, .25, .28, .32, .36 9.4%
Price/Earnings Ratio..........................................................18.0
13,300 Pentair, Inc. @ 42 1/2............................................................ 565,250
Manufactures enclosures for electrical, electronic, woodworking and power
tool equipment
Earnings P/S.............$ .99, .84, .89, 1.11, 1.11, 1.14, 1.32, 1.55, 1.93, 2.39 10.3%
Dividends P/S...................$ .22, .27, .29, .31, .33, .34, .36, .40, .50, .54 10.5%
Price/Earnings Ratio..........................................................17.4
----------
907,750
----------
Media (0.54%)
400 Gannett Co., Inc. @ 71 1/16....................................................... 28,425
Publishes 81 daily/50 nondaily newspapers,
operates 10 TV, 8 FM and 7 AM stations
Earnings P/S..........$ 1.24, 1.18, 1.11, 1.03, 1.24, 1.41, 1.67, 1.64, 2.37, 3.25 11.3%
Dividends P/S...................$ .51, .56, .61, .62, .63, .65, .67, .69, .71, .74 4.2%
Price/Earnings Ratio..........................................................22.2
1,200 McGraw-Hill Companies, Inc. @ 81 9/16............................................. 97,875
Provides informational products and services for business and industry
Earnings P/S............$ .41, 1.77, 1.73, 1.51, 1.60, .11, 2.04, 2.31, 4.98, 2.99 24.7%
Dividends P/S..........$ .92, 1.00, 1.08, 1.10, 1.12, 1.14, 1.16, 1.20, 1.32, 1.44 5.1%
Price/Earnings Ratio..........................................................27.8
----------
126,300
----------
Medical (8.77%)
6,000 Abbott Laboratories @ 40 7/8...................................................... 245,250
Major pharmaceutical and healthcare firm
Earnings P/S................$ .48, .56, .59, .69, .79, .89, 1.01, 1.14, 1.29, 1.44 13.0%
Dividends P/S...................$ .15, .17, .20, .24, .29, .33, .37, .41, .47, .53 15.1%
Price/Earnings Ratio..........................................................30.5
4,000 American Home Products @ 51 3/4................................................... 207,000
Manufactures pharmaceuticals and medical devices
Earnings P/S.............$ .89, 1.51, 1.53, .92, 1.13, 1.20, 1.74, .92, 1.55, 1.88 8.7%
Dividends P/S...................$ .45, .49, .54, .60, .67, .72, .74, .76, .79, .83 7.0%
Price/Earnings Ratio..........................................................26.3
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
92
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
- --------- ---- -----
<C> <S> <C> <C>
Medical (continued)
4,600 Baxter International, Inc. @ 53 13/16............................................. $247,538
The company operates four divisions: renal, biotech, cardiovascular and
intravenous systems and international distribution
Earnings P/S.........$ 1.50, (.05), 1.91, 1.81, 1.73, (.70), 2.01, 1.50, .86, 2.39 5.3%
Dividends P/S................$ .47, .52, .60, .69, .80, .93, .95, 1.03, 1.11, 1.14 10.3%
Price/Earnings Ratio..........................................................22.9
5,000 Becton Dickinson & Co. @ 77 5/8................................................... 388,125
Manufactures broad line of medical supplies
Earnings P/S..........$ 1.00, 1.17, 1.20, 1.19, 1.32, 1.40, 1.67, 1.98, 2.35, 2.50 10.7%
Dividends P/S...................$ .22, .26, .28, .29, .31, .34, .38, .42, .48, .54 10.5%
Price/Earnings Ratio..........................................................34.2
4,000 Bristol-Myers Squibb Co. @ 114 15/16.............................................. 459,750
Produces pharmaceuticals, medical devices and non-prescription health products
Earnings P/S..........$ 1.70, 1.67, 1.75, 2.00, 1.53, 1.92, 1.95, 1.86, 2.93, 3.34 7.8%
Dividends P/S..........$ .84, 1.00, 1.06, 1.20, 1.38, 1.44, 1.46, 1.48, 1.50, 1.52 6.8%
Price/Earnings Ratio..........................................................35.8
6,000 Johnson & Johnson @ 73 3/4........................................................ 442,500
Major producer of prescription and non-prescription drugs, toiletries, medical
instruments and supplies
Earnings P/S.............$ .81, .86, .99, 1.12, 1.28, 1.41, 1.65, 1.94, 2.26, 2.54 13.5%
Dividends P/S...................$ .24, .28, .33, .39, .45, .51, .57, .64, .74, .85 15.1%
Price/Earnings Ratio..........................................................28.3
600 Lilly, Eli, Co. @ 66 1/16......................................................... 39,637
Manufactures and markets pharmaceutical products
Earnings P/S.............$ .80, .98, 1.02, 1.17, .65, .36, 1.09, 1.18, 1.43, (.27) NMF
Dividends P/S...................$ .29, .34, .41, .50, .55, .61, .63, .65, .69, .74 11.0%
Price/Earnings Ratio..........................................................N.A.
----------
2,029,800
----------
Office (2.29%)
11,000 Pitney Bowes, Inc. @ 48 1/8....................................................... 529,375
----------
Manufactures office automation equipment
Earnings P/S..............$ .57, 1.15, .68, .90, .99, 1.00, 1.17, 1.38, 1.63, 1.87 14.1%
Dividends P/S...................$ .23, .26, .30, .34, .39, .45, .52, .60, .69, .80 14.9%
Price/Earnings Ratio..........................................................13.5
Oil & Gas (2.87%)
2,700 Chevron Corp. @ 83 1/16........................................................... 224,269
One of the largest integrated, international oil companies with interest in
petrochemicals
Earnings P/S..........$ 2.81, 3.05, 3.18, 1.54, 3.57, 1.77, 2.70, 1.67, 4.32, 4.47 5.3%
Dividends P/S.........$ 1.28, 1.40, 1.48, 1.63, 1.65, 1.75, 1.85, 1.93, 2.08, 2.28 6.6%
Price/Earnings Ratio..........................................................18.3
600 Exxon Corp. @ 71 5/16............................................................. 42,788
Major integrated oil and gas company
Earnings P/S..........$ 2.15, 1.17, 2.37, 1.87, 1.85, 2.10, 2.24, 2.69, 3.12, 3.31 4.9%
Dividends P/S.........$ 1.08, 1.15, 1.24, 1.34, 1.42, 1.44, 1.46, 1.50, 1.56, 1.63 4.7%
Price/Earnings Ratio..........................................................21.7
5,200 Mobil Corp. @ 76 5/8.............................................................. 398,450
One of the largest integrated, international oil companies with interest in
petrochemicals and plastics
Earnings P/S..........$ 2.20, 2.30, 2.70, 1.60, 2.02, 2.60, 2.27, 3.07, 3.81, 3.94 6.7%
Dividends P/S.........$ 1.18, 1.28, 1.41, 1.56, 1.60, 1.63, 1.70, 1.81, 1.96, 2.12 6.7%
Price/Earnings Ratio..........................................................19.0
----------
665,507
----------
Retail (7.52%)
14,000 Dayton Hudson Corp. @ 48 1/2...................................................... 679,000
General merchandiser selling through Target and Marvyn stores
Earnings P/S............$ 1.15, .56, .93, .85, .65, .83, .85, .90, .74, 1.24, 1.88 14.4%
Dividends P/S...................$ .17, .19, .22, .24, .26, .27, .28, .29, .31, .33 7.6%
Price/Earnings Ratio..........................................................26.6
3,000 Home Depot, Inc. @ 83 1/16........................................................ 249,187
Operates a chain of retail building supply/home improvement "warehouse" stores
Earnings P/S....................$ .11, .12, .16, .22, .29, .36, .45, .54, .70, .85 25.5%
Dividends P/S.................$ .005, .01, .015, .02, .03, .04, .05, .07, .08, .10 39.5%
Price/Earnings Ratio..........................................................57.4
3,000 May Department Stores @ 65 1/2.................................................... 196,500
Department store retailer operating 365 stores in 30 states
Earnings P/S............1.75, 1.83, 1.99, 2.03, 2.42, 2.83, 2.96, 2.77, 2.97, 3.33 7.4%
Dividends P/S................$ .56, .63, .70, .73, .75, .81, .91, 1.01, 1.13, 1.20 8.8%
Price/Earnings Ratio..........................................................20.4
21,200 Sysco Corp. @ 25 5/8.............................................................. 543,250
Largest distributor of food service products
Earnings P/S....................$ .30, .37, .40, .45, .50, .58, .67, .74, .82, .93 5.0%
Dividends P/S..................$ .04, .045, .05, .07, .11, .14, .18, .22, .26, .30 25.1%
Price/Earnings Ratio..........................................................27.2
1,200 Wal-Mart Stores, Inc. @ 60 3/4.................................................... 72,900
Operates chain of discount department stores
Earnings P/S...............$ .48, .50, .59, .73, .90, 1.05, 1.20, 1.21, 1.38, 1.64 14.6%
Dividends P/S...................$ .04, .06, .07, .09, .11, .13, .17, .20, .21, .27 23.6%
Price/Earnings Ratio..........................................................39.1
----------
1,740,837
----------
Soap & Cleaning Preparations (0.40%)
3,000 Ecolab, Inc. @ 31................................................................. 93,000
----------
Develops and markets premium institutional cleansing, sanitizing and
maintenance products and services
Earnings P/S...................$ .03, .54, .46, .50, .52, .63, .64, .77, .92, 1.07 40.5%
Dividends P/S.................$ .16, .165, .17, .175, .18, .20, .23, .26, .29, .34 8.7%
Price/Earnings Ratio..........................................................30.6
Tobacco (0.85%)
5,000 Philip Morris Cos., Inc. @ 39 3/8................................................. 196,875
----------
Global tobacco, brewing and food company
Earnings P/S..........$ 1.06, 1.28, 1.33, 1.48, 1.88, 1.34, 1.90, 2.27, 2.66, 2.45 9.8%
Dividends P/S...............$ .34, .42, .52, .64, .78, .87, 1.01, 1.22, 1.47, 1.60 18.8%
Price/Earnings Ratio..........................................................16.3
Transport (0.54%)
5,000 C.H. Robinson Worldwide, Inc. @ 24 7/8............................................ 124,375
----------
Provides intermodal transportation services
Earnings P/S.............................................$ .28, .36, .52, .67, .78 NMF
Dividends P/S....$ .036, .045, .058, .062, .067, .073, .087, .108, .130, .185, .20 21.0%
Price/Earnings Ratio..........................................................25.5
Utilities (7.75%)
13,000 Ameritech Corp. @ 44 7/8.......................................................... 583,375
One of the world's largest communications companies
Earnings P/S..........$ 1.15, 1.18, 1.17, 1.15, 1.21, 1.15, 1.55, 1.72, 1.99, 2.06 6.7%
Dividends P/S................$ .69, .75, .81, .86, .89, .93, .97, 1.02, 1.08, 1.15 5.8%
Price/Earnings Ratio..........................................................22.9
1,500 Duke Energy Corp. @ 59 1/4........................................................ 88,875
Generates, transmits, distributes and sells electric energy in the Piedmont
sections of North and South Carolina
Earnings P/S..........$ 2.57, 2.40, 2.44, 2.44, 2.39, 2.96, 3.01, 3.11, 2.96, 2.92 1.4%
Dividends P/S.........$ 1.42, 1.52, 1.60, 1.68, 1.76, 1.84, 1.92, 2.00, 2.08, 2.16 4.8%
Price/Earnings Ratio..........................................................20.1
4,400 National Fuel Gas Co. @ 43 9/16................................................... 191,675
Integrated natural gas system serving N.Y., PA. and Ohio
Earnings P/S...........$ 1.93, 1.83, 1.95, 1.89, 1.88, 2.05, 2.27, 2.40, 2.96, .90 NMF
Dividends P/S.........$ 1.25, 1.32, 1.40, 1.45, 1.49, 1.53, 1.57, 1.61, 1.67, 1.73 0.5%
Price/Earnings Ratio..........................................................47.2
8,000 Northern States Power Co. @ 28 5/8................................................ 229,000
Provides electric, utility, and gas services to Mid-western states
Earnings P/S..........$ 1.62, 1.42, 1.39, 1.42, 1.25, 1.58, 1.74, 1.94, 1.89, 1.52 NMF
Dividends P/S.........$ 1.05, 1.10, 1.15, 1.20, 1.25, 1.28, 1.31, 1.34, 1.37, 1.40 3.2%
Price/Earnings Ratio..........................................................18.5
4,400 Questar Corp. @ 19 5/8............................................................ 86,350
Diversified holding company for Utah, Wyoming and Colorado natural gas
transmission, distribution and storage
Earnings P/S................$ .64, .73, .78, .77, 1.00, .99, .56, 1.12, 1.27, 1.27 7.9%
Dividends P/S...................$ .47, .48, .49, .51, .52, .55, .57, .58, .60, .62 3.1%
Price/Earnings Ratio..........................................................14.8
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
93
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
<TABLE>
<CAPTION>
COMPOUND
NUMBER GROWTH MARKET
OF SHARES RATE VALUE
- --------- ---- -----
<C> <S> <C> <C>
Utilities (continued)
10,000 SBC Communications, Inc. @ 40..................................................... $400,000
Provides telephone service throughout the United States and internationally
Earnings P/S...........$ .88, .91, .92, .90, 1.09, (1.37), 1.53, (1.66), 1.77, .80 NMF
Dividends P/S...................$ .61, .65, .68, .71, .73, .75, .78, .82, .85, .89 4.3%
Price/Earnings Ratio..........................................................48.1
8,000 Teco Energy, Inc. @ 26 13/16...................................................... 214,500
Holding company for Tampa Electric, which provides regulated electric utility
services in Florida
Earnings P/S..........$ 1.21, 1.23, 1.22, 1.28, 1.29, 1.38, 1.34, 1.68, 1.68, 1.46 5.9%
Dividends P/S...............$ .70, .75, .80, .85, .90, .95, 1.00, 1.05, 1.11, 1.17 2.1%
Price/Earnings Ratio..........................................................18.3
----------
1,793,775
----------
TOTAL COMMON STOCKS
(Cost $17,005,817) 19,328,049
----------
<CAPTION>
PAR VALUE
(000s
OMITTED)
--------
<C> <S> <C>
UNITED STATES GOVERNMENT
AND AGENCIES OBLIGATIONS (10.63%)
$ 100 United States Treasury, Note 7.875%,
11-15-99 @ 103.062................................................................ 103,062
400 United States Treasury, Note 6.25%,
01-31-02 @ 101.250................................................................ 405,000
1,500 United States Treasury, Bond 10.750%,
08-15-05 @ 130.109................................................................ 1,951,635
----------
TOTAL UNITED STATES GOVERNMENT
AND AGENCIES OBLIGATIONS
(Cost $2,446,719) 2,459,697
----------
<CAPTION>
PAR VALUE
(000s INTEREST MARKET
OMITTED) RATE VALUE
-------- ---- -----
<C> <S> <C> <C>
SHORT-TERM INVESTMENTS (9.88%)
$2,288 Joint Repurchase Agreement (9.88%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. -
Dated 06-30-98, due 07-01-98
(Secured by U. S. Treasury Bond,
9.125% due 05-15-18 and U.S.
Treasury Notes, 5.00% thru 8.75%
due 12-31-98 thru 04-30-03) -
Note B.......................................................................... 5.750% $2,288,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%................................................................ 524
-----------
TOTAL SHORT-TERM INVESTMENTS (9.88%) 2,288,524
-------- -----------
TOTAL INVESTMENTS (103.98%) 24,076,270
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (3.98%) (920,818)
-------- -----------
TOTAL NET ASSETS (100.00%) $23,155,452
======== ===========
</TABLE>
NMF = No Meaningful Figure
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.
94
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. 500 Index Fund on June 30, 1998. It is divided into two main catagories:
common stocks and short-term investments. Common stocks are further broken down
by industry group. Short-term investments, which represent the Fund's "cash"
position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Advertising (0.15%)
Interpublic Group of Cos., Inc. (The) ................. 220 $13,351
Omnicom Group, Inc. ................................... 283 14,115
----------
27,466
----------
Aerospace (1.19%)
Boeing Co. (The) ...................................... 1,746 77,806
General Dynamics Corp. ................................ 220 10,230
Goodrich (B.F.) Co. (The) ............................. 125 6,203
Lockheed Martin Corp. ................................. 340 35,997
Northrop Grumman Corp. ................................ 117 12,066
Raytheon Co. (Class B) ................................ 592 35,002
United Technologies Corp. ............................. 407 37,647
----------
214,951
----------
Agricultural Operations (0.08%)
Agribrands International, Inc. * ...................... 30 908
Pioneer Hi-Bred International, Inc. ................... 345 14,274
----------
15,182
----------
Automobile / Trucks (1.72%)
Chrysler Corp. ........................................ 1,133 63,873
Cummins Engine Co., Inc. .............................. 67 3,434
Dana Corp. ............................................ 183 9,791
Eaton Corp. ........................................... 135 10,496
Echlin, Inc. .......................................... 110 5,397
Ford Motor Co. ........................................ 2,096 123,664
General Motors Corp. .................................. 1,235 82,513
PACCAR, Inc. .......................................... 136 7,106
Ryder System, Inc. .................................... 134 4,229
----------
310,503
----------
Banks - United States (7.46%)
Banc One Corp. ........................................ 1,128 62,956
Bank of New York Co., Inc. ............................ 658 39,932
BankAmerica Corp. ..................................... 1,211 104,676
BankBoston Corp. ...................................... 508 28,257
Bankers Trust New York Corp. .......................... 171 19,847
BB&T Corp. ............................................ 249 16,839
Chase Manhattan Corp. ................................. 1,472 111,136
Citicorp .............................................. 798 119,101
Comerica, Inc. ........................................ 275 18,219
Fifth Third Bancorp ................................... 406 25,578
First Chicago NBD Corp. ............................... 508 45,021
First Union Corp. ..................................... 1,689 98,384
Fleet Financial Group, Inc. ........................... 476 39,746
Huntington Bancshares, Inc. ........................... 334 11,189
KeyCorp ............................................... 767 27,324
Mellon Bank Corp. ..................................... 445 30,983
Mercantile Bancorp., Inc. ............................. 229 11,536
Morgan (J.P.) & Co., Inc. ............................. 310 36,309
National City Corp. ................................... 574 40,754
NationsBank Corp. ..................................... 1,642 125,613
Northern Trust Corp. .................................. 195 14,869
Norwest Corp. ......................................... 1,319 49,298
PNC Bank Corp. ........................................ 533 28,682
Providian Financial Corp. ............................. 166 13,041
Republic New York Corp. ............................... 190 11,958
State Street Corp. .................................... 281 19,530
Summit Bancorp ........................................ 307 14,582
SunTrust Banks, Inc. .................................. 368 29,923
Synovus Financial Corp. ............................... 459 10,901
U.S. Bancorp .......................................... 1,287 55,341
Wachovia Corp. ........................................ 360 30,420
Wells Fargo & Co. ..................................... 151 55,719
----------
1,347,664
----------
Beverages (3.07%)
Anheuser-Busch Cos., Inc. ............................. 856 40,392
Brown-Forman Corp. .................................... 121 7,774
Coca-Cola Co. (The) ................................... 4,320 369,360
Coors (Adolph) Co. (Class B) .......................... 65 2,210
PepsiCo, Inc. ......................................... 2,650 109,147
Seagram Co. Ltd. (The) (Canada) ....................... 623 25,504
----------
554,387
----------
Broker Services (0.46%)
Lehman Brothers Holdings, Inc. ........................ 178 13,806
Merrill Lynch & Co., Inc. ............................. 582 53,689
Schwab (Charles) Corp. ................................ 464 15,080
----------
82,575
----------
Building (0.61%)
Armstrong World Industries, Inc. ...................... 71 4,784
Black & Decker Corp. .................................. 166 10,126
Centex Corp. .......................................... 104 3,926
Fleetwood Enterprises, Inc. ........................... 64 2,560
Fluor Corp. ........................................... 146 7,446
Georgia-Pacific Corp. ................................. 162 9,548
Kaufman & Broad Home Corp. ............................ 68 2,159
Louisiana-Pacific Corp. ............................... 191 3,486
Masco Corp. ........................................... 289 17,484
Owens Corning ......................................... 93 3,796
Pulte Corp. ........................................... 74 2,211
Sherwin-Williams Co. .................................. 302 10,004
Snap-on, Inc. ......................................... 106 3,843
Stanley Works (The) ................................... 156 6,484
Weyerhauser Co. ....................................... 349 16,119
Willamette Industries, Inc. ........................... 194 6,208
----------
110,184
----------
Business Services - Misc. (0.16%)
Block, H & R, Inc. .................................... 183 7,709
Dun & Bradstreet Corp. ................................ 297 10,729
Equifax, Inc. ......................................... 262 9,514
----------
27,952
----------
Chemicals (1.20%)
Air Products & Chemicals, Inc. ........................ 412 16,480
Dow Chemical Co. ...................................... 396 38,288
Eastman Chemical Co. .................................. 137 8,528
Engelhard Corp. ....................................... 252 5,103
FMC Corp. * ........................................... 64 4,364
SEE NOTES TO FINANCIAL STATEMENTS.
95
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Chemicals (continued)
Grace (W.R.) & Co. .................................... 130 $2,218
Great Lakes Chemical Corp. ............................ 105 4,141
Hercules, Inc. ........................................ 169 6,950
Monsanto Co. .......................................... 1,036 57,886
Morton International, Inc. ............................ 228 5,700
Nalco Chemical Co. .................................... 116 4,075
Octel Corp. * ......................................... 26 517
PPG Industries, Inc. .................................. 311 21,634
Praxair, Inc. ......................................... 275 12,873
Rohm & Haas Co. ....................................... 107 11,121
Sigma-Aldrich Corp. ................................... 175 6,147
Union Carbide Corp. ................................... 215 11,476
----------
217,501
----------
Computers (8.36%)
Adobe Systems, Inc. ................................... 120 5,093
Apple Computer, Inc. * ................................ 232 6,656
Autodesk, Inc. ........................................ 81 3,129
Automatic Data Processing, Inc. ....................... 522 38,041
Bay Networks, Inc.* ................................... 384 12,384
Cabletron Systems, Inc.* .............................. 276 3,709
Ceridian Corp.* ....................................... 133 7,814
Cisco Systems, Inc.* .................................. 1,778 163,687
Cognizant Corp. ....................................... 283 17,829
Compaq Computer Corp. ................................. 2,885 81,862
Computer Associates International, Inc. ............... 954 53,007
Computer Sciences Corp.* .............................. 272 17,408
Data General Corp. * .................................. 85 1,270
Dell Computer Corp.* .................................. 1,140 105,806
EMC Corp.* ............................................ 866 38,808
First Data Corp. ...................................... 748 24,918
HBO & Co. ............................................. 736 25,944
Hewlett-Packard Co. ................................... 1,817 108,793
International Business Machines Corp. ................. 1,698 194,952
Microsoft Corp.* ...................................... 4,253 460,919
Novell, Inc.* ......................................... 613 7,816
Oracle Corp.* ......................................... 1,719 42,223
Parametric Technology Corp.* .......................... 448 12,152
Seagate Technology, Inc.* ............................. 423 10,073
Shared Medical Systems Corp. .......................... 44 3,231
Silicon Graphics, Inc.* ............................... 328 3,977
Sun Microsystems, Inc.* ............................... 659 28,625
3Com Corp.* ........................................... 619 18,996
Unisys Corp.* ......................................... 436 12,317
----------
1,511,439
----------
Consumer Products Misc. (0.04%)
American Greetings Corp. (Class A) .................... 127 6,469
Jostens, Inc. ......................................... 68 1,624
----------
8,093
----------
Containers (0.17%)
Bemis Co., Inc. ....................................... 93 3,801
Crown Cork & Seal Co., Inc. ........................... 224 10,640
Owens-Illinois, Inc.* ................................. 245 10,964
Sealed Air Corp. * .................................... 144 5,292
----------
30,697
----------
Cosmetics & Personal Care (0.77%)
Alberto Culver Co. (Class B) .......................... 99 2,871
Avon Products, Inc. ................................... 231 17,902
Gillette Co. .......................................... 1,956 110,881
International Flavors & Fragrances, Inc. .............. 191 8,297
----------
139,951
----------
Diversified Operations (2.40%)
AlliedSignal, Inc. .................................... 985 43,709
Corning, Inc. ......................................... 404 14,039
Crane Co. ............................................. 80 3,885
Du Pont (E.I.) De Nemours & Co. ....................... 1,976 147,459
Fortune Brands, Inc. .................................. 300 11,531
IKON Office Solutions, Inc. ........................... 235 3,422
ITT Industries, Inc. .................................. 207 7,737
Johnson Controls, Inc. ................................ 147 8,407
Laidlaw, Inc. (Canada) ................................ 574 6,996
Loews Corp. ........................................... 201 17,512
Minnesota Mining & Manufacturing Co. .................. 714 58,682
National Service Industries, Inc. ..................... 75 3,816
Tenneco, Inc. ......................................... 297 11,305
Textron, Inc. ......................................... 287 20,574
TRW, Inc. ............................................. 215 11,744
Tyco International Ltd. ............................... 999 62,937
----------
433,755
----------
Electronics (5.75%)
Advanced Micro Devices, Inc.* ......................... 248 4,232
AMP, Inc. ............................................. 384 13,200
Applied Materials, Inc.* .............................. 639 18,850
CBS Corp. ............................................. 1,242 39,433
Emerson Electric Co. .................................. 774 46,730
General Electric Co. .................................. 5,716 520,156
General Signal Corp. .................................. 87 3,132
Grainger (W.W.), Inc. ................................. 174 8,667
Honeywell, Inc. ....................................... 222 18,551
Intel Corp. ........................................... 2,857 211,775
KLA-Tencor Corp.* ..................................... 147 4,070
LSI Logic Corp.* ...................................... 247 5,696
Micron Technology, Inc. ............................... 370 9,181
Motorola, Inc. ........................................ 1,043 54,823
National Semiconductor Corp.* ......................... 287 3,785
Parker Hannifin Corp. ................................. 194 7,396
Raychem Corp. ......................................... 148 4,375
Rockwell International Corp. .......................... 351 16,870
Tektronix, Inc. ....................................... 88 3,113
Texas Instruments, Inc. ............................... 682 39,769
Thomas & Betts Corp. .................................. 96 4,728
----------
1,038,532
----------
Finance (2.45%)
Ahmanson (H.F.) & Co. ................................. 191 13,561
American Express Co. .................................. 812 92,568
Associates First Capital Corp. (Class A) .............. 1,443 110,931
Beneficial Corp. ...................................... 93 14,246
Golden West Financial Corp. ........................... 99 10,525
Household International, Inc. ......................... 561 27,910
MBNA Corp. ............................................ 875 28,875
Morgan Stanley, Dean Witter, Discover & Co. ........... 1,035 94,573
SunAmerica, Inc. ...................................... 341 19,586
Washington Mutual, Inc. ............................... 673 29,233
----------
442,008
----------
SEE NOTES TO FINANCIAL STATEMENTS.
96
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Food (2.24%)
Archer Daniels Midland Co. ............................ 998 $19,336
Bestfoods ............................................. 502 29,147
Campbell Soup Co. ..................................... 797 42,341
ConAgra, Inc. ......................................... 831 26,332
General Mills, Inc. ................................... 276 18,871
Heinz (H.J.) Co. ...................................... 638 35,808
Hershey Foods Corp. ................................... 250 17,250
Kellogg Co. ........................................... 718 26,970
Quaker Oats Co. ....................................... 242 13,295
Ralston Purina Group .................................. 187 21,844
Sara Lee Corp. ........................................ 826 46,204
Unilever N.V. PLC (Netherlands) ....................... 1,118 88,252
Wrigley (Wm.) Jr. Co. ................................. 203 19,894
----------
405,544
----------
Funeral Services & Related (0.10%)
Service Corp. International ........................... 440 18,865
----------
Household (0.24%)
Maytag Corp. .......................................... 166 8,196
Newell Co. ............................................ 278 13,848
Rubbermaid, Inc. ...................................... 262 8,695
Tupperware Corp. ...................................... 107 3,009
Whirlpool Corp. ....................................... 131 9,006
----------
42,754
----------
Instruments - Scientific (0.10%)
EG&G, Inc. ............................................ 79 2,370
Millipore Corp. ....................................... 76 2,071
Perkin-Elmer Corp. (The) .............................. 85 5,286
Thermo Electron Corp.* ................................ 264 9,026
----------
18,753
----------
Insurance (4.08%)
Aetna, Inc. ........................................... 260 19,792
Allstate Corp. (The) .................................. 749 68,580
American General Corp. ................................ 443 31,536
American International Group, Inc. .................... 1,225 178,850
Aon Corp. ............................................. 293 20,583
Chubb Corp. (The) ..................................... 297 23,871
CIGNA Corp. ........................................... 387 26,703
Cincinnati Financial Corp. ............................ 288 11,052
Conseco, Inc. ......................................... 329 15,381
General Re Corp. ...................................... 137 34,729
Hartford Financial Services Group Inc. (The) .......... 206 23,561
Jefferson Pilot Corp. ................................. 186 10,776
Lincoln National Corp. ................................ 179 16,356
Marsh & McLennan Cos., Inc. ........................... 445 26,895
MBIA, Inc. ............................................ 171 12,804
MGIC Investment Corp. ................................. 199 11,355
Progressive Corp. ..................................... 126 17,766
SAFECO Corp. .......................................... 247 11,223
St. Paul Cos., Inc. ................................... 402 16,909
Torchmark Corp. ....................................... 245 11,209
Transamerica Corp. .................................... 110 12,664
Travelers Group, Inc. ................................. 2,003 121,432
UNUM Corp. ............................................ 242 13,431
----------
737,458
----------
Leisure (1.35%)
Brunswick Corp. ....................................... 174 4,307
Disney (Walt) Co. (The) ............................... 1,179 123,869
Eastman Kodak Co. ..................................... 567 41,426
Harrah's Entertainment, Inc. * ........................ 176 4,092
Hasbro, Inc. .......................................... 221 8,688
Hilton Hotels Corp. ................................... 437 12,454
King World Productions, Inc. * ........................ 129 3,290
Marriott International, Inc. (Class A) ................ 446 14,439
Mattel, Inc. .......................................... 508 21,495
Mirage Resorts, Inc. * ................................ 313 6,671
Polaroid Corp. ........................................ 78 2,774
----------
243,505
----------
Machinery (0.63%)
Aeroquip-Vickers, Inc. ................................ 49 2,860
Briggs & Stratton Corp. ............................... 43 1,610
Case Corp. ............................................ 131 6,321
Caterpiller Tractor, Inc. ............................. 650 34,369
Cincinnati Milacron, Inc. ............................. 70 1,702
Cooper Industries, Inc. ............................... 211 11,592
Deere & Co. ........................................... 436 23,053
Dover Corp. ........................................... 388 13,289
Foster Wheeler Corp. .................................. 71 1,522
Harnischfeger Industries, Inc. ........................ 84 2,378
Ingersoll-Rand Co. .................................... 289 12,734
NACCO Industries, Inc. (Class A) ...................... 14 1,810
----------
113,240
----------
Media (1.77%)
Clear Channel Communications, Inc.* ................... 215 23,462
Comcast Corp. ......................................... 610 24,762
Dow Jones & Co., Inc. ................................. 168 9,366
Gannett Co., Inc. ..................................... 495 35,176
Harcourt General, Inc. ................................ 124 7,378
Knight-Ridder, Inc. ................................... 139 7,654
McGraw-Hill Cos., Inc. (The) .......................... 173 14,110
Meredith Corp. ........................................ 92 4,318
New York Times Co. (Class A) .......................... 168 13,314
Tele-Communications, Inc. (Class A)* .................. 886 34,056
Time Warner, Inc. ..................................... 1,010 86,292
Times Mirror Co. (Class A) ............................ 155 9,746
Tribune Co. ........................................... 215 14,795
Viacom, Inc. (Class B)* ............................... 617 35,940
----------
320,369
----------
Medical (10.21%)
Abbott Laboratories ................................... 2,672 109,218
Allergan, Inc. ........................................ 114 5,287
ALZA Corp.* ........................................... 149 6,444
American Home Products Corp. .......................... 2,270 117,472
Amgen, Inc.* .......................................... 460 30,073
Bard (C.R.), Inc. ..................................... 99 3,768
Bausch & Lomb, Inc. ................................... 97 4,862
Baxter International, Inc. ............................ 489 26,314
Becton Dickinson & Co. ................................ 213 16,534
Biomet, Inc. .......................................... 195 6,447
Boston Scientific Corp.* .............................. 340 24,352
Bristol-Myers Squibb Co. .............................. 1,737 199,646
Cardinal Health, Inc. ................................. 192 18,000
Columbia/HCA Healthcare Corp. ......................... 1,131 32,940
Guidant Corp. ......................................... 263 18,755
HEALTHSOUTH Corp.* .................................... 688 18,361
Humana, Inc.* ......................................... 286 8,920
SEE NOTES TO FINANCIAL STATEMENTS.
97
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Medical (continued)
Johnson & Johnson ..................................... 2,349 $173,239
Lilly (Eli) & Co. ..................................... 1,938 128,029
Mallinckrodt, Inc. .................................... 128 3,800
Manor Care, Inc. ...................................... 111 4,267
Medtronic, Inc. ....................................... 819 52,211
Merck & Co., Inc. ..................................... 2,093 279,939
Pall Corp. ............................................ 218 4,469
Pfizer, Inc. .......................................... 2,259 245,525
Pharmacia & Upjohn, Inc. .............................. 886 40,867
Schering-Plough Corp. ................................. 1,279 117,188
St. Jude Medical, Inc. * .............................. 160 5,890
Tenet Healthcare Corp.* ............................... 535 16,719
United Healthcare Corp. ............................... 329 20,891
United States Surgical Corp. .......................... 132 6,023
Warner-Lambert Co. .................................... 1,428 99,067
----------
1,845,517
----------
Metal (0.69%)
Alcan Aluminium Ltd. (Canada) ......................... 397 10,967
Aluminum Co. of America ............................... 301 19,847
Armco, Inc. * ......................................... 189 1,205
ASARCO, Inc. .......................................... 70 1,558
Barrick Gold Corp. (Canada) ........................... 651 12,491
Battle Mountain Gold Co. .............................. 401 2,381
Bethlehem Steel Corp. * ............................... 197 2,450
Cyprus Amax Minerals Co. .............................. 163 2,160
Freeport-McMoRan Copper & Gold, Inc. .................. 338 5,133
Homestake Mining Co. .................................. 256 2,656
Illinois Tool Works, Inc. ............................. 436 29,076
Inco, Ltd. (Canada) ................................... 292 3,979
Newmont Mining Corp. .................................. 273 6,450
Phelps Dodge Corp. .................................... 103 5,890
Placer Dome, Inc. (Canada) ............................ 432 5,076
Reynolds Metals Co. ................................... 129 7,216
Timken Co. (The) ...................................... 110 3,389
Worthington Industries, Inc. .......................... 169 2,546
----------
124,470
----------
Mortgage Banking (1.05%)
Countrywide Credit Industries, Inc. ................... 190 9,643
Fannie Mae ............................................ 1,853 112,570
Federal Home Loan Mortgage Corp. ...................... 1,214 57,134
Green Tree Financial Corp. ............................ 238 10,189
----------
189,536
----------
Office (0.55%)
Avery Dennison Corp. .................................. 179 9,621
Deluxe Corp. .......................................... 142 5,085
Moore Corp., Ltd. (Canada) ............................ 155 2,054
Pitney Bowes, Inc. .................................... 506 24,351
Xerox Corp. ........................................... 569 57,825
----------
98,936
----------
Oil & Gas (6.77%)
Amerada Hess Corp. .................................... 160 8,690
Amoco Corp. ........................................... 1,700 70,763
Anadarko Petroleum Corp. .............................. 105 7,055
Apache Corp. .......................................... 167 5,261
Ashland, Inc. ......................................... 131 6,763
Atlantic Richfield Co. ................................ 560 43,750
Baker Hughes, Inc. .................................... 296 10,231
Burlington Resources, Inc. ............................ 308 13,263
Chevron Corp. ......................................... 1,147 95,273
Coastal Corp. (The) ................................... 185 12,915
Columbia Energy Group ................................. 145 8,066
Dresser Industries, Inc. .............................. 307 13,527
Enron Corp. ........................................... 544 29,410
Exxon Corp. ........................................... 4,307 307,143
Halliburton Co. ....................................... 458 20,410
Helmerich & Payne, Inc. ............................... 88 1,958
Kerr-McGee Corp. ...................................... 83 4,804
McDermott International, Inc. ......................... 98 3,375
Mobil Corp. ........................................... 1,370 104,976
Occidental Petroleum Corp. ............................ 592 15,984
Oryx Energy Co.* ...................................... 185 4,093
Pennzoil Co. .......................................... 83 4,202
Phillips Petroleum Co. ................................ 460 22,166
Rowan Cos., Inc.* ..................................... 151 2,935
Royal Dutch Petroleum Co. (Netherlands) ............... 3,745 205,273
Schlumberger, Ltd. .................................... 869 59,364
Sonat, Inc. ........................................... 192 7,416
Sun Co., Inc. ......................................... 125 4,852
Texaco, Inc. .......................................... 957 57,121
Union Pacific Resources Group ......................... 443 7,780
Unocal Corp. .......................................... 431 15,408
USX - Marathon Group .................................. 504 17,293
Western Atlas, Inc. * ................................. 95 8,063
Williams Cos., Inc. (The) ............................. 718 24,232
----------
1,223,815
----------
Paper & Paper Products (0.69%)
Ball Corp. ............................................ 53 2,130
Boise Cascade Corp. ................................... 98 3,210
Champion International Corp. .......................... 168 8,264
Fort James Corp. ...................................... 365 16,242
International Paper Co. ............................... 528 22,704
Kimberly-Clark Corp. .................................. 971 44,545
Mead Corp. (The) ...................................... 183 5,810
Potlatch Corp. ........................................ 51 2,142
Stone Container Corp. * ............................... 174 2,719
Temple-Inland, Inc. ................................... 99 5,334
Union Camp Corp. ...................................... 122 6,054
Westvaco Corp. ........................................ 178 5,029
----------
124,183
----------
Pollution Control (0.22%)
Browning-Ferris Industries, Inc. ...................... 339 11,780
Waste Management, Inc. ................................ 795 27,825
----------
39,605
----------
Printing - Commercial (0.06%)
Donnelley (R.R.) & Sons ............................... 255 11,666
----------
Retail (5.70%)
Abercrombie & Fitch Co. (Class A)* .................... 6 264
Albertson's, Inc. ..................................... 429 22,227
American Stores Co. ................................... 477 11,537
AutoZone, Inc.* ....................................... 266 8,495
Cendant Corp. * ....................................... 1,415 29,538
Circuit City Stores, Inc. ............................. 172 8,063
Consolidated Stores Corp.* ............................ 188 6,815
Costco Cos., Inc.* .................................... 374 23,585
CVS Corp. ............................................. 668 26,010
Darden Restaurants, Inc. .............................. 259 4,112
SEE NOTES TO FINANCIAL STATEMENTS.
98
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Retail (continued)
Dayton Hudson Corp. ................................... 764 $37,054
Dillards, Inc. ........................................ 194 8,039
Federated Department Stores, Inc.* .................... 366 19,695
Gap, Inc. (The) ....................................... 691 42,583
Genuine Parts Co. ..................................... 312 10,784
Giant Foods, Inc. (Class A) ........................... 105 4,522
Great Atlantic & Pacific Tea Co., Inc. ................ 67 2,215
Home Depot, Inc. (The) ................................ 1,278 106,154
Kmart Corp.* .......................................... 852 16,401
Kroger Co.* ........................................... 445 19,079
Limited, Inc. (The) ................................... 476 15,767
Longs Drug Stores Corp. ............................... 67 1,935
Lowe's Cos., Inc. ..................................... 610 24,743
May Department Stores ................................. 404 26,462
McDonald's Corp. ...................................... 1,203 83,007
Mercantile Stores Co., Inc. ........................... 64 5,052
Nordstrom, Inc. ....................................... 135 10,429
Penney (J.C.) Co., Inc. ............................... 437 31,601
Pep Boys - Manny, Moe & Jack (The) .................... 111 2,102
Reebok International Ltd. * ........................... 98 2,713
Rite Aid Corp. ........................................ 450 16,903
Sears, Roebuck & Co. .................................. 685 41,828
SUPERVALU, Inc. ....................................... 105 4,659
Sysco Corp. ........................................... 594 15,221
Tandy Corp. ........................................... 181 9,604
TJX Cos., Inc. ........................................ 564 13,606
Toys "R" Us, Inc.* .................................... 496 11,687
Tricon Global Restaurants, Inc.* ...................... 265 8,397
Venator Group, Inc. * ................................. 236 4,514
Wal-Mart Stores, Inc. ................................. 3,923 238,322
Walgreen Co. .......................................... 865 35,735
Wendy's International, Inc. ........................... 231 5,429
Winn-Dixie Stores, Inc. ............................... 260 13,309
----------
1,030,197
----------
Rubber - Tires & Misc (0.11%)
Cooper Tire & Rubber Co ............................... 138 2,846
Goodyear Tire & Rubber Co. (The) ...................... 273 17,591
----------
20,437
----------
Shoes & Related Apparel (0.14%)
Nike, Inc. (Class B) .................................. 508 24,733
----------
Soap & Cleaning Preparations (1.57%)
Clorox Co. ............................................ 181 17,263
Colgate-Palmolive Co. ................................. 517 45,496
Ecolab, Inc. .......................................... 225 6,975
Procter & Gamble Co. (The) ............................ 2,345 213,542
----------
283,276
----------
Steel (0.12%)
Allegheny Teledyne, Inc. .............................. 342 7,823
Inland Steel Industries, Inc. ......................... 86 2,424
Nucor Corp. ........................................... 154 7,084
USX-U.S. Steel Group, Inc. ............................ 150 4,950
----------
22,281
----------
Telecommunications (5.21%)
A T & T Corp. ......................................... 2,837 162,064
Airtouch Communications, Inc. * ....................... 986 57,619
Andrew Corp.* ......................................... 155 2,800
Bell Atlantic Corp. ................................... 2,712 123,735
DSC Communications Corp. * ............................ 206 6,180
General Instrument Corp. * ............................ 258 7,014
Harris Corp. .......................................... 140 6,256
Lucent Technologies, Inc. ............................. 2,273 189,085
MCI Communications Corp. .............................. 1,217 70,738
MediaOne Group, Inc. * ................................ 1,060 46,574
Nextel Communications, Inc. (Class A)* ................ 459 11,418
Northern Telecom Ltd. (Canada) ........................ 909 51,586
Scientific-Atlanta, Inc. .............................. 138 3,502
Sprint Corp. .......................................... 751 52,946
Tellabs, Inc.* ........................................ 317 22,705
U S WEST, Inc. ........................................ 872 40,984
WorldCom, Inc.* ....................................... 1,769 85,686
----------
940,892
----------
Textile (0.14%)
Fruit of the Loom, Inc. (Class A)* .................... 128 4,248
Liz Claiborne, Inc. ................................... 117 6,113
Russell Corp. ......................................... 64 1,932
Springs Industries, Inc. .............................. 35 1,614
VF Corp. .............................................. 213 10,970
----------
24,877
----------
Tobacco (0.97%)
Philip Morris Cos., Inc. .............................. 4,235 166,753
UST, Inc. ............................................. 322 8,694
----------
175,447
----------
Transport (0.94%)
AMR Corp.* ............................................ 318 26,473
Burlington Northern Santa Fe Corp. .................... 273 26,805
CSX Corp. ............................................. 381 17,335
Delta Air Lines, Inc. ................................. 130 16,802
FDX Corp. * ........................................... 256 16,064
Navistar International Corp. * ........................ 126 3,638
Norfolk Southern Corp. ................................ 659 19,646
Southwest Airlines Co. ................................ 386 11,435
Union Pacific Corp. ................................... 432 19,062
US Airways Group, Inc.* ............................... 159 12,601
----------
169,861
----------
Utilities (4.69%)
Alltel Corp. .......................................... 321 14,926
Ameren Corp. .......................................... 240 9,540
American Electric Power Co., Inc. ..................... 331 15,019
Ameritech Corp. ....................................... 1,912 85,801
Baltimore Gas & Electric Co. .......................... 258 8,014
BellSouth Corp. ....................................... 1,732 116,260
Carolina Power & Light Co. ............................ 263 11,408
Central & South West Corp. ............................ 371 9,971
Cinergy Corp. ......................................... 275 9,625
Consolidated Edison, Inc. ............................. 410 18,886
Consolidated Natural Gas Co. .......................... 167 9,832
Dominion Resources, Inc. .............................. 338 13,773
DTE Energy Co. ........................................ 253 10,215
Duke Energy Corp. ..................................... 629 37,268
Eastern Enterprises ................................... 36 1,544
Edison International .................................. 666 19,689
Entergy Corp. ......................................... 426 12,248
FirstEnergy Corp. * ................................... 402 12,362
FPL Group, Inc. ....................................... 318 20,034
Frontier Corp. ........................................ 287 9,041
SEE NOTES TO FINANCIAL STATEMENTS.
99
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. 500 Index Fund
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Utilities (continued)
GPU, Inc. ............................................. 222 $8,394
GTE Corp. ............................................. 1,672 93,005
Houston Industries, Inc. .............................. 494 15,252
Niagara Mohawk Power Corp. * .......................... 252 3,764
NICOR, Inc. ........................................... 84 3,371
Northern States Power Co. ............................. 260 7,443
ONEOK, Inc. ........................................... 54 2,153
PP&L Resources, Inc. .................................. 290 6,579
PacifiCorp ............................................ 518 11,720
PECO Energy Co. ....................................... 389 11,354
People's Energy Corp. ................................. 62 2,395
PG&E Corp. ............................................ 766 24,177
Public Service Enterprise Group, Inc. ................. 405 13,947
SBC Communications, Inc. .............................. 3,202 128,080
Sempra Energy* ........................................ 219 6,077
Southern Co. .......................................... 1,205 33,363
Texas Utilities Co. ................................... 430 17,899
Unicom Corp. .......................................... 378 13,254
----------
847,683
----------
TOTAL COMMON STOCKS
(Cost $12,298,015) (86.38%) 15,610,740
------- ----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (13.03%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. -
Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Notes,
5.00% thru 7.50% due 02-15-99
thru 11-15-01) - Note B.................. 5.75% $2,355 $2,355,000
-----------
TOTAL SHORT-TERM INVESTMENTS (13.03%) 2,355,000
-------- -----------
TOTAL INVESTMENTS (99.41%) 17,965,740
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.59%) 107,229
-------- -----------
TOTAL NET ASSETS (100.00%) $18,072,969
======== ===========
* 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.
100
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Sovereign Bond Fund on June 30, 1998. It is divided into three main
catagories: bonds, warrants and short-term investments. Bonds and warrants are
further broken down by industry group. Short-term investments, which represent
the Fund's "cash" position, are listed last.
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
BONDS
Automobile / Trucks (0.62%)
ERAC USA Finance Co.,
Note 02-15-05 (R) ............... 6.625% BBB $19 $18,825
Ford Motor Co.,
Bond 02-15-28 ................... 6.625 A 5 5,004
Deb 11-15-25 .................... 7.125 A 15 15,964
-----------
39,793
-----------
Banks - Foreign (0.91%)
Landeskreditbank Baden-
Wuerttemberg, Sub Note
(Germany) 02-01-23 (Y) .......... 7.625 AAA 15 17,412
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 ........... 10.125 A+ 15 17,778
Scotland International Finance
No. 2 B.V., Gtd Sub Note
(Netherlands) 11-01-06 (R) (Y) .. 8.850 A+ 20 23,223
-----------
58,413
-----------
Banks - United States (1.23%)
Banc One Corp.,
Sub Deb 10-15-26 ................ 7.625 A+ 10 11,133
BankBoston NA,
Sub Note 03-25-08 ............... 6.375 A2 15 14,992
Fleet Financial Group, Inc.,
Sub Note 05-15-08 ............... 6.375 A- 20 20,201
National Westminster Bank Plc -
New York Branch,
Sub Note 05-01-01 ............... 9.450 AA- 5 5,427
NB Capital Trust IV,
Gtd Cap Security 04-15-27 ...... 8.250 A- 25 27,921
-----------
79,674
-----------
Broker Services (0.16%)
Salomon Smith Barney Holdings, Inc.,
Note 10-15-02 ................... 6.500 A 10 10,113
-----------
Building (0.15%)
M.D.C. Holdings, Inc.,
Sr Note 02-01-08 ................ 8.375 BB- 10 10,000
-----------
Computers (0.40%)
Dell Computer Corp.,
Sr Deb 04-15-28 ................. 7.100 BBB 25 25,535
-----------
Cosmetics & Personal Care (0.15%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) ............ 11.000 B+ 10 9,875
-----------
Electronics (0.14%)
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) ........ 9.500 B 12 8,760
-----------
Energy (0.81%)
AES Corp.,
Sr Sub Note 07-15-06 ............ 10.250 B+ 10 10,877
Sr Sub Note 08-15-07 ............ 8.375 B+ 23 23,230
CalEnergy Company, Inc.,
Sr Note 09-15-06 ................ 9.500 BB+ 10 10,857
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) ........ 9.625 B 7 7,192
-----------
52,154
-----------
Finance (4.79%)
Constitution Capital Trust I,
Gtd Cap Security 04-15-27 (R) ... 9.150 BBB 3 3,375
DR Investments,
Sr Note 05-15-07 (R) ............ 7.450 A- 20 21,214
EES Coke Battery Co. Inc.,
Sr Sec Note Ser A 04-15-12 (R) .. 7.125 BBB 8 8,678
Ford Capital, B.V.,
Gtd Deb (Netherlands)
05-15-02 (Y) .................... 9.875 A 50 56,185
General Motors Acceptance Corp.,
Medium Term Note 04-06-00 ...... 5.850 A2 45 44,953
JCP Master Credit Card Trust,
Pass Thru Ctf Ser C Class A
06-15-00 ........................ 9.625 AA+ 95 100,663
United Companies Financial Corp.,
Sr Note 01-15-04 ................ 7.700 BB+ 5 4,948
WMC Finance USA,
Gtd Note (Australia) 11-15-03 (Y) 6.500 A 65 65,116
Yanacocha Receivables Master Trust,
Pass Thru Cert Ser 1997-A
06-15-05 (R) .................... 8.400 BBB- 4 3,739
-----------
308,871
-----------
Funeral Services & Related (0.40%)
Loewen Group International, Inc.,
Gtd Sr Note Ser 4 10-15-03 ...... 8.250 BB+ 25 25,625
-----------
Glass Products (0.05%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico)
05-15-07 (R) (Y) ................ 11.375 B+ 3 3,075
-----------
Government - Foreign (0.56%)
Federative Republic of Brazil,
Global Bond (Brazil) 04-07-08 (Y) 9.375 BB- 15 13,331
Panama, Republic of,
Note (Panama) 02-13-02 (R) (Y) .. 7.875 BB+ 23 22,540
-----------
35,871
-----------
Government - U.S. (42.72%)
United States Treasury,
Bond 08-15-17 ................... 8.875 AAA 77 104,972
Bond 02-15-23 ................... 7.125 AAA 620 733,441
Note 11-30-99 ................... 7.750 AAA 67 68,999
Note 05-15-01 ................... 8.000 AAA 417 443,975
Note 05-15-02 ................... 7.500 AAA 256 273,201
Note 08-15-03 ................... 5.750 AAA 133 134,412
Note 02-15-05 ................... 7.500 AAA 442 489,237
Note 07-15-06 ................... 7.000 AAA 466 508,886
-----------
2,757,123
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
101
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Government - U.S. Agencies (15.01%)
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf 03-01-24 + .. 6.500% AAA $355 $353,555
30 Yr Pass Thru Ctf 01-01-28 .... 6.000 AAA 25 24,152
Note 02-15-11 + ................. 6.500 AAA 45 45,253
Pass Thru Ctf 01-20-08 + ........ 6.000 AAA 125 121,679
Pass Thru Ctf Ser 1997-M8
Class A-1 01-25-22 ............. 6.940 AAA 3 3,041
Government National Mortgage Assn ,
30 Yr Pass Thru Ctf 08-01-24 + .. 7.000 AAA 355 360,655
30 Yr Pass Thru Ctf 07-15-26
to 08-15-27 .................... 8.000 AAA 58 60,103
-----------
968,438
-----------
Household (0.23%)
WestPoint Stevens Inc.,
Sr Note 06-15-05 (R) ............ 7.875 BB 15 15,113
-----------
Insurance (1.98%)
Conseco, Inc.,
Note 06-15-05 ................... 6.800 BBB 15 15,025
Equitable Life Assurance Society
of the United States,
Surplus Note 12-01-05 (R) ....... 6.950 A 15 15,572
Fairfax Financial Holdings Ltd.,
Note (Canada) 04-15-26 (Y) ...... 8.300 BBB+ 15 17,022
Liberty Mutual Insurance Co.,
Surplus Note 05-04-07 (R) ....... 8.200 A+ 5 5,640
Surplus Note 10-15-26 (R) ....... 7.875 A2 15 16,929
Massachusetts Mutual Life
Insurance Co.,
Surplus Note 11-15-23 (R) ....... 7.625 AA 5 5,670
NAC Re Corp.,
Note 06-15-99 ................... 8.000 A- 5 5,084
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) ....... 7.500 AA- 5 5,224
Phoenix Home Life Mutual
Insurance Co.,
Surplus Note 12-01-06 (R) ....... 6.950 A+ 15 15,434
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) ....... 6.625 AA 20 20,710
URC Holdings Corp.,
Sr Note 06-30-06 (R) ............ 7.875 A- 5 5,393
-----------
127,703
-----------
Leisure (0.30%)
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas)
03-15-07 (Y) ................... 9.000 B+ 8 8,380
Gtd Sr Sub Note (Bahamas)
12-15-07 (Y) ................... 8.625 B+ 5 5,150
Trump Hotels & Casino Resorts
Funding, Inc./Holdings, L.P.,
Sr Note 06-15-05 ................ 15.500 B- 5 5,625
-----------
19,155
-----------
Media (2.77%)
Adelphia Communications Corp.,
Sr Note 07-15-03 (R) ............ 8.125 B 12 11,932
Sr Note Ser B 10-01-02 .......... 9.250 B2 17 17,595
Clear Channel Communications,
Inc., Deb 10-15-27 .............. 7.250 BBB- 25 25,758
Comcast Corp.,
Sr Sub Deb 07-15-12 ............. 10.625 BB+ 4 5,160
Cumulus Media Inc.,
Sr Sub Note 07-01-08 ............ 10.375 CCC+ 5 5,069
Garden State Newspapers, Inc.,
Sr Sub Note 10-01-09 ............ 8.750 B+ 7 7,105
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ... 10.625 BBB- 19 20,867
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 ............. 8.250 BBB- 18 20,309
OpTel, Inc.,
Sr Note 07-01-08 (R) + .......... 11.500 B- 10 10,000
Rogers Cablesystems Ltd.,
Sec Second Priority Note
(Canada) 08-01-02 (Y) ........... 9.625 BB+ 21 22,470
TeleWest Communications Plc,
Sr Deb (United Kingdom)
10-01-06 (Y) .................... 9.625 B+ 2 2,110
Time Warner, Inc.,
Deb 01-15-13 .................... 9.125 BBB- 18 21,907
TKR Cable I, Inc.,
Sr Deb 10-30-07 ................. 10.500 BBB- 8 8,801
-----------
179,083
-----------
Medical (1.53%)
Dynacare Inc.,
Sr Note (Canada) 01-15-06 (Y) ... 10.750 B+ 7 7,403
Fresenius Medical Care
Capital Trust II,
Trust Preferred Security
02-01-08 ........................ 7.875 B+ 10 9,900
Integrated Health Services Inc.,
Sr Sub Note 01-15-08 ............ 9.250 B- 16 16,620
PharMerica, Inc.,
Sr Sub Note 04-01-08 (R) ........ 8.375 B 6 6,030
Physician Sales & Service, Inc.,
Gtd Sr Sub Note 10-01-07 ........ 8.500 B+ 9 9,270
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 ............ 10.750 B+ 3 3,353
Sola International, Inc.,
Note 03-15-08 ................... 6.875 BBB- 10 9,994
Tenet Healthcare Corp.,
Sr Sub Note 01-15-07 ............ 8.625 BB- 13 13,325
Sr Sub Note 12-01-08 (R) ........ 8.125 BB- 8 8,010
Vencor, Inc.,
Sr Sub Note 05-01-05 (R) ........ 9.875 B- 5 4,888
Watson Pharmaceuticals, Inc.,
Sr Note 05-15-08 ................ 7.125 BBB- 10 10,138
-----------
98,931
-----------
Metal (0.12%)
Freeport-McMoRan Copper &
Gold, Inc.,
Sr Note 11-15-26 ................ 7.200 CCC+ 10 8,044
-----------
Mortgage Banking (5.47%)
Citibank Credit Card Master Trust I,
Pass Thru Ctf Ser 1997-7 Class A
08-15-02 ........................ 6.350 AAA 45 45,359
ContiFinancial Corp.,
Sr Note 03-15-02 ................ 7.500 BB+ 18 18,061
SEE NOTES TO FINANCIAL STATEMENTS.
102
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Mortgage Banking (continued)
ContiMortgage Home Equity
Loan Trust,
Pass Thru Ctf Ser 1995-2
Class A-5 08-15-25 .............. 8.100% AAA $10 $10,405
CS First Boston Mortgage
Securities Corp., Commercial
Mtg Pass Thru Ctf Ser 1998-C1
Class A-1A 12-17-07 ............. 6.260 AAA 25 25,191
EQCC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-3
Class A-9 02-15-29 .............. 6.570 AAA 25 25,401
First Plus Home Loan Trust,
Pass Thru Ctf Ser 1997-1
Class A-6 12-10-15 .............. 6.950 AAA 5 5,047
GMAC Commercial Mortgage
Securities, Inc.,
Pass Thru Ctf Ser 1997-C2
Class A-3 11-15-07 .............. 6.566 AAA 25 25,609
Homeside Lending Inc.,
Med Term Sr Note 05-15-03 ....... 6.200 A+ 25 24,925
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1998-1
Class A-4 03-20-25 .............. 6.600 Aaa 15 15,017
Money Store Home Equity Trust
(The), Pass Thru Ctf Ser 1997-D
Class AF-7 12-15-38 ............. 6.485 AAA 16 16,230
Morgan Stanley Capital I, Inc.,
Pass Thru Ctf Ser 1997-WF1
Class A1 10-15-06 (R) ........... 6.830 AAA 107 110,352
Nomura Asset Securities Corp.,
Pass Thru Ctf Ser 1998-D6
Class A-1A 03-17-28 ............. 6.280 AAA 15 14,891
Salomon Brothers Mortgage
Securities VII, Inc.,
Mtg Pass Thru Ctf Ser 1997-HUD2
Class A-2 07-25-24 .............. 6.750 Aaa 6 6,098
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-A1
Class A-8 06-15-28 .............. 7.220 AAA 10 10,238
-----------
352,824
-----------
Oil & Gas (1.19%)
Camuzzi Gas Pampeana S.A.,
Bond (Argentina) 12-15-01 (Y) ... 9.250 BBB- 10 10,075
Norsk Hydro ASA,
Deb (Norway) 10-01-16 (Y) ....... 7.500 A 20 22,371
Petroleum Geo-Services,
Sr Note (Norway) 03-30-08 (Y) ... 6.625 BBB 15 15,027
Union Pacific Resources Group, Inc.,
Deb 05-15-28 .................... 7.150 BBB 15 15,002
YPF Sociedad Anonima,
Sr Note (Argentina) 03-15-03 (Y) 7.250 BBB- 15 14,576
-----------
77,051
-----------
Paper & Paper Products (0.21%)
Fort James Corp.,
Sr Note 09-15-02 ................ 6.500 BBB- 5 5,035
Repap New Brunswick,
Sr Note (Canada) 04-15-05 (Y) ... 10.625 CCC+ 5 5,050
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 ...... 12.000 B+ 3 3,315
-----------
13,400
-----------
Real Estate Investment Trust (0.55%)
American Health Properties, Inc.,
Note 01-15-07 ................... 7.500 BBB- 20 20,512
Liberty Property L.P.,
Med Term Note 06-05-02 .......... 6.600 BBB- 10 10,010
TriNet Corporate Realty Trust, Inc.,
Note 05-15-01 ................... 7.300 BBB- 5 5,079
-----------
35,601
-----------
Retail (0.11%)
Southern Foods Group L.P.,
Sr Sub Note 09-01-07 (R) ........ 9.875 B 7 7,298
-----------
Steel (0.20%)
Bayou Steel Corp.,
1st Mtg Bond 05-15-08 (R) ....... 9.500 B 10 9,913
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) ... 11.500 B+ 3 3,293
-----------
13,206
-----------
Telecommunications (3.54%)
Compagnie De Radiocomunicaciones
Moviles S.A.,
Bond (Argentina)
05-08-08 (R) (Y) ................ 9.250 BBB- 3 2,880
Esprit Telecom Group Plc,
Sr Note (United Kingdom)
06-15-08 (R) (Y) ................ 10.875 B- 10 9,900
Facilicom International,
Sr Note 01-15-08 (R) ............ 10.500 B- 10 9,800
FLAG Ltd.,
Sr Note (Bermuda)
01-30-08 (R) (Y) ................ 8.250 B+ 16 16,120
GTE Corp.,
Deb 04-15-28 .................... 6.940 A 35 35,438
MCI Communications Corp.,
Sr Note 04-15-10 ................ 6.500 A 20 20,025
McLeodUSA Inc.,
Sr Note 03-15-08 (R) ............ 8.375 B+ 13 13,033
MetroNet Communications Corp.,
Sr Note (Canada) 08-15-07 (Y) ... 12.000 B 5 5,750
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%,
02-15-99) 08-15-04 (A) ......... Zero CCC+ 31 30,148
Sr Disc Note, Step Coupon (9.95%,
02-15-03) 02-15-08 (A) (R) ..... Zero CCC+ 10 6,375
NEXTLINK Communications, Inc.,
Sr Note 10-01-07 ................ 9.625 B 7 7,140
Sr Note 03-15-08 (R) ............ 9.000 B 6 6,000
Paging Network, Inc.,
Sr Sub Note 10-15-08 ............ 10.000 B 10 10,325
Qwest Communications
International, Inc.,
Sr Note Ser B 04-01-07 .......... 10.875 BB+ 4 4,610
Satelites Mexicanos S.A. de C.V.,
Sr Note (Mexico) 11-01-04 (R) (Y) 10.125 B- 5 4,875
TCI Communications, Inc.,
Sr Deb 08-01-15 ................. 8.750 BBB- 22 26,486
Teligent, Inc.,
Sr Note 12-01-07 ................ 11.500 CCC 11 11,138
SEE NOTES TO FINANCIAL STATEMENTS.
103
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Telecommunications (continued)
Viatel, Inc.,
Unit (Sr Note & Preferred Stock
Ser A) 04-15-08 (R) ............. 11.250% Caa1 $8 $8,380
-----------
228,423
-----------
Textile (0.62%)
Tommy Hilfiger USA,
Gtd Note 06-01-03 ............... 6.500 BBB- 15 15,056
Tropical Sportswear International Corp.,
Sr Sub Note 06-15-08 (R) ........ 11.000 B- 10 10,025
Unifi, Inc.,
Note 02-01-08 ................... 6.500 A- 15 14,831
-----------
39,912
-----------
Tobacco (0.65%)
Philip Morris,
Note 08-15-02 ................... 7.125 A 10 10,259
RJR Nabisco, Inc.,
Note 12-01-02 ................... 8.625 BBB- 21 21,676
Note 09-15-03 ................... 7.625 BBB- 10 9,943
-----------
41,878
-----------
Transport (1.64%)
America West Airlines, Inc.,
Pass Thru Ctf Ser B 01-02-08 .... 6.930 A- 5 4,902
Continental Airlines, Inc.,
Pass Thru Ctf Ser 972C 06-30-04 . 7.206 BBB 20 20,588
Enterprises Shipholding Corp.,
Sr Note (Greece) 05-01-08 (R) (Y) 8.875 BB 8 7,840
Fine Air Services, Inc.,
Sr Note 06-01-08 (R) ............ 9.875 B 15 14,663
Northwest Airlines, Inc.,
Gtd Note 03-15-04 ............... 8.375 BB 15 15,467
Pass Thru Ctf Ser 1996-1D
01-02-15 ........................ 8.970 BBB- 5 5,508
NWA Trust,
Sr Note Ser A 06-21-14 .......... 9.250 A2 4 4,385
U.S. Airways, Inc.,
Pass Thru Ctf Ser 1990-A1
03-19-05 ........................ 11.200 BB 22 24,853
Wisconsin Central Transportation Corp.,
Note 04-15-08 ................... 6.625 BBB- 8 7,948
-----------
106,154
-----------
Utilities (3.58%)
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 ... 9.000 BB- 23 26,302
BVPS II Funding Corp.,
Collateralized Lease Bond
06-01-17 ........................ 8.890 BB- 5 5,781
Calpine Corp.,
Sr Note 07-15-07 ................ 8.750 BB- 8 8,220
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 .......... 9.500 BB+ 23 25,405
Sr Sec Note 11-01-17 ............ 7.880 BB+ 20 21,830
CMS Energy Corp.,
Sr Note 05-15-02 ................ 8.125 BB 5 5,144
First PV Funding Corp.,
Deb Ser 86B 01-15-16 ............ 10.150 BB- 2 2,130
Hydro-Quebec,
Gtd Bond (Canada) 02-01-21 (Y) .. 9.400 A+ 15 19,945
Gtd Bond (Canada) 01-15-22 (Y) .. 8.400 A+ 20 24,419
Iberdrola International B.V.,
Note 10-01-02 ................... 7.500 AA- 15 15,695
Long Island Lighting Co.,
Deb 07-15-19 .................... 8.900 A- 3 3,179
Deb 11-01-22 .................... 9.000 A- 10 11,406
Niagara Mohawk Power Corp.,
Sr Note Ser G 10-01-08 .......... 7.750 BB- 10 10,238
North Atlantic Energy Corp.,
1st Mtg Ser A 06-01-02 .......... 9.050 B+ 8 8,223
Puget Sound Energy Capital Trust I,
Gtd Cap Security Ser B 06-01-27 . 8.231 Baa2 15 15,594
U.S. West Capital Funding Inc.,
Gtd Bond 07-15-28 ............... 6.875 A- 10 10,001
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond
01-02-17 ........................ 8.090 BBB- 17 17,621
-----------
231,133
-----------
TOTAL BONDS
(Cost $5,947,492) (92.79%) 5,988,229
------- -----------
NUMBER OF
SHARES
------
WARRANTS
Telecommunications (0.00%)
MetroNet Communications Corp. (Canada) (Y) (R).. 5 240
-----------
TOTAL WARRANTS
(Cost $51) (0.00%) 240
------- -----------
SEE NOTES TO FINANCIAL STATEMENTS.
104
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Bond Fund
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (15.62%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. -
Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Bond,
9.125%, due 05-15-18 and U.S.
Treasury Notes, 5.000% thru
8.750%, due 12-31-98 thru
04-30-03) - Note B..................... 5.750% $1,008 $1,008,000
----------
Corporate Savings Account (0.02%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.950%............................ 881
----------
TOTAL SHORT-TERM INVESTMENTS (15.64%) 1,008,881
-------- ----------
TOTAL INVESTMENTS (108.43%) 6,997,350
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (8.43%) (544,047)
-------- ----------
TOTAL NET ASSETS (100.00%) $6,453,303
======== ==========
NOTES TO THE SCHEDULE OF INVESTMENTS
* Credit Ratings are rated by Moody's Investors Service or John Hancock
Advisers, Inc. where Standard and Poor's ratings are not available.
+ A portion of these securities having an aggregate value of $891,142 or
13.81% of the Fund's net assets, have been purchased on a when issued
basis. The purchase price and the interest rate of such securities are
fixed at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with current values at least equal to the amounts
of its when issued commitments. Accordingly, the market values of $586,753
of United States Treasury Bonds 7.125%, 02/15/23 and $359,179 of United
States Treasury Notes 7.500%, 02/15/05 have been segregated to the when
issued commitments.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $514,735 or 7.98% of net assets as of
June 30, 1998.
(Y) 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.
105
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. Strategic Income Fund on June 30, 1998. It is divided into four main
catagories: bonds, common stocks, preferred stocks and warrants, and short-term
investments. Bonds are further broken down by industry group. Short-term
investments, which represent the Fund's "cash" position, are listed last.
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
BONDS
Advertising (1.92%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 ............ 9.375% B $100 $106,250
R.H. Donnelly, Inc.
Sr Sub Note 06-01-08 (R) ....... 9.125 B+ 100 101,625
-----------
207,875
-----------
Banks - Foreign (1.84%)
International Bank for Reconstruction
& Development, Sr Note
(South Africa) 07-21-98 # ....... 15.000 AAA 500 83,917
Landeskreditbank Baden-
Wuerttemberg, Sub Note
(Germany) 02-01-23 (Y) .......... 7.625 AAA 100 116,083
-----------
200,000
-----------
Computers (1.07%)
Unisys Corp.,
Sr Note 10-15-04 ................ 11.750 BB- 100 115,500
-----------
Containers (0.94%)
Stone Container Corp., Unit
(Sr Sub Deb & Supplemental
Interest Cert) 04-01-02 ......... 12.250 B- 100 102,000
-----------
Cosmetics & Personal Care (0.91%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) ............ 11.000 B+ 100 98,750
-----------
Diversified Operations (1.00%)
Euramax International Plc,
Sr Sub Note (United Kingdom)
10-01-06 (Y) .................... 11.250 B 100 108,250
-----------
Electronics (1.61%)
Communications Instruments, Inc.,
Gtd Sr Sub Note Ser B 09-15-04 .. 10.000 B- 100 102,000
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) ....... 9.500 B 100 73,000
-----------
175,000
-----------
Energy (1.89%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) ....... 9.625 B 200 205,500
-----------
Finance (0.92%)
AEI Holding Co.,
Sr Note 11-15-07 (R) ............ 10.000 B- 100 99,500
-----------
Government - Foreign (6.74%)
Australia, Commonweath of,
Government Bond (Australia)
08-15-08 # ...................... 8.750 AAA 400 307,559
Government Bond (Australia)
11-15-06 # ...................... 6.750 AAA 200 133,907
United Kingdom of Great Britain
Treasury Gilts, Government Bond
(United Kingdom) 06-07-21 # ..... 8.000 AAA 50 108,870
Government Bond
(United Kingdom) 12-07-28 # ..... 6.000 AAA 100 180,737
-----------
731,073
-----------
Government - U.S. (20.05%)
United States Treasury,
Bond 02-15-16 ................... 9.250 AAA 200 278,188
Bond 08-15-19 ................... 8.125 AAA 500 645,310
Bond 08-15-23 ................... 6.250 AAA 200 214,124
Bond 11-15-27 ................... 6.125 AAA 500 535,780
Note 08-15-04 ................... 7.250 AAA 225 244,793
Note 08-31-02 ................... 6.250 AAA 250 256,523
-----------
2,174,718
-----------
Leisure (4.50%)
Casino America, Inc.,
Sr Sec Note 08-01-03 ............ 12.500 B+ 250 282,500
Cinemark USA, Inc.,
Sr Sub Note Ser D 08-01-08 ...... 9.625 B 100 103,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas)
12-15-07 (Y) .................... 8.625 B+ 100 103,000
-----------
488,500
-----------
Machinery (1.84%)
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 (R) ....... 8.500 B 100 98,750
Newcor, Inc.,
Sr Sub Note 03-01-08 (R) ....... 9.875 B- 100 101,250
-----------
200,000
-----------
Media (8.40%)
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07 ....... 10.500 Ba3 100 111,000
Cumulus Media, Inc.,
Sr Sub Note 07-01-08 ............ 10.375 CCC+ 100 101,375
Falcon Holding Group L.P./Falcon
Funding Corp., Sr Deb
04-15-10 (R) .................... 8.375 B 200 201,500
Intermedia Capital Partners,
Sr Note 08-01-06 ................ 11.250 B 100 111,750
Regional Independent Media Group
Plc, Sr Note (United Kingdom)
07-01-08 (R), (Y) ............... 10.500 B- 175 177,625
SFX Entertainment, Inc.,
Sr Sub Note 02-01-08 (R) ....... 9.125 CCC+ 100 98,000
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ............ 11.000 B- 100 109,250
-----------
910,500
-----------
Medical (0.91%)
Fresenius Medical Care
Capital Trust II, Trust Preferred
Security 02-01-08 ............... 7.875 B+ 100 99,000
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
106
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Metal (1.99%)
GS Technologies Operating Co.,
Sr Note 10-01-05 ................ 12.250% B $100 $114,000
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 ....... 9.875 B- 100 102,000
-----------
216,000
-----------
Oil & Gas (1.47%)
Canadian Forest Oil Ltd.,
Gtd Sr Sub Note (Canada)
09-15-07 (Y) .................... 8.750 B 100 96,750
Universal Compression, Inc.,
Sr Disc Note, Step Coupon
(9.875%, 02-15-03)
02-15-08 (A), (R) ............... Zero B 100 62,500
-----------
159,250
-----------
Paper & Paper Products (0.93%)
Repap New Brunswick,
Sr Note (Canada) 04-15-05 (Y) ... 10.625 CCC+ 100 101,000
-----------
Printing - Commercial (0.98%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 ............ 12.000 B 100 105,750
-----------
Retail (1.38%)
United Stationers, Inc.,
Sr Sub Note 04-15-08 (R) ....... 8.375 B 150 150,000
-----------
Steel (0.92%)
Ameristeel Corp.,
Sr Note 04-15-08 (R) ............ 8.750 B+ 100 100,000
-----------
Telecommunications (28.77%)
Allegiance Telecom, Inc.,
Sr Disc Note, Step Coupon
(11.75%, 02-15-03)
02-15-08 (A), (R) ............... Zero B- 250 125,000
American Mobile Satellite
Corp./AMSC Acquisition
Co. Inc., Unit (Sr Note &
Warrant) 04-01-08 (R) ........... 12.250 B- 100 93,000
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon
(10.40%, 05-15-03) (Canada)
05-15-08 # ...................... Zero B3 150 60,428
COLT Telecom Group Plc,
Sr Note (United Kingdom)
11-30-07 # ...................... 10.125 B 75 132,582
Comunicacion Celular S.A., Bond,
Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A), (Y) .... Zero B3 100 77,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon
(10.625%, 11-01-02)
11-15-07 (A), (R) ............... Zero B 150 102,375
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants),
Step Coupon (12.625%, 03-01-03)
03-01-08 (A), (R) ............... Zero B- 250 117,500
DTI Holdings, Inc.,
Unit (Sr Disc Note & Warrants),
Step Coupon (12.500%, 03-01-03)
03-01-08 (A), (R) ............... Zero B- 150 81,000
Esprit Telecom Group Plc,
Sr Note (United Kingdom)
12-15-07 (Y) .................... 11.500 B- 100 103,000
Sr Note (United Kingdom)
06-15-08 (R), (Y) ............... 10.875 B- 100 99,000
FLAG Ltd., Sr Note (Bermuda)
01-30-08 (R), (Y) ............... 8.250 B+ 100 100,750
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 (R) ............ 9.625 B 100 104,250
Globalstar L.P./Globalstar Capital
Corp., Sr Note 06-01-05 (R) ..... 11.500 B 100 97,375
Hermes Europe Railtel B.V.,
Sr Note (Netherlands)
08-15-07 (Y) .................... 11.500 B 100 113,000
Innova S. de R.L., Sr Note
(Mexico) 04-01-07 (Y) ........... 12.875 B- 100 101,500
Intercel, Inc., Unit (Sr Discount
Note & Warrant), Step Coupon
(12.00%, 02-01-01)
02-01-06 (A) .................... Zero B 200 158,000
Ionica Plc, Sr Disc Note, Step
Coupon (15.00%, 05-01-02)
(United Kingdom)
05-01-07 (A), (Y) ............... Zero Caa3 200 48,000
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 ...... 13.000 B- 100 106,500
IXC Communications, Inc.,
Sr Sub Note 04-15-08 (R) ....... 9.000 CCC+ 100 99,000
MetroNet Communications Corp.,
Sr Disc Note, Step Coupon
(9.95%, 06-15-03) (Canada)
06-15-08 (A), (Y) ............... Zero B 200 123,750
Sr Discount Note, Step Coupon
(10.75%, 11-01-02) (Canada)
11-01-07 (A), (Y) ............... Zero B 100 66,000
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon
(9.75%, 02-15-99) 08-15-04 (A) .. Zero CCC+ 75 72,937
Sr Disc Note, Step Coupon
(9.95%, 02-15-03)
02-15-08 (A), (R) ............... Zero CCC+ 125 79,688
NTL, Inc.,
Sr Note 04-01-08 (R) ............ 9.500 B- 60 103,064
Orion Network Systems,
Sr Note 01-15-07 ................ 11.250 B+ 100 111,500
Qwest Communications
International, Inc., Sr Note
Ser B 04-01-07 .................. 10.875 BB+ 100 115,250
RCN Corp.,
Sr Note 10-15-07 ................ 10.000 B3 100 103,000
Teligent, Inc.,
Sr Note 12-01-07 ................ 11.500 CCC 100 101,250
Viatel, Inc., Unit (Sr Note &
Preferred Stock) 04-15-08 (R) ... 11.250 Caa1 200 209,500
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 ........... 12.500 B3 100 114,000
-----------
3,119,199
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
108
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Textile (1.39%)
Tropical Sportswear International
Corp., Sr Sub Note
06-15-08 (R) .................... 11.000% B- $150 $150,375
-----------
Transport (1.81%)
Enterprises Shipholding Corp.,
Sr Note (Greece)
05-01-08 (R), (Y) ............... 8.875 BB 100 98,000
Fine Air Services, Inc.,
Sr Note 06-01-08 (R) ............ 9.875 B 100 97,750
-----------
195,750
-----------
Utilities (1.97%)
Midland Funding Corp. II,
Deb Ser A 07-23-05 .............. 11.750 B 100 120,294
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico)
11-15-09 (R), (Y) ............... 9.625 BB 100 93,500
-----------
213,794
-----------
TOTAL BONDS
(Cost $10,431,144) (96.15%) 10,427,284
------- -----------
NUMBER OF
SHARES
------
COMMON STOCKS
KLM Royal Dutch Air Lines N.V.,
Common Stock (Netherlands)..................... 500 20,469
Nextel Communications, Inc. (Class A),
Common Stock**................................. 232 5,771
----------
TOTAL COMMON STOCKS
(Cost $21,030) (0.24%) 26,240
------- ----------
PREFERRED STOCKS AND WARRANTS
Allegiance Telecom, Inc., Warrant** ............ 250 625
Comunicacion Celular S.A., Warrant
(Colombia) (Y)** .............................. 1,000 7,000
Loral Space & Communications Ltd., Warrant** ... 100 1,000
NEXTLINK Communications, Inc., 14.00%,
Preferred Stock ............................... 1,662 99,720
SFX Broadcasting, Inc., 12.625%, Ser E,
Preferred Stock ............................... 1,130 134,482
----------
TOTAL PREFERRED
STOCKS AND WARRANTS
(Cost $220,978) (2.24%) 242,827
------- ----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.52%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. - Dated
06-30-98, due 07-01-98 (Secured by U.S.
Treasury Bond, 9.125%, due 05-15-18 and
U.S. Treasury Notes, 5.000% thru 8.750%,
due 12-13-98 thru 04-30-03) - Note B.... 5.750% $56 $56,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%............................. 617
-----------
TOTAL SHORT-TERM INVESTMENTS (0.52%) 56,617
-------- -----------
TOTAL INVESTMENTS (99.15%) 10,752,968
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.85%) 91,365
-------- -----------
TOTAL NET ASSETS (100.00%) $10,844,333
======== ===========
* Credit Ratings are unaudited and rated by Moody's Investors Service or
John Hancock Advisers, Inc. where Standard & Poor's ratings are not
available.
** Non-income producing security.
# Par value of foreign bonds is expressed in local currency, as shown
parenthetically in security description.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
See Note B of the Notes to Financial Statements for valuation policy. Rule
144A securities amounted to $3,419,127 or 31.53% of the Fund's net assets
as of June 30, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of 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.
108
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Strategic Income Fund
Portfolio Concentration
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The V. A. Strategic Income Fund invests primarily in securities issued in the
United States of America. The performance of this Fund is closely tied to the
economic and financial conditions of the countries within which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the schedule of investments. In addition, concentration
of investments can be aggregated by various countries. The table below shows the
percentages of the Fund's investments at June 30, 1998 assigned to country
categories.
MARKET VALUE
AS A % OF
COUNTRY DISTRIBUTION FUND NET ASSETS
- -------------------- ---------------
Australia.................................. 4.07%
Bahamas.................................... 0.95
Bermuda.................................... 0.93
Canada..................................... 4.13
Colombia................................... 0.77
Germany.................................... 1.07
Greece..................................... 0.90
Mexico..................................... 1.80
Netherlands................................ 1.23
South Africa............................... 0.77
United Kingdom............................. 8.83
United States.............................. 73.70
-----
TOTAL INVESTMENTS 99.15%
=====
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
QUALITY DISTRIBUTION
- --------------------
AAA........................................ 28.64
BB......................................... 4.92
B.......................................... 54.19
CCC........................................ 8.40
-----
TOTAL BONDS 96.15%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
109
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. High Yield Bond Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the V.
A. High Yield Bond Fund on June 30, 1998. It is divided into four main
catagories: bonds, common stocks, preferred stocks and short-term investments.
Bonds are further broken down by industry group. Short-term investments, which
represent the Fund's "cash" position, are listed last.
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
BONDS
Agricultural Operations (0.17%)
Iowa Select Farms L.P./ISF
Finance, Inc., Sr Sub Note
12-01-05 (R) .................... 10.750% B3 $10 $10,050
-----------
Automobile / Trucks (0.42%)
J.B. Poindexter & Co., Inc.,
Sr Note 05-15-04 ................ 12.500 B- 25 25,125
-----------
Banks - Foreign (1.98%)
Fuji JGB Inv LLC, Pfd.,
Bond Ser A 12-31-49 (R) ** ...... 9.870 BB+ 135 119,475
-----------
Chemicals (2.54%)
American Pacific Corp.,
Sr Note 03-01-05 (R) ............ 9.250 BB- 50 51,625
Trikem S.A.,
Bond (Brazil) 07-24-07 (R) (Y) .. 10.625 BB- 125 101,250
-----------
152,875
-----------
Computers (2.09%)
Exodus Communications, Inc.,
Sr Note 07-01-08 (R) ............ 11.250 B- 24 24,060
PSINet, Inc.,
Sr Note Ser B 02-15-05 .......... 10.000 B- 100 102,000
-----------
126,060
-----------
Consumer Products Misc. (0.82%)
Indesco International, Inc.,
Sr Sub Note 04-15-08 (R) ........ 9.750 B- 50 49,250
-----------
Containers (6.49%)
Gaylord Container Corp.,
Sr Note Ser B 06-15-07 .......... 9.375 B 25 24,062
Sr Sub Note Ser B 02-15-08 ...... 9.875 B 200 194,000
Riverwood International Corp.,
Gtd Sr Sub Note 04-01-08 ........ 10.875 CCC+ 20 20,375
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental
Interest Cert) 04-01-02 ......... 12.250 B- 150 153,000
-----------
391,437
-----------
Cosmetics & Personal Care (1.51%)
AKI, Inc.,
Sr Note 07-01-08 (R) ............ 10.500 B+ 7 7,070
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) ............ 11.000 B+ 75 74,063
Styling Technology Corp.,
Sr Sub Note 07-01-08 (R) ........ 10.875 B- 10 10,025
-----------
91,158
-----------
Energy (3.41%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) ........ 9.625 B 200 205,500
-----------
Finance (3.01%)
Advance Agro Public Co., Sr Note
(Thailand) 11-15-07 (R) (Y) ..... 13.000 CCC+ 50 50,000
Polysindo International Finance
B.V., Gtd Note (Indonesia)
02-12-99 (Y) ** ................. 8.648 CCC- 10 5,500
Sampoerna International Finance
Co., B.V., Gtd Yankee Bond
(Indonesia) 06-15-06 (R) (Y) .... 8.375 CCC- 50 26,500
Sumitomo Bank Treasury Co. LLC,
Bond Ser A 12-29-49 (R) ** ...... 9.400 BBB- 100 99,500
-----------
181,500
-----------
Food (4.00%)
Del Monte Foods Co., Sr Disc Note,
Step Coupon (12.50%, 12-15-02)
12-15-07 (A) (R) ................ Zero B- 70 45,675
Mastellone Hermanos S.A.,
Sr Bond (Argentina)
04-01-08 (R) (Y) ................ 11.750 B+ 150 150,000
Specialty Foods Acquisition Corp.,
Sr Sub Note Ser B 08-15-03 ...... 11.250 CCC 50 45,250
-----------
240,925
-----------
Government - Foreign (0.41%)
Government of Jamaica,
Note (Jamaica) 06-10-05 (R) (Y) . 10.875 Ba3 25 25,000
-----------
Leisure (5.26%)
Claridge Hotel and Casino Corp.,
1st Mtg Note 02-01-02 ........... 11.750 CC 50 49,124
Clearview Cinema Group, Inc.,
Sr Note 06-01-08 (R) ............ 10.875 B 10 10,200
Fitzgeralds Gaming Corp.,
Gtd Sr Sec Note 12-15-04 (R) .... 12.250 B- 50 48,500
IHF Holdings, Inc., Sr Sub
Disc Note Ser B, Step Coupon
(15.00%, 11-15-99)
11-15-04 (A) .................... Zero Caa2 25 20,750
Premier Parks, Inc., Sr Disc Note,
Step Coupon (10.00%, 04-01-03)
04-01-08 (A) .................... Zero B- 200 132,750
SC International Services, Inc.,
Gtd Sr Sub Note Ser B 09-01-07 .. 9.250 B 55 56,100
-----------
317,424
-----------
Machinery (0.41%)
Glasstech, Inc.,
Sr Note Ser B 07-01-04 .......... 12.750 B+ 25 24,500
-----------
Manufacturing (5.73%)
AP Holdings, Inc., Sr Disc Note,
Step Coupon (11.25%, 03-15-03)
03-15-08 (A) (R) ................ Zero B- 200 119,000
Coyne International Enterprises
Corp., Sr Sub Note 06-01-08 (R) . 11.250 B- 16 16,040
Doe Run Resources Corp.,
Sr Note 03-15-05 (R) ............ 11.250 B+ 10 10,000
Sr Sub Note 03-15-03 (R) ** ..... 12.009 B+ 25 25,000
SEE NOTES TO FINANCIAL STATEMENTS.
110
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. High Yield Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Manufacturing (continued)
Icon Health & Fitness, Inc.,
Sr Sub Note Ser B 07-15-02 ...... 13.000% CCC+ $50 $54,875
RAB Holdings, Inc.,
Sr Note 05-01-08 (R) ............ 13.000 CCC+ 120 120,600
-----------
345,515
-----------
Media (1.38%)
CD Radio, Inc., Sr Disc Note,
Step Coupon (15.00%, 12-01-02)
12-01-07 (A) .................... Zero Caa1 10 5,850
Cumulus Media, Inc., Sr Sub Note
07-01-08 ........................ 10.375 CCC+ 14 14,193
Digital Television Services LLC,
Gtd Sr Sub Note 08-01-07 ........ 12.500 CCC 35 39,900
Regional Independent Media Group Plc,
Sr Disc Note, Step Coupon
(12.875%, 07-01-03)
(United Kingdom)
07-01-08 (A) (R) *** ............ Zero B- 20 18,178
Sr Note (United Kingdom)
07-01-08 (R) (Y) ................ 10.500 B- 5 5,075
-----------
83,196
-----------
Metal (0.65%)
Freeport-McMoRan Copper &
Gold, Inc., Sr Note 11-15-06 .... 7.500 CCC+ 10 7,800
Metallurg, Inc.,
Sr Note 12-01-07 (R) ............ 11.000 B- 30 31,350
-----------
39,150
-----------
Oil & Gas (6.58%)
Gothic Energy Corp., Unit
(Sr Sec Disc Note & Warrants)
05-01-06 (R) .................... 14.125 CCC 10 5,700
Gothic Production Corp.,
Sr Sec Note 05-01-05 (R) ........ 11.125 B- 150 144,000
Great Lakes Acquisition,
Sr Disc Deb, Step Coupon
(13.125%, 05-15-03)
05-15-09 (A) (R) ................ Zero B- 200 109,000
Key Energy Group, Inc.,
Conv Sub Note 09-15-04 (R) ...... 5.000 B 80 62,400
Conv Sub Note 09-15-04 .......... 5.000 B 50 39,000
Mariner Energy, Inc.,
Sr Sub Note Ser B 08-01-06 ...... 10.500 B- 10 10,250
Ocean Rig Norway AS,
Gtd Sr Note (Norway)
06-01-08 (R) (Y) ................ 10.250 B- 11 10,450
PANACO, Inc., Gtd Sr Sub Note
Ser B 10-01-04 .................. 10.625 B- 10 9,950
Universal Compression, Inc.,
Sr Disc Note, Step Coupon
(9.875%, 02-15-03)
02-15-08 (A) (R) ................ Zero B 10 6,250
-----------
397,000
-----------
Paper & Paper Products (4.76%)
American Pad & Paper Co.,
Sr Sub Note Ser B 11-15-05 ...... 13.000 B- 10 10,400
APP International Finance Co. B.V ,
Gtd Sec Note (Indonesia)
10-01-05 (Y) .................... 11.750 CCC+ 150 132,000
Bear Island Paper Co. LLC,
Sr Sec Note Ser B 12-01-07 ...... 10.000 B 25 25,750
Repap New Brunswick,
Sr Note (Canada) 04-15-05 (Y) ... 10.625 CCC+ 100 101,000
Sappi BVI Finance Ltd.,
Gtd Conv Bond (South Africa)
08-01-02 (R) (Y) ................ 7.500 BB- 20 18,000
-----------
287,150
-----------
Real Estate Operations (0.14%)
Signature Resorts, Inc.,
Conv Sub Note 01-15-07 .......... 5.750 B 10 8,250
-----------
Retail (4.57%)
American Restaurant Group, Inc.,
Sr Sec Note 02-15-03 (R) ........ 11.500 B 50 50,250
Corporate Express, Inc.,
Conv Note 07-01-00 .............. 4.500 B 11 10,160
Frank's Nursery & Crafts,
Sr Sub Note 03-01-08 (R) ........ 10.250 B- 25 25,188
Hills Stores Co.,
Sr Note Ser B 07-01-03 .......... 12.500 B- 60 60,000
Imperial Home Decor Group, Inc.,
Sr Sub Note 03-15-08 (R) ........ 11.000 B- 125 129,688
-----------
275,286
-----------
Steel (5.56%)
Acindar Industria Argentina
de Aceros S.A., Bond
(Argentina) 02-15-04 (Y) ........ 11.250 B+ 10 10,025
CSN Iron S.A., Gtd Note (Brazil)
06-01-07 (Y) .................... 9.125 B1 50 40,500
Gulf States Steel, Inc. of Alabama,
1st Mtg 04-15-03 ................ 13.500 B- 100 98,000
NSM Steel Inc./NSM Steel Ltd.,
Unit (Sr Sub Mtg Note
Ser B & Warrant) (Thailand)
02-01-08 (R) (Y) ................ 12.250 CCC 100 90,000
Oregon Steel CF&I,
Note 03-31-03 (r) ............... 9.500 B 100 96,881
-----------
335,406
-----------
Telecommunications (6.95%)
American Mobile Satellite Corp./
AMSC Acquisition Co., Inc.,
Unit (Sr Note & Warrant)
04-01-08 (R) .................... 12.250 B- 40 37,200
Esprit Telecom Group Plc,
Sr Note (United Kingdom)
06-15-08 (R) (Y) ................ 11.000 B- 60 32,915
FaciliCom International,
Sr Note 01-15-08 (R) ............ 10.500 B- 25 24,500
International Wireless
Communications, Inc.,
Sr Sec Disc Note 08-15-01 ...... Zero B- 50 14,000
SEE NOTES TO FINANCIAL STATEMENTS.
111
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. High Yield Bond Fund
INTEREST CREDIT PAR VALUE MARKET
ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE
- ------------------- ---- ------- -------------- -----
Telecommunications (continued)
Ionica Plc, Sr Disc Note,
Step Coupon (15.00%,
05-01-02) (United Kingdom)
05-01-07 (A) (Y) ................ Zero% Caa3 $40 $9,600
Sr Note (United Kingdom)
08-15-06 (Y) .................... 13.500 Caa3 110 66,000
Long Distance International, Inc.,
Unit (Sr Note & Warrant)
04-15-08 (R) .................... 12.250 B- 100 99,000
Telefonica de Argentina S.A.,
Note (Argentina) 11-01-04 (Y) ... 11.875 BBB- 25 26,875
Viatel, Inc.,
Unit (Sr Note & Jr Sub Deb)
04-15-08 (R) .................... 11.150 Caa1 170 98,676
Unit (Sr Note & Preferred Stock
Ser A) 04-15-08 (R) ............. 11.250 Caa1 10 10,475
-----------
419,241
-----------
Textile (2.87%)
Steel Heddle Group, Inc., Sr Disc
Deb, Step Coupon (13.75%,
06-01-03) 06-01-09 (A) (R) ...... Zero CCC+ 200 103,000
Steel Heddle Manufacturing Co.,
Sr Sub Note 06-01-08 (R) ........ 10.625 CCC+ 50 50,125
Tropical Sportswear International
Corp., Sr Sub Note
06-15-08 (R) .................... 11.000 B- 20 20,050
-----------
173,175
-----------
Transport (2.76%)
Cenargo International Plc,
1st Mtg Note (United Kingdom)
06-15-08 (R) (Y) ................ 9.750 BB- 20 19,750
Fine Air Services, Inc.,
Sr Note 06-01-08 (R) ............ 9.875 B 100 97,750
Pacific & Atlantic Holding, Inc.,
1st Mtg Note (Greece)
05-30-08 (R) (Y) ................ 11.500 B 50 48,750
-----------
166,250
-----------
Utilities (1.12%)
Empire Gas Corp.,
Gtd Sr Sec Note 07-15-04 ........ 7.000 CC 50 46,250
Espirito Santo Centrais Electric,
Sr Note (Brazil) 07-15-07 (R) (Y) 10.000 BB- 25 21,500
-----------
67,750
-----------
Waste Disposal Service & Equip (3.37%)
Waste Systems International, Inc.,
Conv Sub Note 05-13-05 (R) ...... 7.000 CCC+ 200 203,000
-----------
TOTAL BONDS
(Cost $4,838,575) (78.96%) 4,760,648
------- -----------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES OR WARRANTS VALUE
- ------------------- ------------------ -----
COMMON STOCKS
Abitibi-Consolidated, Inc., Common Stock
(Canada) (Y) ..................................... 12,500 $160,156
American Pacific Corp., Common Stock .............. 5,000 49,375
Gaylord Container Corp. (Class A), Common Stock ... 4,000 30,750
KLM Royal Dutch Airlines N.V., Common Stock
(Netherlands) (Y) ................................ 100 4,094
Northwest Airlines Corp. (Class A), Common Stock .. 3,250 125,328
Repap Enterprises Inc., Common Stock
(Canada) *** ..................................... 150,000 25,500
----------
TOTAL COMMON STOCKS
(Cost $484,148) (6.55%) 395,203
------- ----------
PREFERRED STOCKS
Cumulus Media, Inc., 13.75%, Ser A,
Preferred Stock .................................. 27 27,473
Nextel Communications, Inc., 11.125%, Ser E,
Payment-In-Kind, Preferred Stock (R) ............. 154 158,620
----------
TOTAL PREFERRED STOCKS
(Cost $190,740) (3.09%) 186,093
------- ----------
SEE NOTES TO FINANCIAL STATEMENTS.
112
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. High Yield Bond Fund
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (10.78%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion Securities
USA, Inc. - Dated 06-30-98, due 07-01-98
(secured by U.S. Treasury Bond, 9.125%,
due 05-15-18 and U.S. Treasury Notes,
5.000% thru 8.750%, due 12-31-98 thru
04-30-03) - Note B....................... 5.750% $650 $650,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.950%.............................. 107
----------
TOTAL SHORT-TERM INVESTMENTS (10.78%) 650,107
-------- ----------
TOTAL INVESTMENTS (99.38%) 5,992,051
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (0.62%) 37,087
-------- ----------
TOTAL NET ASSETS (100.00%) $6,029,138
======== ==========
* Credit ratings are rated by Moody's Investors Service or John Hancock
Advisers, Inc. where Standard and Poor's ratings are not available.
** Represents rate in effect on June 30, 1998.
*** Par value of foreign bonds and shares outstanding of common stocks is
expressed in local currency, as shown parenthetically in security
description.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $3,129,223 or 51.90% of net assets as of
June 30, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer, however, security is U.S. dollar
denominated.
(r) Direct placement securities are restricted as to resale. They have been
valued in accordance with procedures approved by the Trustees after
consideration of restrictions as to resale, financial condition and
prospects of the issuer, general market conditions and pertinent
information in accordance with the Fund's By-Laws and the Investment
Company Act of 1940, as amended. The Fund has limited rights to
registration under the Securities Act of 1933 with respect to these
restricted securities.
Additional information on these securities is as follows:
MARKET VALUE MARKET VALUE
ACQUISITION ACQUISITION AS A %OF AS OF
ISSUER, DESCRIPTION DATE COST FUND NET ASSETS JUNE 30, 1998
- ------------------- ----------- ----------- -------------- -------------
Oregon Steel CF&I 5/14/98 $98,069 1.61% $96,881
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
Portfolio Concentration
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The V. A. High Yield Bond Fund invests primarily in securities issued in the
United States of America. The performance of this Fund is closely tied to the
economic and financial conditions of the countries within which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the Schedule of Investments. In addition, concentration
of investments can be aggregated by various countries. The table below shows the
percentages of the Fund's investments at June 30, 1998 assigned to country
categories.
MARKET VALUE
AS A % OF
COUNTRY DIVERSIFICATION FUND NET ASSETS
- ----------------------- ---------------
Argentina......................................... 3.10%
Brazil............................................ 2.71
Canada............................................ 4.76
Greece............................................ 0.81
Indonesia......................................... 2.72
Jamaica........................................... 0.42
Netherlands....................................... 0.07
Norway............................................ 0.17
South Africa...................................... 0.30
Thailand.......................................... 2.32
United Kingdom.................................... 2.51
United States..................................... 79.49
-----
TOTAL INVESTMENTS 99.38%
=====
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
QUALITY DISTRIBUTION
- --------------------
BBB............................................... 2.10%
BB................................................ 5.91
B................................................. 48.12
CCC............................................... 21.25
CC................................................ 1.58
-----
TOTAL BONDS 78.96%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
113
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. World Bond Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by V.A.
World Bond Fund on June 30, 1998. It's divided into three main categories:
bonds, options and short-term investments. The bonds and options are further
broken down by currency denomination. Short-term investments, which represent
the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
BONDS
British Pound Sterling (4.80%)
United Kingdom Treasury,
Bond 11-06-01# ............................ 7.000% 70 $118,106
----------
Deutsche Mark (18.21%)
Federal Republic of Germany,
Bond Ser 98 01-04-08# ..................... 5.250 442 253,889
Ford Motor Credit Company, (United States),
Bond 06-16-08# ............................ 5.250 350 193,626
----------
447,515
----------
U.S. Dollar (70.29%)
Federal Home Loan Bank,
Bond 10-15-03 ............................. 5.440 $150 147,961
Bond 03-26-07 ............................. 6.945 100 107,109
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 .............. 7.000 122 124,341
Federal National Mortgage Assn.,
Note Ser MTN 10-23-02 ..................... 6.080 250 253,555
Federative Republic of Brazil, (Brazil),
Global Bond 11-05-01 ...................... 8.875 50 50,125
Government of Jamaica, (Jamaica),
Note 06-09-05 (R) ......................... 10.875 10 10,000
Republic of Costa Rica, (Costa Rica),
Deb 05-01-03 (R) .......................... 8.000 25 25,188
Republic of Equador, (Equador),
Deb 04-25-02 (R) .......................... 11.250 50 51,000
Republic of Panama, (Panama),
Note Ser REGS 02-13-02 .................... 7.875 50 48,925
Republic of South Africa, (South Africa),
Note 06-23-17 ............................. 8.500 50 47,313
Republic of Venezuela, (Venezuela),
Floating Rate Note Ser C 12-30-03 ......... 7.000* 50 45,500
United Mexican States, (Mexico),
Global Bond 02-06-01 ...................... 9.750 50 52,550
United States Treasury,
Bond 08-15-27 ............................. 6.375 75 82,359
Bond 11-15-27 ............................. 6.125 250 267,890
Note 05-31-02 ............................. 6.500 100 103,328
Note 04-30-03 ............................. 5.750 25 25,246
Note 05-15-07 ............................. 6.625 120 128,887
Note 08-15-07 ............................. 6.125 150 156,070
----------
1,727,347
----------
TOTAL BONDS
(Cost $2,261,749) (93.30%) 2,292,968
------- ----------
EXPIRATION
CURRENCY DATE/STRIKE MARKET
CURRENCY PURCHASED SOLD PRICE VALUE
- ------------------ -------- ----------- ------
OPTIONS
Japanese Yen..................... USD 5,765,000 March 99/140-150 $4,774
----------
TOTAL OPTIONS
(Premium Paid $2,450) (0.19%) 4,774
------- ----------
PAR VALUE
INTEREST (000s
ISSUER, DESCRIPTION RATE OMITTED)
- ------------------- ---- --------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (6.23%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities
USA, Inc. - Dated 06-30-98,
due 07-01-98 (Secured by U.S.
Treasury Notes, 5.00% thru
7.50% due 2-15-99 thru
11-15-01) - Note B.......................... 5.750% $153 153,000
-------- ----------
TOTAL SHORT-TERM INVESTMENTS (6.23%) 153,000
-------- ----------
TOTAL INVESTMENTS (99.72%) 2,450,742
-------- ----------
OTHER ASSETS AND LIABILITIES, NET (0.28%) 6,864
-------- ----------
TOTAL NET ASSETS (100.00%) $2,457,606
======== ==========
* Represents rate in effect on June 30, 1998.
# Par value of non US$ denominated foreign bonds is expressed in local
currency for each country listed.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $86,188 or 3.51% of the Fund's net assets
as of June 30, 1998.
MTN = Medium Term Note.
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.
114
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. World Bond Fund
Portfolio Concentration (Unaudited)
June 30, 1998
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by the U.S. government, its agencies
or instrumentalities, foreign governments and companies. The performance of the
Fund is closely tied to the economic condition within the countries in which it
invests. The concentration of investments by currency denomination for
individual securities held by the Fund is shown in the schedule of investments.
In addition, concentration of investments can be aggregated by various
investment categories. The table below shows the percentages of the Fund's
investments at June 30, 1998 assigned to the various investment categories.
MARKET VALUE AS A
INVESTMENT CATEGORIES % OF FUND NET ASSETS
- --------------------- --------------------
Finance........................................ 7.88%
Government - Foreign........................... 28.59
Government - U.S............................... 31.08
Government - U.S. Agencies..................... 25.75
Options........................................ 0.19
Short-Term Investments......................... 6.23
-----
TOTAL INVESTMENTS 99.72%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
115
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Declaration Trust -- V.A. Money Market Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
V.A. Money Market Fund on June 30, 1998.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST QUALITY (000s MARKET
ISSUER, DESCRIPTION RATE RATINGS* OMITTED) VALUE
- ------------------- ---- --------- -------- -----
<S> <C> <C> <C> <C>
NEGOTIABLE BANK CERTIFICATES OF DEPOSIT
U.S Branches of Foreign Banks (3.66%)
Abbey National Treasury Services,
01-19-99.................. 5.375% Tier 1 $ 400 $399,289
-----------
TOTAL NEGOTIABLE BANK CERTIFICATES OF DEPOSIT
(Cost $399,289) (3.66%) 399,289
-------- -----------
CORPORATE INTEREST BEARING OBLIGATIONS
Automotive (9.17%)
Chrysler Financial Corp.,
08-13-98.................. 6.310 Tier 1 500 500,293
General Motors Acceptance Corp.,
09-08-98.................. 6.250 Tier 1 500 500,222
-----------
1,000,515
-----------
Banking (8.09%)
Norwest Corp.,
10-13-98.................. 6.000 Tier 1 500 500,283
Security Pacific Corp.,
05-15-99.................. 9.750 Tier 1 370 382,178
-----------
882,461
-----------
Finance (3.21%)
CIT Group Holdings, Inc.,
07-31-98.................. 6.350 Tier 1 350 350,096
-----------
Retail Stores (4.62%)
Sears Roebuck Acceptance Corp.,
11-01-98.................. 8.450 Tier 1 500 503,993
-----------
Tobacco (2.80%)
Philip Morris Cos., Inc.,
03-01-99.................. 8.625 Tier 1 300 305,189
-----------
TOTAL CORPORATE INTEREST BEARING OBLIGATIONS
(Cost $3,042,254) (27.89%) 3,042,254
-------- -----------
U.S.GOVERNMENT OBLIGATIONS
Governmental - U.S.Agencies (59.54%)
Federal Farm Credit Bank,
11-02-98 ............................... 5.373%** Tier 1 2,000 1,998,846
Federal Home Loan Bank,
08-20-98 ............................... 5.442** Tier 1 1,500 1,499,824
Federal Home Loan Bank,
08-27-98 # ............................. 5.860 Tier 1 200 200,000
Federal Home Loan Bank,
09-02-98 # ............................. 5.610 Tier 1 300 300,000
Federal National Mortgage
Association, 05-05-99 .................. 5.630 Tier 1 500 499,726
Student Loan Marketing
Association, 02-22-99 .................. 5.331** Tier 1 2,000 1,997,574
-----------
6,495,970
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $6,495,970) (59.54%) 6,495,970
-------- -----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $9,937,513) (91.09%) 9,937,513
-------- -----------
JOINT REPURCHASE AGREEMENT
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities USA,
Inc. - Dated 06-30-98, due
07-01-98 (Secured by U.S.
Treasury Notes, 5.00% thru
7.50%, due 02-15-99
thru 11-15-01) - Note B................. 5.750% 838 838,000
-----------
TOTAL JOINT REPURCHASE AGREEMENT (7.68%) 838,000
-------- -----------
TOTAL INVESTMENTS (98.77%) 10,775,513
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (1.23%) 134,625
-------- -----------
TOTAL NET ASSETS (100.00%) $10,910,138
======== ===========
</TABLE>
* Quality ratings indicate the categories of eligible securities, as defined
by Rule 2a-7 of the Investment Company Act of 1940, owned by the Fund.
** Floating rate note, interest rate effective June 30, 1998.
# Call date.
The percentage shown for each investment category is the total value of that
category expressed as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
116
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
(UNAUDITED)
NOTE A --
ORGANIZATION
John Hancock V.A. International Fund ("V.A. International Fund"), John Hancock
V.A. Regional Bank Fund (which commenced operations on May 1, 1998) ("V.A.
Regional Bank Fund"), John Hancock V.A. Financial Industries Fund ("V.A.
Financial Industries Fund"), John Hancock V.A. Emerging Growth Fund ("V.A.
Emerging Growth Fund"), John Hancock V.A. Special Opportunities Fund (which
commenced operations on January 2, 1998) ("V.A. Special Opportunities Fund"),
John Hancock V.A. Growth Fund ("V.A. Growth Fund"), John Hancock V.A. Growth and
Income Fund (which commenced operations on January 2, 1998) ("V.A. Growth and
Income Fund"), John Hancock V.A. Independence Equity Fund ("V.A. Independence
Equity Fund"), John Hancock V.A. Sovereign Investors Fund ("V.A. Sovereign
Investors Fund"), John Hancock V.A. 500 Index Fund ("V.A. 500 Index Fund"), John
Hancock V.A. Sovereign Bond Fund ("V.A. Sovereign Bond Fund"), John Hancock V.A.
Strategic Income Fund ("V.A. Strategic Income Fund"), John Hancock V.A. High
Yield Bond Fund (which commenced operations on January 2, 1998) ("V.A. High
Yield Bond Fund"), John Hancock V.A. World Bond Fund ("V.A. World Bond Fund")
and, John Hancock V.A. Money Market Fund ("V.A. Money Market Fund") (each a
"Fund," collectively, the "Funds") are separate series of John Hancock
Declaration Trust (the "Trust") an open-end management investment company,
registered under the Investment Company Act of 1940. Prior to January 2, 1998,
V.A. Growth Fund was known as John Hancock V.A. Discovery Fund. The Trust,
organized as a Massachusetts business trust in 1995, consisted of fifteen
different series at June 30, 1998. Each Fund currently has one class of shares
with equal rights as to voting, redemption, dividends and liquidation within its
respective Fund. The Trustees may authorize the creation of additional series
from time to time to satisfy various investment objectives. An insurance company
issuing a Variable Contract that participates in the Trust will vote shares of
the Funds held by the insurance company's separate accounts as required by law.
In accordance with current law and interpretations thereof, participating
insurance companies are required to request voting instructions from policy
owners and must vote shares of the Funds in proportion to the voting
instructions received.
The investment objective of the V.A. International Fund is to seek long-term
growth of capital by investing primarily in equity securities of foreign
companies and governments. The investment objective of the V.A. Regional Bank
Fund is to seek long-term capital appreciation by investing primarily in
regional banks and lending institutions. The investment objective of the V.A.
Financial Industries Fund is to seek capital appreciation by investing primarily
in equity securities of financial services companies throughout the world. The
investment objective of the V.A. Emerging Growth Fund is to seek long-term
growth of capital. The investment objective of the V.A. Special Opportunities
Fund is to seek long-term capital appreciation by investing primarily in equity
securities of domestic and foreign issuers in various economic sectors. The
investment objective of the V.A. Growth Fund is to seek long-term capital
appreciation by investing primarily in common stocks of companies which the
Fund's management believes offer outstanding growth potential over both the
intermediate and long term. The investment objective of the V.A. Growth and
Income Fund is to seek the highest total return (capital appreciation plus
current income) that is consistent with reasonable safety of capital. The
investment objective of the V.A. Independence Equity Fund is to seek
above-average total return, consisting of capital appreciation and income, by
focusing on stocks of companies that management believes are undervalued and
have improving fundamentals over both the intermediate and long-term. The
investment objective of the V.A. Sovereign Investors Fund is to seek long term
growth of capital and income without assuming undue market risks by investing
primarily in common stocks of seasoned companies in sound financial condition
with a long record of paying increasing dividends. The investment objective of
the V.A. 500 Index Fund is to provide investment results that correspond to the
total return performance of the Standard & Poor's 500 Stock Price Index (the
"S&P 500 Index"). The investment objective of the V.A. Sovereign Bond Fund is to
seek a high level of current income consistent with prudent investment risk by
investing primarily in a diversified portfolio of investment grade fixed income
securities of U.S. and foreign issuers, although the Fund may invest up to 25%
of its total assets in lower-rated high yield, high risk, fixed income
securities. The investment objective of the V.A. Strategic Income Fund is to
seek a high level of current income by investing primarily in foreign government
and corporate fixed income securities, U.S. Government securities and
lower-rated high yield, high risk, fixed income securities of U.S. issuers. The
investment objective of the V.A. High Yield Bond Fund is to seek maximum current
income without assuming undue risk, investing primarily in lower-rated,
higher-yielding debt securities. The investment objective of the V.A. World Bond
Fund is to seek a high total investment return, a combination of current income
and capital appreciation, by investing primarily in a global portfolio of fixed
income securities. The investment objective of the V.A. Money Market Fund is to
seek maximum current income consistent with capital preservation and liquidity
by investing only in high-quality money market instruments.
NOTE B --
ACCOUNTING POLICIES
VALUATION OF INVESTMENTS Securities in the Funds' portfolios (except for the
V.A. Money Market Fund) 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
117
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
into U.S. dollars as described in "Foreign Currency Translation." The Funds may
invest in indexed securities whose value is linked either directly or inversely
to changes in foreign currencies, interest rates, commodities, indices or other
reference instruments. Indexed securities may be more volatile than the
reference instrument itself, but any loss is limited to the amount of the
original investment.
The V.A. Money Market Fund's portfolio of securities is valued at amortized
cost, in accordance with Rule 2a-7 of the Investment Company Act of 1940, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and the cost of the security to the Fund. Interest income on certain
portfolio securities such as negotiable bank certificates of deposit and
interest bearing notes is accrued daily and included in interest receivable.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Funds, 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,
Inc., may participate in joint repurchase agreement transactions. Aggregate cash
balances are invested in one or more large repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Funds' custodian bank receives delivery of the underlying
securities for the joint account on the Funds' 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 Funds' policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies.
They will not be subject to federal income tax on taxable earnings which are
distributed to shareholders. For federal income tax purposes, net currency
exchange gains and losses from sales of foreign debt securities may be treated
as ordinary income even though such items are capital gains and losses for
accounting purposes.
For federal income tax purposes, the following funds had capital loss
carryforwards available. These carryforwards are available to offset future net
realized capital gains to the extent provided by regulations. Additionally, net
capital losses attributable to security transactions occurring after October 31,
1997 are treated as arising on the first day (January 1, 1998) of the Funds'
next taxable year.
<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS POST OCTOBER 31, 1997
CARRYFORWARD CARRYFORWARD LOSS TREATED AS
FUND EXPIRING 12/31/2004 EXPIRING 12/31/2005 ARISING JANUARY 1, 1998
- ---- ------------------- ------------------- -----------------------
<S> <C> <C> <C>
V.A. International Fund..... $ -- $ -- $65,667
V.A. Regional Bank Fund..... -- -- --
V.A. Financial
Industries Fund........... -- -- --
V.A. Emerging
Growth Fund............... 18,937 167,508 66,172
V.A. Special
Opportunities Fund........ -- -- --
V.A. Growth Fund............ 11,062 197,206 --
V.A. Growth and
Income Fund............... -- -- --
V.A. Independence
Equity Fund............... -- -- --
V.A. Sovereign
Investors Fund............ -- -- --
V.A. 500 Index Fund......... -- -- --
V.A. Sovereign Bond Fund.... -- -- --
V.A. Strategic
Income Fund............... -- 2,482 8,904
V.A. High Yield Bond Fund... -- -- --
V.A. World Bond Fund........ -- -- 27,755
V.A. Money Market Fund...... -- -- --
</TABLE>
DIVIDENDS, INTEREST AND DISTRIBUTIONS 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 Funds are notified 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 Funds record 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.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Funds.
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 Funds. Actual results could differ from these estimates.
ORGANIZATION EXPENSES Expenses incurred in connection with the organization of
the Funds have been capitalized and are being charged to the Funds' operations
ratably over a five-year period that commenced with the investment operations of
each Fund.
118
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
BANK BORROWINGS The Funds are 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 Funds to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 million,
collectively. V.A. Money Market is permitted to borrow from the uncommitted
portion of the unsecured lines of credit, which is $400 million. Interest is
charged to each of the funds, based on its borrowings, at a rate equal to 0.50%
over the Fed Funds Rate. In addition, a commitment fee, at rates ranging from
0.070% to 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating funds. The Funds had no
borrowing activity for the period ended June 30, 1998.
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 Funds. 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 Funds do 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
Funds' 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for the V.A.
Independence Equity Fund, V.A. 500 Index Fund, V.A. Sovereign Investors Fund and
V.A. Money Market Fund) may enter into forward foreign currency exchange
contracts as a hedge against the effect of fluctuations in currency exchange
rates. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date at a set price. The
aggregate principal amounts of the contracts are marked to market daily at the
applicable foreign currency exchange rates. Any resulting unrealized gains and
losses are included in the determination of each Fund's daily net assets. The
Funds record realized gains and losses at the time the forward foreign currency
contract is closed out or offset by a matching contract. Risks may arise upon
entering these contracts from potential inability of counterparties to meet the
terms of the contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. These contracts involve market or credit
risk in excess of the unrealized gain or loss reflected in the Funds' Statements
of Assets and Liabilities.
The Funds may also purchase and sell forward contracts to facilitate the
settlement of foreign currency denominated portfolio transactions, under which
they intend to take delivery of the foreign currency. Such contracts normally
involve no market risk if they are offset by the currency amount of the
underlying transaction.
Open forward foreign currency contracts for the Trust at June 30, 1998 were
as follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION/
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ---------- --------------
V.A. INTERNATIONAL FUND
Sells
French Franc................... 93,602 JULY 98 ($ 63)
Japanese Yen................... 191,674 JULY 98 ( 45)
------
($ 108)
======
V.A. GROWTH AND INCOME FUND
Sell
Japanese Yen................... 11,919,000 DEC 98 $1,027
======
V.A. STRATEGIC INCOME FUND
Buy
British Pound.................. 63,000 JULY 98 $ 118
======
Sells
Australian Dollar.............. 107,000 JULY 98 $4,168
Australian Dollar.............. 660,000 AUG 98 ( 2,217)
British Pound.................. 128,000 JULY 98 (904)
British Pound.................. 84,000 AUG 98 ( 3,081)
British Pound.................. 68,000 SEPT 98 ( 2,142)
------
($4,176)
======
V.A. HIGH YIELD BOND FUND
Sell
British Pound.................. 11,000 AUG 98 ($ 39)
======
V.A. WORLD BOND
Buys
Deutsche Mark.................. 470,398 JULY 98 $1,468
Japanese Yen................... 40,113,000 JULY 98 (8,586)
------
($7,118)
======
Sell
Japanese Yen................... 20,056,500 JULY 98 ($3,412)
======
FINANCIAL FUTURES CONTRACTS The Funds (except V.A. Money Market Fund) may buy
and sell financial futures contracts to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. Buying futures tends to increase the Funds' exposure to the
underlying instrument. Selling futures tends to decrease the Funds' exposure to
the underlying instrument or hedge other Funds instruments. At the time each
Fund enters into a financial futures contract, it will be required to deposit
with its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value
119
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
of the financial futures contract being traded. Each day, the futures contract
is valued at the official settlement price on the board of trade or U.S.
commodities exchange on which it trades. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market," will be recorded by the
Funds as unrealized gains or losses.
When the contracts are closed, the Funds recognize a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Funds could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Funds' gains and/or losses can be affected as a result of futures contracts.
Open financial futures contracts for the Trust at June 30, 1998 were as
follows:
OPEN UNREALIZED
EXPIRATION CONTRACTS POSITION DEPRECIATION
- ---------- --------- -------- ------------
V.A. 500 INDEX FUND
Sept 98............................. 9 S&P 500 Long $19,125
=======
OPTIONS The Funds (except V.A. Money Market Fund) may purchase options
contracts. Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked to market to reflect the current market
value of the written option.
The Funds may use option contracts to manage their exposure to changing
security prices. Writing puts and buying calls will tend to increase the Funds'
exposure to the underlying instrument, and buying puts and writing calls will
tend to decrease the Funds' exposure to the underlying instrument, or hedge
other Fund investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Funds in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Funds are unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Funds will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Funds' Statements of
Assets and Liabilities.
The were no written option transactions for the period ended June 30, 1998,
for the Funds.
NOTE C --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, each Fund pays a monthly
management fee to the Adviser, for a continuous investment program equivalent,
on an annual basis as follows:
FUND RATE
- ---- ----
V.A. International Fund 0.90% of average daily net assets
V.A. Regional Bank Fund 0.80% of average daily net assets
V.A. Financial Industries Fund 0.80% of average daily net assets
V.A. Emerging Growth Fund 0.75% of average daily net assets
V.A. Special Opportunities Fund 0.75% of average daily net assets
V.A. Growth Fund 0.75% of average daily net assets
V.A. Growth And Income Fund 0.60% of average daily net assets
V.A. Independence Equity Fund 0.70% of average daily net assets
V.A. Sovereign Investors Fund 0.60% of average daily net assets
V.A. 500 Index Fund 0.10% of average daily net assets
V.A. Sovereign Bond Fund 0.50% of average daily net assets
V.A. Strategic Income Fund 0.60% of average daily net assets
V.A. High Yield Bond Fund 0.60% of average daily net assets
V.A. World Bond Fund 0.75% of average daily net assets
V.A. Money Market Fund 0.50% of average daily net assets
John Hancock Advisers International Limited ("JHAI") serves as the
sub-adviser to the V.A. International Fund pursuant to a sub-advisory agreement
among the Fund, the Adviser, and JHAI. JHAI was formed in 1987 and is a wholly
owned subsidiary of the Adviser. JHAI provides international investment research
and advisory services to investment companies and institutional clients. The
Adviser pays a portion of its advisory fee from the V.A. International Fund to
JHAI at the following rate: 70% of the advisory fee payable by the Fund.
Independence Investment Associates, Inc. ("IIA") serves as the sub-adviser to
the V.A. Independence Equity Fund pursuant to a separate sub-advisory agreement
among the Fund, the Adviser, and IIA. IIA was organized in 1982 and is a wholly
owned indirect subsidiary of John Hancock Mutual Life Insurance Company
("JHMLICo"). IIA provides investment advice and advisory services to investment
companies and institutional accounts. The Adviser pays a portion of its advisory
fee from the V.A. Independence
120
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
Equity Fund to IIA at the following rate: 55% of the advisory fee payable by the
Fund.
Sovereign Asset Management Corporation ("SAMCorp") serves as the sub-advisor
of the V.A. Sovereign Investors Fund pursuant to a separate sub-advisory
agreement among the Fund, the Adviser, and SAMCorp. SAMCorp was organized in
1992 and is a wholly owned indirect subsidiary of JHMLICo. SAMCorp provides
investment advice and advisory services to investment companies and private and
institutional accounts. The Adviser pays a portion of its advisory fee from the
V.A. Sovereign Investors Fund to SAMCorp at the following rate: 40% of the
advisory fee payable by the Fund.
The V.A. 500 Index Fund has an agreement with Standard & Poor's ("S & P") to
license certain trademarks and trade names of S & P and of the S & P 500 Index,
which is determined, composed and calculated by S & P without regard to the
Adviser or the V.A. 500 Index Fund. (Requisite disclosure regarding the use of
the Standard & Poor's name is included in the Trust's prospectus.)
Effective February 10, 1997, the Adviser agreed to limit its management fee
on the V.A. 500 Index Fund to 0.10% of the Fund's average daily net assets. The
Adviser may terminate this limitation in the future.
The Adviser has voluntarily agreed to limit each Fund's expenses, excluding
the management fee, to 0.25% of each Fund's average daily net assets.
Accordingly, the reductions in expenses for the period ended June 30, 1998 were
as follows:
FUND FEE REDUCTION
- ---- -------------
V.A. International Fund............................ $69,056
V.A. Regional Bank Fund............................ 5,300
V.A. Financial Industries Fund..................... --
V.A. Emerging Growth Fund.......................... 19,502
V.A. Special Opportunities Fund.................... 12,001
V.A. Growth Fund................................... 10,419
V.A. Growth and Income Fund........................ 10,355
V.A. Independence Equity Fund...................... 3,364
V.A. Sovereign Investors Fund...................... --
V.A. 500 Index Fund................................ 26,314
V.A. Sovereign Bond Fund........................... 19,913
V.A. Strategic Income Fund......................... 5,817
V.A. High Yield Bond Fund.......................... 9,549
V.A. World Bond Fund............................... 12,118
V.A. Money Market Fund............................. 2,112
The Adviser reserves the right to terminate this limitation in the future.
The Funds have an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Funds.
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
Trustees of the Funds. The compensation of unaffiliated Trustees is 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 Funds make investments into other John Hancock funds, as
applicable, to cover their liability for the deferred compensation. Investments
to cover the Funds' deferred compensation liability are recorded on the Funds
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.
The Adviser and other subsidiaries of John Hancock Mutual Life Insurance
Company owned the following shares of beneficial interest of the Funds as of
June 30, 1998:
FUND SHARES OF BENEFICIAL INTEREST
- ---- -----------------------------
V.A. International Fund........................ 213,604
V.A. Regional Bank Fund........................ 50,090
V.A. Financial Industries Fund................. --
V.A. Emerging Growth Fund...................... 100,201
V.A. Special Opportunities Fund................ 50,000
V.A. Growth Fund............................... 100,000
V.A. Growth and Income Fund.................... 50,213
V.A. Independence Equity Fund.................. --
V.A. Sovereign Investors Fund.................. --
V.A. 500 Index Fund............................ --
V.A. Sovereign Bond Fund....................... 113,038
V.A. Strategic Income Fund..................... 235,590
V.A. High Yield Bond Fund...................... 207,829
V.A. World Bond Fund........................... 222,474
V.A. Money Market Fund......................... 108,303
121
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Declaration Trust
NOTE D --
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities for the Funds, excluding
short-term securities, during the period ended June 30, 1998, were as follows:
FUND PURCHASES SALES
- ---- --------- -----
V.A. International Fund.................... $ 4,462,556 $2,941,336
V.A. Regional Bank Fund.................... 11,406,819 303,959
V.A. Financial Industries Fund............. 31,750,919 6,649,533
V.A. Emerging Growth Fund.................. 4,809,966 2,426,583
V.A. Special Opportunities Fund............ 1,352,122 272,439
V.A. Growth Fund........................... 7,096,208 4,948,591
V.A. Growth and Income Fund................ 9,016,990 1,981,097
V.A. Independence Equity Fund.............. 9,344,673 3,829,846
V.A. Sovereign Investors Fund
U.S. Government Securities............... 1,816,266 -
Other Investments........................ 9,408,573 2,053,555
V.A. 500 Index Fund........................ 2,458,266 8,800,274
V.A. Sovereign Bond Fund
U.S. Government Securities............... 7,448,345 6,167,857
Other Investments........................ 4,728,336 3,356,452
V.A. Strategic Income Fund
U.S. Government Securities............... 1,849,953 301,039
Other Investments........................ 8,122,437 3,861,208
V.A. High Yield Bond Fund
U.S. Government Securities............... 753,281 752,633
Other Investments........................ 7,486,163 1,990,663
V.A. World Bond Fund
U.S. Government Securities............... 365,875 822,508
Other Investments........................ 931,955 355,016
At June 30, 1998, the cost (excluding the corporate savings account) and
gross unrealized appreciation and depreciation in value of investments owned by
the Funds, as computed on a federal income tax basis, were as follows:
GROSS GROSS NET UNREALIZED
AGGREGATE UNREALIZED UNREALIZED APPRECIATION/
FUND COST APPRECIATION DEPRECIATION (DEPRECIATION)
- ---- ---- ------------ ------------ --------------
V.A. International
Fund.............. $ 5,240,357 $ 778,604 $258,315 $ 520,289
V.A. Regional Bank
Fund.............. 18,348,900 141,701 374,847 233,146
V.A. Financial
Industries Fund... 44,383,003 5,477,159 945,420 4,531,739
V.A. Emerging
Growth Fund....... 5,469,002 1,280,943 238,816 1,042,127
V.A. Special
Opportunities
Fund.............. 1,145,350 120,849 47,176 73,673
V.A. Growth Fund.... 5,822,991 812,908 79,201 733,707
V.A. Growth and
Income Fund....... 9,306,043 538,913 189,194 349,719
V.A. Independence
Equity Fund....... 14,174,567 2,400,385 235,543 2,164,842
V.A. Sovereign
Investors Fund.... 21,740,536 2,524,215 189,005 2,335,210
V.A. 500 Index
Fund.............. 14,653,015 3,575,093 262,367 3,312,726
V.A. Sovereign
Bond Fund......... 6,955,718 56,751 16,000 40,751
V.A. Strategic
Income Fund ...... 10,729,152 276,103 252,905 23,198
V.A High Yield
Bond Fund......... 6,163,463 62,356 233,876 (171,520)
V.A. World Bond
Fund.............. 2,417,199 40,919 7,376 33,543
V.A. Money
Market Fund....... 10,775,513 -- -- --
122
<PAGE>
================================================================================
John Hancock Funds - Declaration Trust -- V.A. Sovereign Investors Fund
Dividend Increases (Unaudited)
Listed below are the most recent dividend increases for the common stocks held
in the V.A. Sovereign Investors Fund as of June 30, 1998.
- --------------------------------------------------------------------------------
PERCENT OF
COMPANY DIVIDEND INCREASE
- ------- -----------------
Abbott Laboratories, Inc.......................... 11.1%
AFLAC Corp........................................ 13.0
Air Products & Chemicals, Inc..................... 13.3
American Home Products Corp....................... 4.9
American International Group, Inc................. 12.4
Ameritech Corp.................................... 6.2
Archer Daniels Midland Co......................... 5.0
Automatic Data Processing, Inc.................... 15.2
BB&T Corp......................................... 12.9
Banc One Corp..................................... 10.0
BankAmerica Corp.................................. 13.1
Baxter International, Inc......................... 3.0
Becton Dickinson & Co............................. 11.5
Bemis Company, Inc................................ 10.0
Bristol-Myers Squibb Co........................... 2.6
C.H. Robinson Worldwide, Inc...................... 8.1
Chevron Corp...................................... 5.2
Chubb Corp........................................ 6.9
Dayton Hudson Corp................................ 12.5
Dover Corp........................................ 11.8
DuPont (E.I.) De Nemours & Co..................... 11.1
Duke Energy Corp.................................. 3.8
Ecolab, Inc....................................... 18.8
Emerson Electric Co............................... 9.3
Exxon Corp........................................ 3.8
First Tennessee National Corp..................... 10.0
First Union Corp.................................. 13.5
Gannett Co., Inc.................................. 5.6
General Electric Co............................... 15.4
General RE Corp................................... 7.3
Grainger (W.W.), Inc.............................. 11.1
Hasbro, Inc....................................... 19.9
Hewlett-Packard Co................................ 14.3
Home Depot, Inc................................... 20.0
Honeywell, Inc.................................... 3.7
Interpublic Group of Companies, Inc............... 15.4
Johnson & Johnson................................. 13.6
Johnson Controls, Inc............................. 7.0
KeyCorp........................................... 11.9
Leggett & Platt, Inc.............................. 6.7
Lilly (Eli) & Co.................................. 11.1
Masco Corp........................................ 4.8
May Department Stores............................. 5.8
McGraw-Hill Companies, Inc........................ 8.3
Mobil Corp........................................ 7.5
National Fuel Gas Co.............................. 3.4
NationsBank Corp.................................. 15.2
Northern States Power Co.......................... 1.4
Norwest Corp...................................... 10.0
Pentair, Inc...................................... 11.1
PepsiCo, Inc...................................... 4.0
Philip Morris Cos., Inc........................... 20.0
Pitney Bowes, Inc................................. 12.5
Questar Corp...................................... 4.8
Reliastar Financial Corp.......................... 19.4
RPM, Inc.......................................... 7.7
Sara Lee Corp..................................... 9.5
SBC Communications, Inc........................... 0.04
Sigma-Aldrich Corp................................ 12.0
Sonoco Products Corp.............................. 10.0
Sysco Corp........................................ 5.9
Teco Energy, Inc.................................. 5.1
Travelers Group, Inc.............................. 25.0
UNUM Corp......................................... 3.5
Wal-Mart Stores, Inc.............................. 14.8
----
The average dividend increase for this group was 9.9%
====
Historical Data (Unaudited)
The table below shows the record for the V.A. Sovereign Investors Fund during
the past periods.
- -----------------------------------------------------------------------------
PER SHARE
YEAR -----------------------------------------------------------------
ENDED SHARES DIVIDENDS NET ASSET CAPITAL GAINS
DEC. 31 OUTSTANDING FROM INCOME VALUE DISTRIBUTION
- ------- ----------- ----------- ----- -------------
1996 103,482 $.07 $10.74 $.02
1997 896,718 .18 13.59 .01
1998(1) 1,582,585 .11 14.63 --
(1) For the period ended June 30, 1998
123
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Declaration Trust
124
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Declaration Trust
125
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Declaration Trust
126
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Declaration Trust
127
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603
1-800-824-0335
INTERNET: www.jhancock.com/funds
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Declaration Trust. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper
DECSA 6/98
8/98
<PAGE>
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
VOTE THIS CARD TODAY!
A PROMPT RESPONSE WILL SAVE THE FUND
THE EXPENSE OF ADDITIONAL MAILINGS
John Hancock V.A. World Bond Fund
Special Meeting of Shareholders to Be Held on
March 18, 1999
Indicate your voting instructions below by filling in the appropriate boxes
using blue or black ink or dark pencil.
This voting instruction card, if properly executed, will be voted in the manner
directed by the contract owner. If this voting instruction is executed and no
direction is made, this voting instruction will be voted for all proposals and
in the discretion of the insurance company upon such other business as may
properly come before the meeting.
Proposal 1. To approve an Agreement and Plan of Reorganization between John
Hancock V.A. World Bond Fund and John Hancock V.A. Strategic Income Fund ("V.A.
Strategic Income Fund"). Under this Agreement, V.A. World Bond Fund would
transfer all of its assets to V.A. Strategic Income Fund in exchange for shares
of V.A. Strategic Income Fund. These shares would be distributed proportionately
to the shareholders of V.A. World Bond Fund. V.A. Strategic Income Fund would
also assume V.A. World Bond Fund's liabilities.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE>
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
VOTE THIS CARD TODAY!
A PROMPT RESPONSE WILL SAVE THE FUND
THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK V.A. WORLD BOND FUND
A series of John Hancock Declaration Trust
These voting instructions will be used by the insurance companies in
connection with a solicitation of proxies by the trustees of the Fund.
The undersigned, revoking previous instructions, hereby instructs the
above-referenced insurance companies to vote all the shares of beneficial
interest of John Hancock V.A. World Bond Fund ("V.A. World Bond Fund")
attributable to the undersigned's variable annuity contract at the Special
Meeting of Shareholders (the "Meeting") of V.A. World Bond Fund to be held at
101 Huntington Avenue, Boston, Massachusetts, on Thursday, March 18, 1999 at
9:00 a.m., Eastern time, and at any adjournment(s) of the Meeting. Receipt of
the Proxy Statement dated February 12, 1999 is hereby acknowledged. If not
revoked, this card shall be voted for the proposal.
Thomas J. Lee and Michele G. Van Leer, and each of them, with power of
substitution in each, are hereby instructed to vote the shares held in the fund
portfolio attributable to the undersigned at the special meeting of shareholders
and at any adjornment thereof, as specified on the reverse side.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Date , 1999 NOTE: Signature(s) should
agree with the name(s) printed herein. When
signing as attorney, executor,
administrator, trustee or guardian, please
give your full name as such. If a
corporation, please sign in full corporate
name by president or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.
--------------------------------------------
--------------------------------------------
Signature(s)
S:/corpsec/proxy/v.a.votcard
<PAGE>
Part B
Statement of Additional Information
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
(a series of John Hancock Declaration Trust)
February 12, 1999
This Statement of Additional Information provides information and is not a
prospectus. It should be read in conjunction with the related proxy statement
and prospectus that is also dated February 12, 1999. This Statement of
Additional Information provides additional information about John Hancock V.A.
Strategic Income Fund and the Fund that it is acquiring, John Hancock V.A. World
Bond Fund. Please retain this Statement of Additional Information for future
reference. A copy of the proxy statement and prospectus can be obtained free of
charge by calling John Hancock Signature Services, Inc., at 1-800-225-5291.
Table Of Contents
Page
Introduction 3
Additional Information about V.A. Strategic Income Fund 3
General Information and History 3
Investment Objective and Policies 3
Management of V.A. Strategic Income Fund 3
Control Persons and Principal Holders of Shares 3
Investment Advisory and Other Services 3
Brokerage Allocation 3
Capital Stock and Other Securities 3
Purchase, Redemption and Pricing of V.A. Strategic Income Fund Shares 3
Tax Status 4
Underwriters 4
Calculation of Performance Data 4
Financial Statements 4
Additional Information about V.A. World Bond Fund 4
General Information and History 4
Investment Objective and Policies 4
Management of V.A. World Bond Fund 4
Investment Advisory and Other Services 4
Brokerage Allocation 4
Capital Stock and Other Securities 4
Purchase, Redemption and Pricing of V.A. World Bond Fund 4
Tax Status 5
Underwriters 5
Calculation of Performance Data 5
Financial Statements 5
<PAGE>
Exhibits
A - Statement of Additional Information, dated May 1, 1998, of John
Hancock V.A. Strategic Income Fund including audited financial
statements as of December 31, 1997.
B - Statement of Additional Information, dated May 1, 1998, of John Hancock
V.A. World Bond Fund including audited financial statements as of
December 31,1997.
C - Pro forma combined financial statements as of June 30, 1998,
assuming the reorganization of John Hancock V.A. World Bond Fund into
John Hancock V.A. Strategic Income occurred on that date.
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a proxy statement and prospectus dated February 12,
1999. The proxy statement and prospectus has been sent to the shareholders of
V.A. World Bond Fund in connection with the solicitation by the Trustees of V.A.
World Bond Fund of proxies to be voted at the special meeting of shareholders of
V.A. World Bond Fund to be held on March 18, 1999. This Statement of
Additional Information incorporates by reference the Statement of Additional
Information of V.A. Strategic Income Fund, dated May 1, 1998, and the Statement
of Additional Information of V.A. World Bond Fund, dated May 1, 1998. The V.A.
Strategic Income Fund SAI and the V.A. World Fund SAI are included with this
Statement of Additional Information.
Additional Information About V.A. Strategic Income Fund
General Information and History
For additional information about V.A. Strategic Income Fund generally and its
history, see "Organization of the Trust" in V.A. Strategic Income Fund SAI.
Investment Objective and Policies
For additional information about V.A. Strategic Income Fund's investment
objective, policies and restrictions, see "Eligible Investors; Investment
Objective and Policies" and "Investment Restrictions" in the V.A.Strategic
Income Fund SAI.
Management of V.A. Strategic Income Fund
For additional information about V.A. Strategic Income Fund's Board of
Trustees, officers and management personnel, see "Those Responsible for
Management" in the V.A. Strategic Income Fund SAI.
Control Persons and Principal Holders of Shares
For additional information about control persons of V.A. Strategic Income Fund
and principal holders of shares of V.A. Strategic Income Fund, see "Those
Responsible for Management" in the V.A. Strategic Income Fund SAI.
Investment Advisory and Other Services
For additional information about V.A. Strategic Income Fund's investment
adviser, custodian, transfer agent and independent accountants, see "Investment
Advisory and Other Services", "Distribution Contract", "Shareholder Servicing
Agent", "Custody of Portfolio" and "Independent Auditors" in the V.A. Strategic
Income Fund SAI.
Brokerage Allocation and Other Practices
For additional information about V.A. Strategic Income Fund's brokerage
allocation practices, see "Brokerage Allocation" in the V.A. Strategic Income
Fund SAI.
<PAGE>
Capital Stock and Other Securities
For additional information about the voting rights and other characteristics of
V.A. Strategic Income Fund's shares of beneficial interest, see "Description of
the Trust's Shares" in the V.A.Strategic Income Fund SAI.
Purchase, Redemption and Pricing of V.A. Strategic Income Fund Shares
For additional information about the determination of net asset value, see "Net
Asset Value" in the V.A. Strategic Income Fund SAI.
Tax Status
For additional information about the tax status of V.A. Strategic Income Fund,
see "Tax Status" in the V.A. Strategic Income Fund SAI.
Underwriters
For additional information about V.A. Strategic Income Fund's principal
underwriter and the distribution contract between the principal underwriter and
V.A.Strategic Income Fund, see "Distribution Contract" in the V.A. Strategic
Income Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of V.A. Strategic
Income Fund, see "Calculation of Performance" in the V.A. Strategic Income Fund
SAI.
Financial Statements
Audited financial statements of V.A. Strategic Income Fund at December 31, 1997
are attached to the V.A. Strategic Income Fund SAI.
Pro forma combined financial statements as of June 30, 1998 are also
attached hereto.
Additional Information About V.A. World Bond Fund
General Information and History
For additional information about V.A. World Bond Fund generally and its history,
see "Organization of the Fund" in the V.A. World Bond Fund SAI.
Investment Objective and Policies
For additional information about V.A. World Bond Fund's investment objective,
policies and restrictions, see "Eligible Investors; Investment Objective
and Policies" and "Investment Restrictions" in the V.A. World Bond Fund SAI.
Management of V.A. World Bond Fund
For additional information about the V.A. World Bond Fund's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in the
V.A. World Bond Fund SAI.
Investment Advisory and Other Services
For additional information about V.A. World Bond Fund's investment adviser,
custodian, transfer agent and independent accountants, see "Investment Advisory
and Other Services", "Distribution Contract", "Shareholder Servicing Agent",
"Custody of Portfolio" and "Independent Auditors" in the V.A. World Bond Fund
SAI.
Brokerage Allocation and Other Practices
For additional information about V.A. World Bond Fund's brokerage allocation
practices, see "Brokerage Allocation" in the V.A. World Bond Fund SAI.
Capital Stock and Other Securities
For additional information about the voting rights and other characteristics of
V.A. World Bond Fund's shares of beneficial interest, see "Description of the
Trust's Shares" in the V.A. World Bond Fund SAI.
Purchase, Redemption and Pricing of V.A.World Bond Fund Shares
For additional information about the net asset value of V.A. World Bond Fund,
see "Net Asset Value" in the V.A. World Bond Fund SAI.
Tax Status
For additional information about the tax status of V.A. World Bond Fund, see
"Tax Status" in the V.A. World Bond Fund SAI.
Underwriters
For additional information about V.A. World Bond Fund's principal underwriter
and the distribution contract between the principal underwriter and V.A. World
Bond Fund, see "Distribution Contract" in the V.A. World Bond Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of V.A. World Bond
Fund, see "Calculation of Performance" in the V.A. World Bond Fund SAI.
Financial Statements
Audited financial statements of V.A. World Bond Fund at December 31, 1997 are
attached to the V.A. World Bond Fund SAI.
<PAGE>
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock V.A. International Fund
John Hancock V.A. Regional Bank Fund
John Hancock V.A. Financial Industries Fund
John Hancock V.A. Emerging Growth Fund
John Hancock V.A. Special Opportunities Fund
John Hancock V.A. Growth Fund
John Hancock V.A. Growth and Income Fund
John Hancock V.A. Independence Equity Fund
John Hancock V.A. Sovereign Investors Fund
John Hancock V.A. 500 Index Fund
John Hancock V.A. Sovereign Bond Fund
John Hancock V.A. Strategic Income Fund
John Hancock V.A. High Yield Bond Fund
John Hancock V.A. World Bond Fund
John Hancock V.A. Money Market Fund
(each, a "Fund" and collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
This Statement of Additional Information provides information about John Hancock
Declaration Trust (the "Trust") and the Funds, in addition to the information
that is contained in the Funds' Prospectus dated May 1, 1998 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Servicing Center
P.O. Box 9298
Boston, Massachusetts 02205-9298
1-800-824-0335
<PAGE>
TABLE OF CONTENTS
Page
Organization of the Trust......................................................3
Eligible Investors; Investment Objectives and Policies.........................3
Investment Restrictions.......................................................18
Those Responsible for Management..............................................22
Investment Advisory and Other Services........................................31
Distribution Contract.........................................................33
Net Asset Value...............................................................34
Special Redemptions...........................................................35
Description of the Trust's Shares.............................................35
Tax Status....................................................................36
Calculation of Performance....................................................39
Brokerage Allocation..........................................................41
Shareholder Servicing Agent...................................................43
Custody of Portfolio..........................................................43
Independent Auditors .........................................................43
Appendix - Description of Bond Ratings........................................44
Financial Statements..........................................................47
2
<PAGE>
ORGANIZATION OF THE TRUST
John Hancock Declaration Trust (the "Trust") is an open-end investment
management company organized as a Massachusetts business trust under a
Declaration of Trust dated November 15, 1995. The Trust currently has fifteen
series of shares designated as: John Hancock V.A. International Fund
("International Fund"), John Hancock V.A. Regional Bank Fund ("Regional Bank
Fund"), John Hancock V.A. Financial Industries Fund ("Financial Industries"),
John Hancock V.A. Emerging Growth Fund ("Emerging Growth Fund"), John Hancock
V.A. Special Opportunities Fund ("Special Opportunities Fund"), John Hancock
V.A. Growth Fund ("Growth Fund") (formerly John Hancock V.A. Discovery Fund),
John Hancock V.A. Growth and Income Fund ("Growth and Income Fund"), John
Hancock V.A. Independence Equity Fund ("Independence Equity Fund"), John Hancock
V.A. Sovereign Investors Fund ("Sovereign Investors Fund"), John Hancock V.A.
500 Index Fund ("500 Index Fund"), John Hancock V.A. Sovereign Bond Fund
("Sovereign Bond Fund"), John Hancock V.A. Strategic Income Fund ("Strategic
Income Fund"), John Hancock V.A. High Yield Bond Fund ("High Yield Bond Fund"),
John Hancock V.A. World Bond Fund ("World Bond Fund") and John Hancock V.A.
Money Market Fund ("Money Market Fund").
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"). The Adviser is an indirect wholly-owned subsidiary of John Hancock
Mutual Life Insurance Company (the "Life Company"), a Massachusetts life
insurance company chartered in 1862, with national headquarters at John Hancock
Place, Boston, Massachusetts. The investment sub-adviser to the International
Fund is John Hancock Advisers International Limited ("JHAI"). The investment
sub-adviser of Independence Equity Fund is Independence Investment Associates,
Inc. ("IIA"). The investment sub-adviser for Sovereign Investors Fund is
Sovereign Asset Management Corp. ("SAMCorp"). Together, JHAI, IIA and SAMCorp
are sometimes referred to herein collectively as the "Sub-advisers" or,
individually, as the "Sub-adviser." The Sub-advisers are wholly owned indirect
subsidiaries of the Life Company.
ELIGIBLE INVESTORS; INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's investment
objective and policies discussed in the Prospectus. The Funds are designed to
serve as investment vehicles for variable annuity and variable life insurance
contracts (the "Variable Contracts") offered by the separate accounts of various
insurance companies. Participating insurance companies are the owners of shares
of beneficial interest in each Fund of the Trust. In accordance with any
limitations set forth in their Variable Contracts, contract holders may direct,
through their participating insurance companies, the allocation of amounts
available for investment among the Funds. Instructions for any such allocation,
or for the purchase or redemption of shares of a Fund, must be made by the
investor's participating insurance company's separate account as the owner of
the Fund's shares. The rights of participating insurance companies as owners of
shares of a Fund are different from the rights of contract holders under their
Variable Contracts. The term "shareholder" in this Statement of Additional
Information refers only to participating insurance companies, and not to
contract holders.
Each Fund has its own distinct investment objective and policies. In striving to
meet its objective, each Fund will face the challenges of changing business,
economic and market conditions. There is no assurance that the Funds will
achieve their investment objectives. For a further description of the Funds'
investment objectives, policies and restrictions see "Investment Objective and
Overview of each Fund" in the Prospectus and "Investment Restrictions" in this
Statement of Additional Information.
Custodial Receipts. The Funds may each acquire custodial receipts with respect
to U.S. Government securities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds.
These custodial receipts are known by various names, including Treasury
Receipts, Treasury Investors Growth Receipts ("TIGRs"), and Certificates of
3
<PAGE>
Accrual on Treasury Securities ("CATS"). For certain securities law purposes,
custodial receipts are not considered U.S. Government securities.
Bank and Corporate Obligations. Each of the Funds may invest in commercial
paper. Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Funds consists of direct U.S.
Dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which a Fund may invest include certificates of deposit, bankers' acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Mortgage-Backed Securities. Each Fund may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the Government National Mortgage Association ("Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by
the full faith and credit of the U.S. Government for timely payment of principal
and interest on the certificates. Fannie Mae certificates are guaranteed by
Fannie Mae, a federally chartered and privately owned corporation, for full and
timely payment of principal and interest on the certificates. Freddie Mac
certificates are guaranteed by Freddie Mac, a corporate instrumentality of the
U.S. Government, for timely payment of interest and the ultimate collection of
all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
issuers. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
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Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass- through securities. Debt service on CMOs
is provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), invests in certain mortgages
primarily secured by interests in real property and other permitted investments
and issues "regular" and "residual" interests. The Funds do not intend to
acquire REMIC residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the
Securities and Exchange Commission ("SEC") considers privately issued SMBS to be
illiquid.
Structured or Hybrid Notes. The Sovereign Bond Fund, Strategic Income Fund, High
Yield Bond Fund and World Bond Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows a Fund to gain exposure to the benchmark market while fixing the maximum
loss that the Fund may experience in the event that market does not perform as
expected. Depending on the terms of the note, a Fund may forego all or part of
the interest and principal that would be payable on a comparable conventional
note; a Fund's loss cannot exceed this foregone interest and/or principal. An
investment in structured or hybrid notes involves risks similar to those
associated with a direct investment in the benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counterparty to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
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Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Asset-Backed Securities. The Sovereign Bond Fund, Strategic Income Fund and High
Yield Bond Fund may invest in securities that represent individual interests in
pools of consumer loans and trade receivables similar in structure to
Mortgage-Backed Securities. The assets are securitized either in a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). Although the collateral supporting
asset-backed securities generally is of a shorter maturity than mortgage loans
and historically has been less likely to experience substantial prepayments, no
assurance can be given as to the actual maturity of an asset-backed security
because prepayments of principal may be made at any time. Payments of principal
and interest typically are supported by some form of credit enhancement, such as
a letter of credit, surety bond, limited guarantee by another entity or having a
priority to certain of the borrower's other securities. The degree of credit
enhancement varies, and generally applies to only a fraction of the asset-backed
security's par value until exhausted. If the credit enhancement of an
asset-backed security held by a Fund has been exhausted, and if any required
payments of principal and interest are not made with respect to the underlying
loans, a Fund may experience losses or delays in receiving payment.
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund's ability to maintain positions in
these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Risks Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), leveraged floating rate securities whose yield changes
in the same direction, rather than inversely to, a referenced interest rate ("
super floaters"), other leveraged floating rate instruments and Mortgage-Backed
Securities purchased at a premium to their par value. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities.
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The primary risks associated with certain other derivative debt securities are
the potential extension of average life and/or depreciation due to rising
interest rates. These securities include floating rate securities based on the
Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate
securities, floating rate securities that are subject to a maximum interest rate
("capped floaters"), Mortgage-Backed Securities purchased at a discount,
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs"), certain residual or support tranches of CMOs and index
amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but
are subject to extension risk resulting from the issuer's failure to exercise
its option to call or redeem the notes before their stated maturity date.
Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities
described above and thus present an especially intense combination of
prepayment, extension and interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risks
than other Mortgage-Backed Securities, provided that prepayment rates remain
within expected prepayment ranges or "collars." To the extent that prepayment
rates remain within these prepayment ranges, the residual or support tranches of
PAC and TAC CMOs assume the extra prepayment, extension and interest rate risks
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, with
the largest portion issued by Argentina and Brazil. Brady Bonds may involve a
high degree of risk, may be in default or present the risk of default. Investors
should recognize however, that Brady Bonds have been issued only recently, and,
accordingly, they do not have a long payment history. Agreements implemented
under the Brady Plan to date are designed to achieve debt and debt-service
reduction through specific options negotiated by a debtor nation with its
creditors. As a result, the financial packages offered by each country differ.
The types of options have included the exchange of outstanding commercial bank
debt for bonds issued at 100% of face value of such debt, bonds issued at a
discount of face value of such debt, bonds bearing an interest rate which
increases over time and bonds issued in exchange for the advancement of new
money by existing lenders. Certain Brady Bonds have been collateralized as to
principal due at maturity by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, the World Bank and the debtor nations'
reserves. In addition, the first two or three interest payments on certain types
of Brady Bonds may be collateralized by cash or securities agreed upon by
creditors. Although Brady Bonds may be collateralized by U.S. Government
securities, repayment of principal and interest is not guaranteed by the U.S.
Government.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's), Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service ("Fitch") represent the opinions of these agencies as to the
quality of the securities which they rate. It should be emphasized, however,
that such ratings are relative and subjective and are not absolute standards of
quality. These ratings will be used by the Funds as initial criteria for the
selection of portfolio securities. Among the factors which will be considered
are the long-term ability of the issuer to pay principal and interest and
general economic trends. Appendix A contains further information concerning the
ratings of Moody's, S&P and Fitch and their significance.
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Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
Lower Rated High Yield/High Risk Debt Obligations. Strategic Income Fund,
Regional Bank Fund, Financial Industries Fund, Growth and Income Fund, Sovereign
Investors Fund, Growth Fund, Sovereign Bond Fund, High Yield Bond Fund and World
Bond Fund may invest in high yield/high risk, fixed income securities rated
below investment grade (e.g., rated below Baa by Moody's or below BBB by S&P).
Ratings are based largely on the historical financial condition of the issuer.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate.
See the Appendix to the Prospectus and this Statement of Additional Information
which describes the characteristics of corporate bonds in the various rating
categories. These Funds may invest in comparable quality unrated securities
which, in the opinion of the Adviser or relevant Sub-adviser, offer comparable
yields and risks to those securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal.
The market price and liquidity of lower rated fixed income securities generally
respond to short term corporate and market developments to a greater extent than
do the price and liquidity of higher rated securities because such developments
are perceived to have a more direct relationship to the ability of an issuer of
such lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield/high risk bond market or the
reduced availability of market quotations will make it more difficult to dispose
of the bonds and to value accurately a Fund's assets. The reduced availability
of reliable, objective data may increase a Fund's reliance on management's
judgment in valuing high yield/high risk bonds. In addition, a Fund's
investments in high yield/high risk securities may be susceptible to adverse
publicity and investor perceptions, whether or not justified by fundamental
factors.
Foreign Currency Transactions. Each Fund (other than Independence Equity Fund,
500 Index Fund, Sovereign Investors Fund and Money Market Fund) may engage in
foreign currency transactions. The foreign currency transactions of the Funds
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Funds may enter
into forward foreign currency contracts involving currencies of the different
countries in which they will invest as a hedge against possible variations in
the foreign exchange rate between these currencies. Forward contracts are
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Funds' transactions in forward
foreign currency contracts will be limited to hedging either specific
transactions or portfolio positions. The Funds may elect to hedge less than all
of their foreign portfolio positions. The Funds will not engage in speculative
forward currency transactions.
If a Fund enters into a forward contract to purchase foreign currency, its
custodian will segregate cash or liquid securities, of any type or maturity, in
a separate account of the Fund in an amount necessary to complete the forward
contract. These assets will be marked to market daily and if the value of the
assets in the separate account declines, additional cash or liquid assets will
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be added so that the value of the account will equal the amount of the Fund's
commitments in purchased forward contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for a Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to a Fund of engaging in foreign currency exchange transactions varies
with such factors as the currency involved, the length of the contract period
and the market conditions then prevailing. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Time Deposits. World Bond's time deposits are non-negotiable deposits maintained
for a stated period of time at a stated interest rate. If the Fund purchases
time deposits maturing in seven days or more, it will treat those longer-term
time deposits as illiquid.
Foreign Securities and Emerging Countries. Each Fund except for Independence
Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund may
invest in U.S. Dollar and foreign denominated securities of foreign issuers.
Independence Equity Fund, 500 Index Fund and Money Market Fund may only invest
in U.S. dollar denominated securities including those of foreign issuers which
are traded on a U.S. Exchange. International Fund, Emerging Growth Fund,
Strategic Income Fund, High Yield Bond Fund and World Bond Fund may also invest
in debt and equity securities of corporate and governmental issuers of countries
with emerging economies or securities markets.
Investing in obligations of non-U.S. issuers and foreign banks, particularly
securities of issuers located in emerging countries, may entail greater risks
than investing in similar securities of U.S. issuers. These risks include (i)
social, political and economic instability; (ii) the small current size of the
markets for many such securities and the currently low or nonexistent volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property. Investing in
securities of non-U.S. companies may entail additional risks due to the
potential political and economic instability of certain countries and the risks
of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
In addition, even though opportunities for investment may exist in foreign
countries, and in particular emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist. Investors should note that upon the
accession to power of authoritarian regimes, the governments of a number of
Latin American countries previously expropriated large quantities of real and
personal property similar to the property which may be represented by the
securities purchased by the Funds. The claims of property owners against those
governments were never finally settled. There can be no assurance that any
property represented by foreign securities purchased by a Fund will not also be
expropriated, nationalized, or otherwise confiscated. If such confiscation were
to occur, a Fund could lose a substantial portion of its investments in such
countries. A Fund's investments would similarly be adversely affected by
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exchange control regulations in any of those countries. Certain countries in
which the Funds may invest may have vocal minorities that advocate radical
religious or revolutionary philosophies or support ethnic independence. Any
disturbance on the part of such individuals could carry the potential for
widespread destruction or confiscation of property owned by individuals and
entities foreign to such country and could cause the loss of a Fund's investment
in those countries.
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Funds. As illustrations, certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
by foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Moreover, the national policies of certain countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. In addition, some countries require governmental approval
for the repatriation of investment income, capital or the proceeds of securities
sales by foreign investors. A Fund could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most foreign securities held by the Funds will not be
registered with the SEC and such issuers thereof will not be subject to the
SEC's reporting requirements. Thus, there will be less available information
concerning foreign issuers of securities held by the Funds than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately the financial situation of the
issuer, the Adviser or relevant Sub-adviser will take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists. There is substantially less publicly available
information about foreign companies than there are reports and ratings published
about U.S. companies and the U.S. Government. In addition, where public
information is available, it may be less reliable than such information
regarding U.S. issuers.
Because the Funds (other than Independence Equity Fund, 500 Index Fund,
Sovereign Investors Fund and Money Market Fund) may invest, and International
Fund, Emerging Growth Fund and World Bond Fund will (under normal circumstances)
invest, a substantial portion of their total assets in securities which are
denominated or quoted in foreign currencies, the strength or weakness of the
U.S. dollar against such currencies may account for part of the Funds'
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of a
Fund's holdings of securities denominated in such currency and, therefore, will
cause an overall decline in the Fund's net asset value and any net investment
income and capital gains to be distributed in U.S. dollars to shareholders of
the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Funds value their respective assets daily in terms of U.S. dollars,
the Funds do not intend to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. However, the Funds may do so from time to time,
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and investors should be aware of the costs of currency conversion. Although
currency dealers do not charge a fee for conversion, they do realize a profit
based on the difference ("spread") between the prices at which they are buying
and selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire to sell that currency to the dealer.
Securities of foreign issuers, and in particular many emerging country issuers,
may be less liquid and their prices more volatile than securities of comparable
U.S. issuers. In addition, foreign securities exchanges and brokers are
generally subject to less governmental supervision and regulation than in the
U.S., and foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a Fund due
to subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
The Funds' investment income or, in some cases, capital gains from stock or
securities of foreign issuers may be subject to foreign withholding or other
foreign taxes, thereby reducing the Funds' net investment income and/or net
realized capital gains. See "Tax Status."
Repurchase Agreements. Each Fund may enter into repurchase agreements. In a
repurchase agreement the Fund buys a security for a relatively short period
(usually not more than seven days) subject to the obligation to sell it back to
the issuer at a fixed time and price plus accrued interest. Each Fund will enter
into repurchase agreements only with member banks of the Federal Reserve System
and with securities dealers. The Adviser or relevant Sub-adviser will
continuously monitor the creditworthiness of the parties with whom a Fund enters
into repurchase agreements.
Each Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, a Fund could experience delays in liquidating
the underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period in which the
Fund seeks to enforce its rights thereto, possible subnormal levels of income or
lack of access to income during this period, as well as the expense of enforcing
its rights. A Fund will not invest in a repurchase agreement maturing in more
than seven days, if such investment, together with other illiquid securities
held by the Fund would exceed 15% (10% for Money Market Fund) of the Fund's net
assets.
Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by a Fund. Reverse repurchase agreements involve
the risk that the market value of securities purchased by a Fund with proceeds
of the transaction may decline below the repurchase price of the securities sold
by a Fund which it is obligated to repurchase. A Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. To minimize various risks associated with reverse repurchase
agreements, a Fund will establish and maintain with the Fund's custodian a
separate account consisting of highly liquid securities, of any type or
maturity, in an amount at least equal to the repurchase prices of the securities
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(plus any accrued interest thereon) under such agreements. In addition, a Fund
will not enter into reverse repurchase agreements and other borrowings exceeding
in the aggregate 33 1/3% of the market value of its total assets. A Fund will
enter into reverse repurchase agreements only with selected registered
broker/dealers or with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Trustees. Under
procedures established by the Trustees, the Adviser will monitor the
creditworthiness of the firms involved.
Restricted Securities. Each Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. However, the Fund will not invest more than 15% (10%
for Money Market Fund) of its net assets in illiquid investments. If the
Trustees determine, based upon a continuing review of the trading markets for
specific Section 4(2) paper or Rule 144A securities, that they are liquid, they
will not be subject to the 15% limit on illiquid investments. The Trustees may
adopt guidelines and delegate to the Adviser the daily function of determining
and monitoring the liquidity of restricted securities. The Trustees, however,
will retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor the Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Options on Securities, Securities Indices and Currency. Each Fund (other than
the Money Market Fund) may purchase and write (sell) call and put options on any
securities in which it may invest, on any securities index based on securities
in which it may invest or on any currency in which Fund investments may be
denominated. These options may be listed on national domestic securities
exchanges or foreign securities exchanges or traded in the over-the-counter
market. Each Fund may write covered put and call options and purchase put and
call options to enhance total return, as a substitute for the purchase or sale
of securities or currency, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the affected Fund's custodian with a value at least equal
to the Fund's obligation under the option, (ii) entering into an offsetting
forward commitment and/or (iii) purchasing an offsetting option or any other
option which, by virtue of its exercise price or otherwise, reduces the Fund's
net exposure on its written option position. A written call option on securities
is typically covered by maintaining the securities that are subject to the
option in a segregated account. Each Fund may cover call options on a securities
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index by owning securities whose price changes are expected to be similar to
those of the underlying index.
Each Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in anticipation
of an increase, or put options in anticipation of a decrease ("protective
puts"), in the market value of securities or currencies of the type in which it
may invest. Each Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities or currencies which it does not own. A Fund would ordinarily realize
a gain if, during the option period, the value of the underlying securities or
currency decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of a Fund's
portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which a Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If a Fund is unable
to effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
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operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, each Fund (other than the Money Market Fund) may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on these futures contracts. Each Fund may also enter into closing
purchase and sale transactions with respect to any of these contracts and
options. The futures contracts may be based on various securities (such as U.S.
Government securities), securities indices, foreign currencies and any other
financial instruments and indices. All futures contracts entered into by a Fund
are traded on U.S. or foreign exchanges or boards of trade that are licensed,
regulated or approved by the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that a Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling, a
Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, a Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases. A Fund may seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
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A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by a Fund or securities with characteristics similar to those of a Fund's
portfolio securities. Similarly, a Fund may sell futures contracts on any
currencies in which its portfolio securities are quoted or denominated or in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if there is an established historical pattern of
correlation between the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in a Fund's portfolio may
be more or less volatile than prices of such futures contracts, the Adviser will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any differential by having the Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. A Fund may
also purchase futures contracts as a substitute for transactions in securities
or foreign currency, to alter the investment characteristics of or currency
exposure associated with portfolio securities or to gain or increase its
exposure to a particular securities market or currency.
Options on Futures Contracts. Each Fund (other than the Money Market Fund) may
purchase and write options on futures for the same purposes as its transactions
in futures contracts. The purchase of put and call options on futures contracts
will give a Fund the right (but not the obligation) for a specified price to
sell or to purchase, respectively, the underlying futures contract at any time
during the option period. As the purchaser of an option on a futures contract, a
Fund obtains the benefit of the futures position if prices move in a favorable
direction but limits its risk of loss in the event of an unfavorable price
movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that a Fund intends to purchase. However, a
Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by each Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
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Other Considerations. Each Fund (other than the Money Market Fund) will engage
in futures and related options transactions either for bona fide hedging
purposes or to seek to increase total return as permitted by the CFTC. To the
extent that a Fund is using futures and related options for hedging purposes,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are quoted or denominated) that the
Fund owns or futures contracts will be purchased to protect the Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. Each Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or securities or instruments which it expects to purchase. As evidence
of its hedging intent, each Fund expects that on 75% or more of the occasions on
which it takes a long futures or option position (involving the purchase of
futures contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for the Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. Each Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent a Fund from closing out
positions and limiting its losses.
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Lending of Securities. Each Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. A
Fund may reinvest any cash collateral in short-term securities and money market
funds. When a Fund lends portfolio securities, there is a risk that the borrower
may fail to return the securities involved in the transaction. As a result, the
Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund
may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. Each Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of Fund's assets as compared with investing the same amount in
the underlying stock.
Short Sales. International Fund, Growth Fund, Financial Industries Fund,
Emerging Growth Fund and Special Opportunities Fund may engage in short sales in
order to profit from an anticipated decline in the value of a security. Each
Fund (except for 500 Index Fund and Money Market Fund) may also engage in short
sales to attempt to limit its exposure to a possible market decline in the value
of its portfolio securities through short sales of securities which the Adviser
believes possess volatility characteristics similar to those being hedged. To
effect such a transaction, a Fund must borrow the security sold short to make
delivery to the buyer. A Fund then is obligated to replace the security borrowed
by purchasing it at the market price at the time of replacement. Until the
security is replaced, a Fund is required to pay to the lender any accrued
interest or dividends and may be required to pay a premium.
A Fund will realize a gain if the security declines in price between the date of
the short sale and the date on which the Fund replaces the borrowed security. On
the other hand, a Fund will incur a loss as a result of the short sale if the
price of the security increases between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, interest or dividends a Fund may be required to pay in connection with
a short sale. The successful use of short selling as a hedging device may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
Under applicable guidelines of the staff of the SEC, if a Fund engages in short
sales, it must put in a segregated account (not with the broker) an amount of
cash or liquid securities, of any type or maturity, equal to the difference
between (a) the market value of the securities sold short at the time they were
sold short and (b) any cash or U.S. Government securities required to be
deposited as collateral with the broker in connection with the short sale (not
including the proceeds from the short sale). In addition, until a Fund replaces
the borrowed security, it must daily maintain the segregated account at such a
level that the amount deposited in it plus the amount deposited with the broker
as collateral will equal the current market value of the securities sold short.
Except for short sales against the box, the amount of the Fund's net assets that
may be committed to short sales is limited and the securities in which short
sales are made must be listed on a national securities exchange.
Short selling may produce higher than normal portfolio turnover which may result
in increased transaction costs to a Fund and may result in gains from the sale
of securities deemed to have been held for less than three months. Such gains
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must be less than 30% of the Fund's gross income in order for the Fund to
qualify as a regulated investment company under the Code.
Forward Commitment and When-Issued Securities. Each Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when- issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. Each Fund has adopted the following
fundamental investment restrictions which will not be changed without the
approval of a majority of the applicable Fund's outstanding voting securities.
Under the Investment Company Act of 1940, as amended (the "1940 Act"), and as
used in the Prospectus and this Statement of Additional Information, a "majority
of the outstanding voting securities" means approval by the lesser of (1) the
holders of 67% or more of the Fund represented at a meeting if the more than 50%
of the Fund's outstanding shares of the Fund are present in person or by proxy
or (2) more than 50% of the outstanding shares.
Each Fund (other than Money Market Fund) may not:
1. Issue senior securities, except as permitted by paragraphs 3,
6 and 7 below. For purposes of this restriction, the issuance
of shares of beneficial interest in multiple classes or
series, the deferral of the Trustees' fees and the purchase or
sale of options, futures contracts, forward commitments, swaps
and repurchase agreements entered into in accordance with the
Fund's investment policies within the meaning of paragraph 6
below, are not deemed to be senior securities.
2. Borrow money, except for the following extraordinary or
emergency purposes: (i) from banks for temporary or short-term
purposes or for the clearance of transactions; (ii) in
connection with the redemption of Fund shares or to finance
failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; and (iii) in
order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio
securities or assets, but only if after each such borrowing
there is asset coverage of at least 300% as defined in the
1940 Act. For purposes of this investment restriction, the
deferral of trustees' fees and short sales, transactions in
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futures contracts and options on futures contracts, securities
or indices and forward commitment transactions shall not
constitute borrowing. This restriction does not apply to
transactions in reverse repurchase agreements in amounts not
to exceed 33 1/3% of the value of the Fund's total assets
(including the amount borrowed) taken at market value.
3. Act as an underwriter, except to the extent that, in
connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the
Securities Act of 1933 (the "1933 Act").
4. Purchase or sell real estate except that the Fund may (i)
acquire or lease office space for its own use, (ii) invest in
securities of issuers that invest in real estate or interests
therein, (iii) invest in securities that are secured by real
estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of
securities.
5. Invest in commodities, except the Fund may purchase and sell
options on securities, securities indices and currency,
futures contracts on securities, securities indices and
currency and options on such futures, forward foreign currency
exchange contracts, forward commitments, securities index put
or call warrants, interest rate and currency swaps, interest
rate caps, floors and collars and repurchase agreements
entered into in accordance with the Fund's investment
policies.
6. Make loans, except that the Fund (1) may lend portfolio
securities in accordance with the Fund's investment policies
up to 33 1/3% of the Fund's total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase
all or a portion of an issue of debt securities, bank loan
participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
7. Purchase the securities of issuers conducting their principal
activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would
equal or exceed 25% of its total assets taken at market value
at the time of such investment, except that the Regional Bank
Fund will invest and the Financial Industries Fund intends to
invest more than 25% of its total assets in the banking
industry. The Financial Industries Fund will ordinarily invest
more than 25% of its assets in the financial services sector,
which includes the banking industry. The High Yield Bond Fund
may invest up to 40% of the value of its total assets in the
securities of issuers in the electric utility and telephone
industries. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies,
instrumentalities or authorities.
8. For each Fund, other than World Bond Fund, with respect to 75%
of total assets, purchase securities of an issuer (other than
the U.S. Government, its agencies, instrumentalities or
authorities), if:
(a) such purchase would cause more than 5% of the Fund's
total assets taken at market value to be invested in
the securities of such issuer; or
(b) such purchase would at the time result in more than
10% of the outstanding voting securities of such
issuer being held by the Fund.
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Money Market Fund may not:
1. Issue senior securities. For purposes of this restriction, the
issuance of shares of beneficial interest in multiple classes
or series, the deferral of the Trustees' fees and transactions
in repurchase agreements or reverse repurchase agreements are
not deemed to be senior securities.
2. Borrow money, except from banks to meet redemptions in amounts
not exceeding 33 1/3% (taken at the lower of cost or current
value) of its total assets (including the amount borrowed).
The Fund does not intend to borrow money during the coming
year, and will do so only as a temporary measure for
extraordinary purposes or to facilitate redemptions. The Fund
will not purchase securities while any borrowings are
outstanding. This restriction does not apply to the purchase
of reverse repurchase agreements in amounts not to exceed 33
1/3% of the value of the Fund's total assets (including the
amount borrowed) taken at market value.
3. Act as an underwriter, except to the extent that, in
connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the
1933 Act.
4. Write, purchase or otherwise invest in any put, call, straddle
or spread option or buy or sell real estate, commodities or
commodity futures contracts.
5. Make loans, except that the Fund (1) may lend portfolio
securities in accordance with the Fund's investment policies
up to 33 1/3% of the Fund's total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase
all or a portion of an issue of debt securities, bank loan
participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
6. Purchase the securities of issuers conducting their principal
activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would
equal or exceed 25% of its total assets taken at market value
at the time of such investment. This limitation does not apply
to investments in obligations of the U.S. Government or any of
its agencies, instrumentalities or authorities.
7. With respect to 75% of total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies,
instrumentalities or authorities), if:
(a) such purchase would cause more than 5% of the Fund's
total assets taken at market value to be invested in
the securities of such issuer; or
(b) such purchase would at the time result in more than
10% of the outstanding voting securities of such
issuer being held by the Fund.
Non-Fundamental Investment Restrictions. The following restrictions are
designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
Each Fund (other than Money Market Fund) may not:
1. Participate on a joint or joint-and-several basis in any
securities trading account. The "bunching" of orders for the
sale or purchase of marketable portfolio securities with other
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accounts under the management of the Adviser or any
Sub-adviser to save commissions or to average prices among
them is not deemed to result in a joint securities trading
account.
2. Purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, the Fund has the
right to obtain securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale
is made upon the same conditions, except (i) in connection
with arbitrage transactions, (ii) for hedging the Fund's
exposure to an actual or anticipated market decline in the
value of its securities, (iii) to profit from an anticipated
decline in the value of a security, and (iv) for obtaining
such short-term credits as may be necessary for the clearance
of purchases and sales of securities.
3. Purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of
other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one
investment company, or (iii) more than 5% of the Fund's total
assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the
investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in
the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection
with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company.
Subject to the above percentage limitations the Fund may, in
connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John
Hancock Group of Funds.
4. Invest in securities which are illiquid if, as a result, more
than 15% of its net assets would consist of such securities,
including repurchase agreements maturing in more than seven
days, securities that are not readily marketable, restricted
securities not eligible for resale pursuant to Rule 144A under
the 1933 Act and privately issued stripped mortgage-backed
securities. The adviser will determine on a case by case basis
whether a particular OTC option is illiquid.
5. Purchase securities while outstanding borrowings (other than
reverse repurchase agreements) exceed 5% of the Fund's total
assets.
6. Invest for the purpose of exercising control over or
management of any company.
The Money Market Fund may not:
1. Purchase securities on margin or make short sales of
securities except for obtaining such short-term credits as may
be necessary for the clearance of purchases and sales of
securities.
2. Purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of
other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one
investment company, or (iii) more than 5% of the Fund's total
assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the
investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in
the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection
with a merger, consolidation, reorganization or purchase of
21
<PAGE>
substantially all of the assets of another investment company.
Subject to the above percentage limitations the Fund may, in
connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John
Hancock Group of Funds.
3. Invest in securities which are illiquid if, as a result, more
than 10% of its net assets would consist of such securities,
including repurchase agreements maturing in more than seven
days, securities that are not readily marketable, restricted
securities not eligible for resale pursuant to Rule 144A under
the 1933 Act, purchased OTC options, certain assets used to
cover written OTC options, and privately issued stripped
mortgage-backed securities.
4. Invest for the purpose of exercising control over or
management of any company. If a percentage restriction on
investment or utilization of assets as set forth above is
adhered to at the time an investment is made, a later change
in percentage resulting from changes in the values of a Fund's
assets will not be considered a violation of the restriction.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will not be considered a violation
of any of the foregoing restrictions.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Funds and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also officers and directors of the Adviser, one or
more of the Sub-advisers and/or the Fund's principal distributor, John Hancock
Funds, Inc. ("John Hancock Funds").
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Director and Chief
October 1944 Executive Officer, The Berkeley
Financial Group, Inc. ("The
Berkeley Group"); Chairman and
Director, NM Capital Management,
Inc. ("NM Capital"), John Hancock
Advisers International Limited
("Advisers International") and
Sovereign Asset Management
Corporation ("SAMCorp"); Chairman,
Chief Executive Officer and
President, John Hancock Funds, Inc.
("John Hancock Funds"); Chairman,
First Signature Bank and Trust
Company; Director, John Hancock
Insurance Agency, Inc. ("Insurance
Agency, Inc."), John Hancock
Advisers International (Ireland)
Limited ("International Ireland"),
John Hancock Capital Corporation
and New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1,) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
Freeport-McMoRan Copper & Gold
Company, Inc., Hecla Mining Company,
Canyon Resources Corporation and
Original Sixteen to One Mines, Inc.
(1984-1987 and 1991-1995)
(management consultant).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Senior Vice President and Chief
3054 So. Abingdon Street Economist, The Conference Board
Arlington, VA 22206 (non-profit economic and business
December 1947 research); Director, Unisys Corp.;
and H.B. Fuller Company. Director,
National Bureau of Economic Research
(academic).
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser, The
Boston, MA 02199 Berkeley Group; Director, John
April 1953 Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the Audit
Committee and the Administration Committee.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Director, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Director and Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group, NM Capital;
March 1950 Vice President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
29
<PAGE>
All of the officers listed are officers or employees of the Adviser, a
Sub-adviser or affiliated companies. Some of the Trustees and officers may also
be officers, Directors and/or Trustees of one or more of the other funds for
which the Adviser serves as investment adviser.
As of December 31, 1997, all shares were held by the Life Co. and the Variable
Life Co. except the Adviser owns the following: International Fund 59.16%,
Emerging Growth Fund 26.99%, Growth Fund 28.75%, Independence Equity Fund
16.75%, Sovereign Investors Fund 11.41%, 500 Index Fund 52.40%, Sovereign Bond
30.88%, Strategic Income Fund 42.82%, World Bond Fund 91.56%, Money Market Fund
1.26%.
At such date, no other person(s) owned of record or was known by the Trust to
beneficially own as much as 5% of the outstanding shares of the Trust or of any
of the Funds.
Compensation of the Trustees. The following table provides information regarding
the compensation paid by the Funds and the other investment companies in the
John Hancock Fund Complex to the Independent Trustees for their services.
Messrs. Boudreau and Scipione and Ms. Hodsdon, each a non-Independent Trustee,
and each of the officers of the Funds are interested persons of the Adviser, are
compensated by the Adviser and/or its affiliates and receive no compensation
from the Funds for their services.
<TABLE>
<CAPTION>
Independent Trustees Aggregate Compensation Total Compensation From
- ------------------- From the Funds Fiscal Year All Funds in John Hancock
Ended December 31, 1997 Fund Complex
----------------------- Trustees(*)
------------
<S> <C> <C>
Dennis S. Aronowitz $ 116 $ 72,000
Richard P. Chapman, Jr.+ 122 75,000
William J. Cosgrove+ 116 72,000
Douglas M. Costle 122 75,000
Leland O. Erdahl 116 72,000
Richard A. Farrell 122 75,000
Gail D. Fosler 116 72,000
William F. Glavin+ 116 72,000
John A. Moore+ 116 72,000
Patti McGill Peterson 116 72,000
John W. Pratt 116 72,000
Edward J. Spellman 122 75,000
--------- ----------
$ 1,416 $ 876,000
</TABLE>
(*) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1997. As of
this date, there were sixty-seven funds in the John Hancock Fund Complex of
which each of these Independent Trustees served on thirty-five funds.
+ As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for Mr.
Chapman was $69,148, for Mr. Cosgrove was $167,829 and for Mr. Glavin was
$193,514, and for Dr. Moore was $84,315 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
30
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in total assets under
management in its capacity as investment adviser to the Funds and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over 1,400,000 shareholders. The Adviser is
a wholly owned subsidiary of The Berkeley Financial Group, which is in turn a
wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc., which is in
turn a wholly owned subsidiary of the Life Company, one of the most recognized
and respected financial institutions in the nation. With total assets under
management of over $100 billion, the Life Company is one of the ten largest life
insurance companies in the United States, and carries a high rating from
Standard & Poor and A.M. Best. Founded in 1862, the Life Company has been
serving clients for over 130 years.
Each Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser, which was approved by the Funds' shareholders.
Pursuant to the advisory agreements, the Adviser will: (a) furnish continuously
an investment program for the Funds and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Funds' operations except those which are delegated to a custodian, transfer
agent or other agent.
The Funds bear all costs of their organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Funds' plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Funds (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Funds); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association membership; insurance premiums; and any
extraordinary expenses.
With respect to the International Fund, the Adviser has entered into a
sub-advisory agreement with JHAI. With respect to Independence Equity Fund, the
Adviser has entered into a sub-advisory agreement with IIA. With respect to
Sovereign Investors Fund, the Adviser has entered into a sub-advisory agreement
with SAMCorp. Under each respective sub-advisory agreement, the corresponding
Sub-adviser, subject to the review of the Trustees and the overall supervision
of the Adviser, is responsible for managing the investment operations of the
corresponding Fund and the composition of the Fund's portfolio and furnishing
the Fund with advice and recommendations with respect to investments, investment
policies and the purchase and sale of securities. See "Organization and
Management of the Funds" and "The Funds' Expenses" in the Prospectus for a
description of certain information concerning each Fund's advisory agreement and
the sub-advisory agreements of International Fund, Independence Equity Fund and
Sovereign Investors Fund.
JHAI, located at 34 Dover Street, London, England, W1X3RA, is a wholly owned
subsidiary of the Adviser, formed in 1987 to provide investment research and
advisory services to U.S. institutional clients. IIA, located at 53 State
Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly owned
indirect subsidiary of John Hancock Subsidiaries, Inc. SAMCorp, located at 1235
Westlakes Drive, Berwyn, Pennsylvania 19312, is a wholly owned subsidiary of The
Berkeley Financial Group.
31
<PAGE>
As provided by the advisory agreements, each Fund pays the Adviser a fee, which
is accrued daily and paid monthly in arrears and is equal on an annual basis to
a stated percentage of the respective Fund's average daily net asset value. The
Adviser, not any Fund, pays the subadvisory fees as described in the Prospectus.
See "The Fund's Expenses" in the Prospectus.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The adviser has voluntarily agreed to limit each Fund's expenses, excluding the
management fee, to 0.25% of each Fund's average daily net assets. The Adviser
retains the right to reimpose a fee and recover any other payments to the extent
that, at the end of any fiscal year, the Fund's annual expenses fall below this
limit.
Securities held by a Fund may also be held by other funds or investment advisory
clients for which the Adviser or any of its affiliates provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser or Sub-adviser for a Fund or for other funds or
clients for which the Adviser or Sub-adviser renders investment advice arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds or clients in a manner
deemed equitable to all of them. To the extent that transactions on behalf of
more than one client of the Adviser or its affiliates may increase the demand
for securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
Pursuant to each advisory agreement, and, where applicable, sub-advisory
agreement, neither the Adviser nor any Sub-adviser is liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in connection
with the matters to which its respective contract relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser or any Sub-adviser in the performance of its duties or from its
reckless disregard of the obligations and duties under the applicable contract.
Under the advisory agreements, each Fund may use the name "John Hancock" or any
name derived from or similar to it only for as long as the applicable advisory
agreement or any extension, renewal or amendment thereof remains in effect. If a
Fund's advisory agreement is no longer in effect, the Fund (to the extent that
it lawfully can) will cease to use such name or any other name indicating that
it is advised by or otherwise connected with the Adviser. In addition, the
Adviser or the Life Company may grant the non-exclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity, including
but not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
As provided by the investment management contracts, each Fund pays the Adviser a
fee, which is accrued daily and paid monthly in arrears, equal on an annual
basis to a stated percentage of the respective Fund's average daily net asset
value. The Adviser, not any Fund, pays the subadvisory fees as described in the
Prospectuses.
After the expense reduction by the Adviser, each Fund paid no management fee to
the Adviser for the fiscal period from August 29, 1996 to December 31, 1996. For
the fiscal year ended December 31, 1997, the Adviser's management fee for each
Fund is listed below.
32
<PAGE>
Fund Management fee before Management fee received
expense reduction by the Adviser
International Fund $26,618 $ 188
Financial Industries Fund 41,060 23,382
Emerging Growth Fund 14,584 0
Growth Fund 16,677 0
Independence Equity Fund 23,457 2,169
500 Index Fund 11,552 0
Sovereign Investors Fund 27,842 13,539
World Bond Fund 16,085 0
Strategic Income Fund 19,377 2,512
Sovereign Bond Fund 8,924 0
Money Market Fund 12,328 0
For the fiscal year ended December 31, 1997, the Adviser paid the Subadviser of
International Fund $18,127. For the fiscal year ended December 31, 1997, the
Subadvisers of Independence Equity Fund and Sovereign Investors Fund waived
their fees.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. Since inception on August 29, 1996 to December 31, 1996, and
for the fiscal year ended December 31, 1997, the Funds paid the Adviser the
following for services under this agreement: $133 and $535 for International
Fund, $0 and $909 for Financial Industries Fund, $64 and $349 for Emerging
Growth Fund, $65 and $400 for Growth Fund, $70 and $600 for Independence Equity
Fund, $245 and $1,862 for 500 Index Fund, $68 and $829 for Sovereign Investors
Fund, $131 and $390 for World Bond Fund, $132 and $583 for Strategic Income
Fund, $66 and $322 for Sovereign Bond Fund and $7 and $439 for Money Market
Fund.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser,
the sub-advisers and the Funds have adopted extensive restrictions on personal
securities trading by personnel of the Adviser, the sub-advisers and their
affiliates. In the case of the Adviser, some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. The sub-advisers have adopted similar
restrictions which may differ where appropriate as long as they have similar
intent. These restrictions are a continuation of the basic principle that the
interests of the Funds and their shareholders come first.
DISTRIBUTION CONTRACTS
Distribution Agreement. John Hancock Funds, a wholly owned subsidiary of the
Adviser, serves as the principal underwriter for the Trust in connection with
the continuous offering of the shares of the Funds. John Hancock Funds has the
exclusive right, pursuant to the Distribution Agreement, to purchase shares from
the Funds at net asset value for resale to the separate accounts of insurance
companies at the public offering price.
Each advisory agreement, sub-advisory agreement and distribution agreement
(except those for Special Opportunities Fund, Growth and Income Fund and High
Yield Bond Fund which will expire on January 2, 2000) initially expires on
August 12, 1998, and will continue in effect from year to year if approved by
either the vote of the Fund's shareholders or the Trustees, including a vote of
a majority of the Trustees who are not parties to the agreement or "interested
persons" of any such party, cast at a meeting called for such purposes. These
agreements may be terminated on 60 days written notice by any party or by a vote
of a majority of the outstanding voting securities of the affected Fund and will
terminate automatically if assigned.
33
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of the
Funds, the following procedures are utilized wherever applicable.
Debt securities are valued on the basis of valuations furnished by a principal
market maker or a pricing service, both of which generally utilize electronic
data processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt instruments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of any security may be determined in good faith in accordance with
procedures approved by the Trustees.
Money Market Fund utilizes the amortized cost valuation method of valuing
portfolio instruments in the absence of extraordinary or unusual circumstances.
Under the amortized cost method, assets are valued by constantly amortizing over
the remaining life of an instrument the difference between the principal amount
due at maturity and the cost of the instrument to the Fund. The Trustees will
from time to time review the extent of any deviation of the net asset value, as
determined on the basis of the amortized cost method, from net asset value as it
would be determined on the basis of available market quotations. If any
deviation occurs which may result in unfairness either to new investors or
existing shareholders, the Trustees will take such actions as they deem
appropriate to eliminate or reduce such unfairness to the extent reasonably
practicable. These actions may include selling portfolio instruments prior to
maturity to realize gains or losses or to shorten the Fund's average portfolio
maturity, withholding dividends, splitting, combining or otherwise
recapitalizing outstanding shares or utilizing available market quotations to
determine net asset value per share.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the Funds' custodian
based on London currency exchange quotations as of 5:00 p.m., London time (12:00
noon, New York time) on the date of any determination of a Fund's NAV. If
quotations are not readily available, or the value has been materially affected
by events occurring after the closing of a foreign market, assets are valued by
a method that the Trustees believe accurately reflects fair value.
The NAV for each Fund is determined each business day at the close of regular
trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by
dividing the Fund's net assets by the number of its shares outstanding. On any
day an international market is closed and the New York Stock Exchange is open,
any foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of that Fund's
shares may be significantly affected on days when a shareholder has no access to
that Fund.
34
<PAGE>
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, a brokerage charge would be incurred. Any
such security would be valued for the purpose of making such payment at the same
value as used in determining net asset value. Each Fund has elected to be
governed by Rule 18f-1 under the 1940 Act. Under that rule, the Fund must redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one account.
DESCRIPTION OF THE TRUST'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Funds. The Declaration of Trust, dated November 15, 1995 (the "Declaration
of Trust"), permits the Trustees to issue an unlimited number of full and
fractional shares of beneficial interest of the Funds, without par value. Under
the Declaration of Trust, the Trustees have the authority to create and classify
shares of beneficial interest in separate series, without further action by
shareholders. As of the date of this Statement of Additional Information, the
Trustees have only authorized shares of the Funds. Additional series may be
added in the future. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Funds, or any other series of the
Trust, into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have not authorized the issuance of additional classes
of shares of the Funds.
Each share of a Fund represents an equal proportionate interest in the assets
belonging to that Fund. When issued, shares are fully paid and nonassessable
except as provided in the Prospectus under the caption "Organization and
Management of the Funds." In the event of liquidation of a Fund, shareholders
are entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of a Fund are freely transferable and
have no preemptive, subscription or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times net asset value per share) will be
entitled to one vote on any matter on which such shares are entitled to vote.
The rights, if any, of Variable Contract holders to vote the shares of a Fund
are governed by the relevant Variable Contract. For information on these voting
rights, see the Prospectus describing the Variable Contract.
Unless otherwise required by the 1940 Act or the Declaration of Trust, each Fund
has no intention of holding annual meetings of shareholders. Fund shareholders
may remove a Trustee by the affirmative vote of at least two-thirds of the
Trust's outstanding shares and the Trustees shall promptly call a meeting for
such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Trust. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts, obligations or affairs of the Funds. The
Declaration of Trust also provides for indemnification out of the Funds' assets
for all losses and expenses of any shareholder held personally liable by reason
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of being or having been a shareholder. The Declaration of Trust also provides
that no series of the Trust shall be liable for the liabilities of any other
series. Liability is therefore limited to circumstances in which a Fund itself
would be unable to meet its obligations, and the possibility of this occurrence
is remote. A shareholder's account is governed by the laws of The Commonwealth
of Massachusetts.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes. Each
Fund has elected or intends to elect to be treated, and intends to qualify for
each taxable year, as a separate "regulated investment company" under Subchapter
M of the Code. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, each Fund will not be subject to Federal
income tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
Qualification of a Fund for treatment as a regulated investment company under
the Code requires, among other things, that (a) at least 90% of a Fund's annual
gross income, without being offset for losses from the sale or other disposition
of stock or securities or other transactions, be derived from interest,
dividends, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (b) each Fund distributes to its shareholders for each taxable year
(in compliance with certain timing requirements) as dividends at least 90% of
the sum of its taxable and tax-exempt net investment income, the excess of net
short-term capital gain over net long-term capital loss earned in each year and
any other net income (except for the excess, if any, of net long-term capital
gain over net short-term capital loss, which need not be distributed in order
for the Fund to qualify as a regulated investment company but is taxed to the
Fund if it is not distributed); and (c) each Fund diversifies its assets so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
fair market value of its total (gross) assets is comprised of cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to no more than 5% of
the fair market value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer and (ii) no more than 25% of the fair market
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies) or of two or more issuers controlled by the Fund and engaged in the
same, similar, or related trades or businesses.
Each Fund also must, and intends to, comply with the diversification
requirements imposed by Section 817(h) of the Code and the regulations
thereunder on certain insurance company separate accounts. These requirements,
which are in addition to the diversification requirements imposed on a Fund by
the 1940 Act and Subchapter M of the Code, place certain limitations on assets
of each insurance company separate account used to fund variable contracts and,
because Section 817(h) and those regulations treat the assets of the Fund as
assets of the related separate account, the assets of a Fund that may be
invested in securities of any one, two, three and four issuers. Specifically,
the regulations provide that, except as permitted by the "safe harbor" described
below, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the total assets of a Fund may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. Government agency and instrumentality is considered a separate
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets is attributable to cash and cash items (including
receivables), U.S. Government securities and securities of other regulated
investment companies. Failure by a Fund to both qualify as a regulated
investment company and satisfy the Section 817(h) requirements would generally
result in treatment of the variable contract holders other than as described in
the applicable variable contract prospectus, including possible current
inclusion in ordinary income of income accrued under the contracts for the
current and all prior taxable years. Under certain circumstances described in
the applicable Treasury regulations, inadvertent failure to satisfy the
applicable diversification requirements may be corrected, but such a correction
would require a payment to the Internal Revenue Service (the "I.R.S.") based on
the tax contract holders would have incurred if they were treated as receiving
the income on the contract for the period during which the diversification
requirements were not satisfied. Any such failure may also result in adverse tax
consequences for the insurance company issuing the contracts. Failure by a Fund
to qualify as a regulated investment company would also subject the Fund to
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federal and state income taxation of all of its taxable income and gain, whether
or not distributed to shareholders.
If a Fund acquires stock in certain non-U.S. corporations that receive at least
75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), that Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may ameliorate these adverse tax
consequences, but any such election could require the applicable Fund to
recognize taxable income or gain without the concurrent receipt of cash. Any
Fund that is permitted to acquire stock in foreign corporations may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
foreign currency futures and options, foreign currency forward contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. Any such transactions
that are not directly related to a Fund's investment in stock or securities,
possibly including speculative currency positions or currency derivatives not
used for hedging purposes, and could under future Treasury regulations produce
income not among the types of "qualifying income" from which the Fund must
derive at least 90% of its annual gross income. Income from investments in
commodities, such as gold and certain related derivative instruments, is also
not treated as qualifying income under this test. If the net foreign exchange
loss for a year treated as ordinary loss under Section 988 were to exceed a
Fund's investment company taxable income computed without regard to such loss
but after considering the post-October loss regulations (i.e., all of the Fund's
net income other than any excess of net long-term capital gain over net
short-term capital loss) the resulting overall ordinary loss for such year would
not be deductible by the Fund or its shareholders in future years.
A Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases.
For Federal income tax purposes, each Fund is generally permitted to carry
forward a net realized capital loss in any year to offset its own net realized
capital gains, if any, during the eight years following the year of the loss. To
the extent subsequent net realized capital gains are offset by such losses, they
would not result in Federal income tax liability to the applicable Fund and
would not be distributed as such to shareholders. As of December 31, 1997, the
following Funds had capital loss carry forwards which expire in 2004 and 2005,
respectively; Emerging Growth Fund $18,937 and $167,508 Growth Fund $11,062 and
$197,206, and Strategic Income Fund $0 and $2,482.
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Each Fund that invests in certain pay in-kind securities ("PIKs") (debt
securities whose interest payments may be made either in cash or in-kind), zero
coupon securities or certain increasing rate securities (and, in general, any
other securities with original issue discount or with market discount if the
Fund elects to include market discount in income currently) must accrue income
on such investments prior to the receipt of the corresponding cash payments.
However, each Fund must distribute, at least annually, all or substantially all
of its net income, including such accrued income, to shareholders to qualify as
a regulated investment company under the Code and avoid Federal income tax.
Therefore, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
Investments in debt obligations that are at risk of or are in default present
special tax issues for any Fund that may hold such obligations, such as Growth
and Income Fund, Sovereign Investors Fund, Strategic Income Fund, High Yield
Bond Fund, and World Bond Fund. Tax rules are not entirely clear about issues
such as when the Funds may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by any Fund that may hold such obligations in order to reduce the risk
of distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income tax.
Limitations imposed by the Code on regulated investment companies like the Funds
may restrict a Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions undertaken by
a Fund may cause such Fund to recognize gains or losses from marking to market
even though its securities or other positions have not been sold or terminated
and affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of a Fund's
losses on its transactions involving options, futures and forward foreign
currency contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gains. These transactions may therefore affect the
amount, timing and character of a Fund's distributions to shareholders. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. The Funds
will take into account the special tax rules (including consideration of
available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The tax rules applicable to dollar rolls, currency swaps and interest rate
swaps, caps, floors and collars may be unclear in some respects, and the Funds
may be required to limit participation in such transactions in order to qualify
as regulated investment companies. Additionally, the Fund may be required to
recognize gain, but not loss, if a swap or other transaction is treated as a
constructive sale of an appreciated financial position in the Fund's portfolio.
The Fund may have to sell portfolio securities under disadvantageous
circumstances to generate cash, or borrow cash, to satisfy these distribution
requirements.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to the Funds and certain aspects of their distributions. The
discussion does not address special tax rules applicable to insurance companies.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership or redemption of shares of, and receipt of
distributions from, a Fund in their particular circumstances.
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The Funds are not subject to Massachusetts corporate excise or franchise taxes.
Provided that each Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1997, the annualized yield was:
Sovereign Bond Fund 5.62%
Strategic Income Fund 8.56%
World Bond Fund 5.48%
Yield (except for Money Market Fund). The yield of each Fund (except for Money
Market Fund) is computed by dividing net investment income per share determined
for a 30-day period by the net asset value per share on the last day of the
period, according to the following standard formula:
a - b
____ 6
Yield = 2 ( [ cd ) + 1 ] - 1 )
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding
during the period that would be entitled to receive
dividends.
d = the net asset value per share on the last day
of the period.
Money Market Fund Yield. For the purposes of calculating yield for the Money
Market Fund, daily income per share consists of interest and discount earned on
the Fund's investments less provision for amortization of premiums and
applicable expenses, divided by the number of shares outstanding, but does not
include realized or unrealized appreciation or depreciation.
If the Fund reports its annualized yield, it will also furnish information as to
the average portfolio maturities of the Fund. It will also report any material
effect of realized gains or losses or unrealized appreciation on dividends which
have been excluded from the computation of yield.
Yield calculations are based on the value of a hypothetical preexisting account
with exactly one share at the beginning of the seven day period. Yield is
computed by determining the net change in the value of the account during the
base period and dividing the net change by the value of the account at the
beginning of the base period to obtain the base period return. Base period is
multiplied by 365/7 and the resulting figure is carried to the nearest 100th of
a percent. Net change in account value during the base period includes dividends
declared on the original share, dividends declared on any shares purchased with
dividends of that share and any account or sales charges that would affect an
account of average size, but excludes any capital changes.
Effective yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
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period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1
The average annual total return for each Fund for the 1 year period ended
December 31, 1997 and since, the commencement of operations through December 31,
1997 is as follows:
Commencement of
1 year period ended Operations to
December 31, 1997 December 31, 1997*
V.A. International Fund (0.54%) 8.93%
V.A. Financial Industries Fund -- 35.05%
V.A. Emerging Growth Fund 11.06% 2.76%
V.A. Growth Fund 14.27% 5.40%
V.A. Independence Equity Fund 30.68% 32.69%
V.A. Sovereign Investors Fund 28.43% 27.92%
V.A. 500 Index Fund 29.51% 31.55%
V.A. Sovereign Bond Fund 9.30% 10.37%
V.A. Strategic Income Fund 11.77% 13.84%
V.A. World Bond Fund 1.37% 4.04%
* V.A. Financial Industries Fund commenced operations on April 30, 1997. Each of
the other funds commenced operations on August 29, 1996.
Total Return. Each Fund's total return is computed by finding the average annual
compounded rate of return over the indicated period that would equate the
initial amount invested to the ending redeemable value according to the
following formula
n ________
T = \ / ERV / P - 1
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the indicated period.
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period. The "distribution
rate" is determined by annualizing the result of dividing the declared dividends
of a Fund during the period stated by the net asset value at the end of the
period.
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In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
From time to time, in reports and promotional literature, a Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on approximately 1,700 fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. A Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta reflects the market-related risk of the Fund by showing how
responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of a Fund for any
period in the future. The performance of a Fund is a function of many factors
including its earnings, expenses and number of outstanding shares. Fluctuating
market conditions; purchases, sales and maturities of portfolio securities;
sales and redemptions of shares of beneficial interest; and changes in operating
expenses are all examples of items that can increase or decrease a Fund's
performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser, any Sub-adviser and
the officers of the Trust pursuant to recommendations made by its investment
committee, which consists of officers and directors of the Adviser and
affiliates and officers and Trustees who are interested persons of the Funds.
Orders for purchases and sales of securities are placed in a manner which, in
the opinion of the Adviser or Sub-adviser, will offer the best price and market
for the execution of each such transaction. Purchases from underwriters of
portfolio securities may include a commission or commissions paid by the issuer
and transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Conduct Rules of the NASDAQ and other policies that the Trustees may determine,
the Adviser or Sub- Adviser may consider sales of shares of the Funds as a
factor in the selection of broker-dealers to execute a Fund's portfolio
transactions.
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Purchases of securities for Sovereign Bond Fund, Strategic Income Fund, High
Yield Bond Fund and World Bond Fund are normally principal transactions made
directly from the issuer or from an underwriter or market maker for which no
brokerage commissions are usually paid. Purchases from underwriters will include
a commission or concession paid by the issuer to the underwriter, and purchases
and sales from dealers serving as market makers will usually include a mark up
or mark down. Purchases and sales of exchange-traded options and futures will be
effected through brokers who charge a commission for their services.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser or relevant
Sub-adviser of the Fund, and their value and expected contribution to the
performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser or relevant
Sub-adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser or relevant Sub-adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser or relevant
Sub-adviser, and conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or relevant Sub-adviser may result in research
information and statistical assistance beneficial to the Funds. The Funds will
not make commitments to allocate portfolio transactions on any prescribed basis.
While the Adviser's officers will be primarily responsible for the allocation of
each Fund's brokerage business, the policies and practices of the Adviser in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the year ended December 31, 1996, the
Fund paid brokerage commissions as follows: International Fund $10,407, Emerging
Growth Fund $819, Growth Fund $1,057, Independence Equity Fund $582, Sovereign
Investors Fund $1,769, 500 Index Fund $190, Sovereign Bond Fund $0, Strategic
Income Fund $0, Financial Industries Fund $0 and World Bond Fund $ 0. For the
year ended December 31, 1997, the Fund paid broker commissions as follows:
International Fund $17,425, Emerging Growth Fund $4,501, Growth Fund $7,000,
Independence Equity Fund $1,936, Sovereign Investors Fund $5,611, 500 Index Fund
$0, Sovereign Bond Fund $0, Strategic Income Fund $0, Financial Industries Fund
$16.780 and World Bond Fund $0.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a Fund may
pay to a broker which provides brokerage and research services to the Fund an
amount of disclosed commission in excess of the commission which another broker
would have charged for effecting that transaction. This practice is subject to a
good faith determination by the Trustees that the price is reasonable in light
of the services provided and to policies that the Trustees may adopt from time
to time. During the fiscal year ended December 31, 1996, Growth Fund, Emerging
Growth Fund, Sovereign Investors directed commissions in the amounts of $70,
$42, and $413, and during the fiscal year ended December 31, 1997, Growth Fund,
Emerging Growth Fund, Financial Industries Fund, International Fund, Sovereign
Investors directed commissions in the amounts of $732, $245, $2,789, $82, and
$228 respectively, to compensate brokers for research services such as industry,
economics and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Distributors. During the fiscal
year ended December 31, 1997, the Funds did not execute any portfolio
transactions with Affiliated Brokers.
Distributors may act as broker for a Fund on exchange transactions, subject,
however, to the general policy of the Funds set forth above and the procedures
adopted by the Trustees pursuant to the 1940 Act. Commissions paid to an
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Affiliated Broker must be at least as favorable as those which the Trustees
believe to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to a Fund as determined by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Funds, the Adviser or the Affiliated Brokers. Because the Adviser, which is
affiliated with the Affiliated Broker, has, as an investment adviser to the
Funds, the obligation to provide investment management services, which includes
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Broker as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Funds. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position attainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Funds with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
SHAREHOLDER SERVICING AGENT
John Hancock Servicing Center, P.O. Box 9298, Boston, MA 02205, a division of
the Life Company, is the shareholder servicing agent for the Funds. Currently,
the Funds pay no fee.
CUSTODY OF PORTFOLIO
Portfolio securities of the International Fund, World Bond Fund, Money Market
Fund and 500 Index Fund are held pursuant to a custodian agreement between the
Trust and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02205. Portfolio securities of the other Funds are held pursuant
to a custodian agreement between the Trust and Investors Bank & Trust Company,
200 Clarendon Street, Boston, MA 02117. Under the custodian agreements, the
custodians perform custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young, LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has been
selected as the independent auditor of the Trust. The financial statements of
the Funds for the fiscal year ended December 31, 1997 included in the Prospectus
and this Statement of Additional Information have been audited by Ernst & Young,
LLP for the periods indicated in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon authority of
such firm as experts in accounting and auditing.
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APPENDIX
Description of Bond Ratings
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues as
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
44
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C: The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an active or implied 'CCC-' debt rating. The 'C' debt rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
FITCH INVESTORS SERVICE ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and high quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change
over the term of the issue. Bonds rated A are considered to be investment grade
and of good quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
45
<PAGE>
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Moody's - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issuers rated A have the greatest capacity for a timely payment and the
designation 1,2 and 3 indicates the relative degree of safety. Issues rated
"A-1=" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (=) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
Other Considerations - The ratings of S&P, Moody's, and Fitch represent their
respective opinions of the quality of the municipal securities they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal securities with the same
maturity, coupon and ratings may have different yields and municipal securities
of the same maturity and coupon with different ratings may have the same yield.
46
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included and incorporated by reference
into Part B of the Registration Statement from the 1997 Annual Report to
Shareholder's for the year ended December 31, 1997 (filed electronically on
March 13, 1998, accession number 0001010521-98-000228, file no. 811-07437 and
33-64465).
John Hancock Declaration Trust
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the year ended of December 31, 1997.
Statement of Changes in Net Assets for each of the two years in the
period ended ended December 31, 1997.
Financial Highlights for each of the two years in the period ended
December 31, 1997.
Schedule of Investments as of December 31, 1997.
Notes to Financial Statements.
Report of Independent Auditors.
47
<PAGE>
JOHN HANCOCK V.A. STRATEGIC INCOME FUND
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998
Pro forma information is intended to provide the shareholders of the John
Hancock V.A. Strategic Income Fund and John Hancock V.A. World Bond Fund with
information about the impact of the proposed merger by indicating how the merger
might have affected information had the merger been consummated as of June 30,
1997.
The pro forma combined statements of assets and liabilities and results of
operations as of June 30, 1998 have been prepared to reflect the merger of John
Hancock V.A. Strategic Income Fund and John Hancock V.A. World Bond Fund after
giving effect to pro forma adjustments described in the notes listed below.
(a) Acquisition by John Hancock V.A. Strategic Income Fund of all the assets
of John Hancock V.A. World Bond Fund and issuance of John Hancock V.A.
Strategic Income Fund shares in exchange for all of the outstanding shares
of John Hancock V.A. World Bond Fund.
(b) The deferred organization expense of John Hancock V.A. World Bond Fund was
written off as the Fund would no longer be in existence.
(c) The investment advisory fee was adjusted to reflect the application of the
fee structure which will be in effect for John Hancock V.A. Strategic
Income Fund: 0.60%.
(d) The actual expenses incurred by the John Hancock V.A. Strategic Income
Fund and the John Hancock V.A. World Bond Fund for various expenses
included on a pro forma basis were reduced to reflect the estimated
savings arising from the merger.
(e) Represents the Adviser's voluntary agreement to limit the funds' expenses
to an annual rate of 0.85% of the funds' average daily net assets.
<PAGE>
John Hancock V.A. Strategic Income Fund
Pro-forma combined statement of assets and liabilities
For the year ended June 30, 1998
<TABLE>
<CAPTION>
John Hancock John Hancock
V. A. Strategic V. A. World
Income Bond Pro-Forma
Fund Fund Adjustments Combined
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets
Investments at value $ 10,752,968 $2,450,742 -- $ 13,203,710
Cash -- 487 -- 487
Foreign currency, at value -- -- -- 0
Receivable for investments sold 174,031 259,546 -- 433,577
Receivable for forward foreign currency exchange contracts
purchased 118 1,468 -- 1,586
Dividends and interest receivable 208,504 29,875 -- 238,379
Receivable from John Hancock Advisers, Inc. and affiliates -- 918 -- 918
Deferred organization expenses 6,766 6,766 (6,766)(b) 6,766
Other Assets 41 31 -- 72
------------ ---------- ---------- ------------
Total assets 11,142,428 2,749,833 (6,766) 13,885,495
------------ ---------- ---------- ------------
Liabilities
Distribution payable 2,393 373 -- 2,766
Payable for closed forward foreign currency exchange contracts -- 10,719 -- 10,719
Payable for foreign currency exchange contracts purchased -- 8,586 -- 8,586
Payable for foreign currency exchange contracts sold 4,176 3,412 -- 7,588
Payable for investment purchased 279,531 260,697 -- 540,228
Payable to John Hancock Advisers, Inc. and affiliates 3,521 -- -- 3,521
Accounts payable and accrued expenses 8,474 8,440 -- 16,914
------------ ---------- ---------- ------------
Total liabilities 298,095 292,227 -- 590,322
------------ ---------- ---------- ------------
Net assets:
Capital paid-in 10,801,036 2,477,696 (6,766)(b) 13,271,966
Accumulated net realized gain (loss)
on investments, futures contracts
and foreign currency transactions 20,812 (12,618) -- 8,194
Net unrealized appreciation of investments,
futures contracts and foreign currency transactions 16,016 10,883 -- 26,899
Undistributed net investment income
(distributions in excess of net investment income) 6,469 (18,355) -- (11,886)
------------ ---------- ---------- ------------
Net assets 10,844,333 2,457,606 (6,766) 13,295,173
============ ========== ========== ============
Net assets:
V. A. Strategic Income 10,844,333 -- 2,450,840(a) 13,295,173
V. A. World Bond -- 2,457,606 (2,457,606)(a) --
------------ ---------- ---------- ------------
10,844,333 2,457,606 (6,766) $ 13,295,173
============ ========== ========== ============
Shares outstanding:
V. A. Strategic Income 1,032,151 -- 233,900(a) 1,266,051
V. A. World Bond -- 254,904 (254,904)(a) 0
------------ ---------- ---------- ------------
1,032,151 254,904 (21,004) 1,266,051
============ ========== ========== ============
Net asset value per share:
V. A. Strategic Income $ 10.51 -- -- $ 10.51
V. A. World Bond -- 9.64 $ (9.64)(a) --
============ ========== ========== ============
</TABLE>
See Notes to Pro-forma Combined Financial Statements
<PAGE>
John Hancock VA Strategic Income Fund
Pro-forma combined statement of operations
For the 12 months ended June 30, 1998
<TABLE>
<CAPTION>
John Hancock John Hancock
VA Strategic Income VA World Bond
Fund Fund
12 months ended 12 months ended Pro-Forma
June 30, 1998 June 30, 1998 Adjustments Combined
------------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Investment Income
Interest $ 553,547 $ 156,082 $ -- $ 709,629
Dividends 21,189 -- -- 21,189
--------- --------- --------- ---------
Total 574,736 156,082 -- 730,818
--------- --------- --------- ---------
Expenses
Investment management fee 37,081 17,341 (3,467)(c) 50,955
Custodian fee 8,346 13,855 (1,000)(d) 21,201
Registration and filing fees 1,223 682 (182)(d) 1,723
Legal fees -- -- 600 (d) 600
Financial services fess 1,092 421 -- 1,513
Auditing fees 14,122 14,119 (14,119)(d) 14,122
Printing 5,456 4,536 (4,000)(d) 5,992
Organization Expense 2,064 2,073 (2,073)(b) 2,064
Trustees' fee 262 147 -- 409
Miscellaneous 70 189 (89)(d) 170
--------- --------- --------- ---------
Total expenses 69,716 53,363 (24,330) 98,749
--------- --------- --------- ---------
Less Expense Reductions (17,170) (30,233) 9,841(e) (26,562)
--------- --------- --------- ---------
Net Expenses 52,546 23,130 (14,489) 72,187
--------- --------- --------- ---------
Net Investment Income 522,190 132,952 14,489 669,631
--------- --------- --------- ---------
Realized and Unrealized Gain (Loss)
on Investments, Financial Futures Contracts
and Foreign Currency Transactions
Net realized gain (loss) on investments sold, financial
futures contracts and foreign currency transactions (21,263) 33,372 -- 12,109
Change in net unrealized appreciation/depreciation
of investments, financial futures contracts and
foreign currency transactions (35,775) (10,729) -- (46,504)
--------- --------- --------- ---------
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions (57,038) 22,643 -- (34,395)
--------- --------- --------- ---------
Net Increase (Decrease) in Net Assets Resulting from
Operations $ 465,152 $ 155,595 $ 14,489 $ 635,236
========= ========= ========= =========
</TABLE>
See Notes to Pro-forma Combined Financial Statements
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BONDS
Advertising (1.56%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 9.375% $100 $106,250 $100 $106,250
R.H.Donnelly, Inc.
Sr Sub Note 06-01-08 (R) 9.125 100 101,625 100 101,625
---------- ----------
207,875 207,875
---------- ----------
Banks - Foreign (1.50%)
International Bank for Reconstruction &
Development,
Sr Note (South Africa) 07-21-98# 15.000 500 83,917 500 83,917
Landeskreditbank Baden - Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) 7.625 100 116,083 100 116,083
---------- ----------
200,000 200,000
---------- ----------
Computers (0.87%)
Unisys Corp.,
Sr Note 10-15-04 11.750 100 115,500 100 115,500
---------- ----------
Containers (0.77%)
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest
Cert) 04-01-02 12.250 100 102,000 100 102,000
---------- ----------
Cosmetics & Personal Care (0.74%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) 11.000 100 98,750 100 98,750
---------- ----------
Diversified Operations (0.81%)
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y) 11.250 100 108,250 100 108,250
---------- ----------
Electronics (1.32%)
Communications Instruments, Inc.,
Gtd Sr Sub Note Ser B 09-15-04 10.000 100 102,000 100 102,000
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) 9.500 100 73,000 100 73,000
---------- ----------
175,000 175,000
---------- ----------
Energy (1.55%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) 9.625 200 205,500 200 205,500
---------- ----------
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance (2.20%)
AEI Holding Co.,
Sr Note 11-15-07 (R) 10.000 100 99,500 100 99,500
Ford Motor Credit Company,
Bond (Germany) 06-16-08# 5.250 350 193,626 350 193,626
---------- -------- ----------
99,500 193,626 293,126
---------- -------- ----------
Government - Foreign (10.78%)
Australia, Commonweath of,
Government Bond (Australia) 08-15-08# 8.750 400 307,559 400 307,559
Government Bond (Australia) 11-15-06# 6.750 200 133,907 200 133,907
Brazil, Federative Republic of,
Global Bond (Brazil) 11-05-01 (Y) 8.875 50 50,125 50 50,125
Costa Rica, Republic of,
Deb (Costa Rica) 05-01-03 (R), (Y) 8.000 25 25,188 25 25,188
Ecuador, Republic of ,
Deb (Ecuador) 04-25-02 (R), (Y) 11.250 50 51,000 50 51,000
Germany, Federal Republic of,
Bond Ser 98 (Germany) 01-04-08# 5.250 442 253,889 442 253,889
Jamaica, Government of,
Note (Jamaica) 06-09-05 (R), (Y) 10.875 10 10,000 10 10,000
Panama, Republic of,
Note Ser REGS (Panama) 02-13-02 (Y) 7.875 50 48,925 50 48,925
South Africa, Republic of,
Note (South Africa) 06-23-17 (Y) 8.500 50 47,313 50 47,313
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 06-07-21# 8.000 50 108,870 50 108,870
Government Bond (United Kingdom) 11-06-01# 7.000 70 118,106 70 118,106
Government Bond (United Kingdom) 12-07-28# 6.000 100 180,737 100 180,737
United Mexican States,
Global Bond (Mexico) 02-06-01 (Y) 9.750 50 52,550 50 52,550
Venezuela, Republic of,
Floating Rate Note Ser C (Venezuela)
12-30-03 (Y) 7.000* 50 45,500 50 45,500
---------- -------- ----------
731,073 702,596 1,433,669
---------- -------- ----------
Government - U.S. (22.09%)
United States Treasury,
Bond 02-15-16 9.250 200 278,188 200 278,188
Bond 08-15-19 8.125 500 645,310 500 645,310
Bond 08-15-23 6.250 200 214,124 200 214,124
Bond 08-15-27 6.375 75 82,359 75 82,359
Bond 11-15-27 6.125 500 535,780 6.125 250 267,890 750 803,670
Note 08-15-04 7.250 225 244,793 225 244,793
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Note 05-15-07 6.625 120 128,887 120 128,887
Note 05-31-02 6.500 100 103,328 100 103,328
Note 08-31-02 6.250 250 256,523 250 256,523
Note 08-15-07 6.125 150 156,070 150 156,070
Note 04-30-03 5.750 25 25,246 25 25,246
---------- -------- ----------
2,174,718 763,780 2,938,498
---------- -------- ----------
Government - U.S. Agencies (4.76%)
Federal Home Loan Bank,
Bond 03-26-07 6.945 100 107,109 100 107,109
Bond 10-15-03 5.440 150 147,961 150 147,961
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 7.000 122 124,341 122 124,341
Federal National Mortgage Assn.,
Note Ser MTN 10-23-02 6.080 250 253,555 250 253,555
-------- ----------
632,966 632,966
-------- ----------
Leisure (3.67%)
Casino America, Inc.,
Sr Sec Note 08-01-03 12.500 250 282,500 250 282,500
Cinemark USA Inc.,
Sr Sub Note Ser D 08-01-08 9.625 100 103,000 100 103,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 100 103,000 100 103,000
---------- ----------
488,500 488,500
---------- ----------
Machinery (1.50%)
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 (R) 8.500 100 98,750 100 98,750
Newcor, Inc.,
Sr Sub Note 03-01-08 (R) 9.875 100 101,250 100 101,250
---------- ----------
200,000 200,000
---------- ----------
Media (6.85%)
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07 10.500 100 111,000 100 111,000
Cumulus Media, Inc.,
Sr Sub Note 07-01-08 10.375 100 101,375 100 101,375
Falcon Holding Group L.P./Falcon Funding Corp.,
Sr Deb 04-15-10 (R) 8.375 200 201,500 200 201,500
Intermedia Capital Partners,
Sr Note 08-01-06 11.250 100 111,750 100 111,750
Regional Independent Media Group Plc,
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sr Note (United Kingdom) 07-01-08 (R), (Y) 10.500 175 177,625 175 177,625
SFX Entertainment, Inc.,
Sr Sub Note 02-01-08 (R) 9.125 100 98,000 100 98,000
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 11.000 100 109,250 100 109,250
---------- ----------
910,500 910,500
---------- ----------
Medical (0.74%)
Fresenius Medical Care Capital Trust II,
Trust Preferred Security 02-01-08 7.875 100 99,000 100 99,000
---------- ----------
Metal (1.62%)
GS Technologies Operating Co.,
Sr Note 10-01-05 12.250 100 114,000 100 114,000
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 9.875 100 102,000 100 102,000
---------- ----------
216,000 216,000
---------- ----------
Oil & Gas (1.20%)
Canadian Forest Oil Ltd.,
Gtd Sr Sub Note (Canada) 09-15-07 (Y) 8.750 100 96,750 100 96,750
Universal Compression, Inc.,
Sr Disc Note, Step Coupon (9.875%,
02-15-03) 02-15-08 (A), (R) Zero 100 62,500 100 62,500
---------- ----------
159,250 159,250
---------- ----------
Paper & Paper Products (0.76%)
Repap New Brunswick,
Sr Note (Canada) 04-15-05 (Y) 10.625 100 101,000 100 101,000
---------- ----------
Printing - Commercial (0.80%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 12.000 100 105,750 100 105,750
---------- ----------
Retail (1.13%)
United Stationers, Inc.,
Sr Sub Note 04-15-08 (R) 8.375 150 150,000 150 150,000
---------- ----------
Steel (0.75%)
Ameristeel Corp.,
Sr Note 04-15-08 (R) 8.750 100 100,000 100 100,000
---------- ----------
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunications (23.45%)
Allegiance Telecom, Inc.,
Sr Disc Note, Step Coupon (11.75%,
02-15-03) 02-15-08 (A), (R) Zero 250 125,000 250 125,000
American Mobile Satellite Corp./AMSC
Acquisition Co. Inc.,
Unit (Sr Note & Warrant) 04-01-08 (R) 12.250 100 93,000 100 93,000
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.40%,
05-15-03) (Canada) 05-15-08# Zero 150 60,428 150 60,428
COLT Telecom Group Plc,
Sr Note (United Kingdom) 11-30-07# 10.125 75 132,582 75 132,582
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A), (Y) Zero 100 77,000 100 77,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%,
11-01-02) 11-15-07 (A), (R) Zero 150 102,375 150 102,375
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants), Step Coupon
(12.625%, 03-01-03) 03-01-08 (A),(R) Zero 250 117,500 250 117,500
DTI Holdings Inc.,
Unit (Sr Disc Note & Warrants), Step Coupon
(12.500%, 03-01-03) 03-01-08 (A),(R) Zero 150 81,000 150 81,000
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) 11.500 100 103,000 100 103,000
Sr Note (United Kingdom) 06-15-08 (R), (Y) 10.875 100 99,000 100 99,000
FLAG Ltd.,
Sr Note (Bermuda) 01-30-08 (R), (Y) 8.250 100 100,750 100 100,750
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 (R) 9.625 100 104,250 100 104,250
Globalstar L.P./Globalstar Capital Corp.,
Sr Note 06-01-05 (R) 11.500 100 97,375 100 97,375
Hermes Europe Railtel B.V.,
Sr Note (Netherlands) 08-15-07 (Y) 11.500 100 113,000 100 113,000
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 (Y) 12.875 100 101,500 100 101,500
Intercel, Inc.,
Unit (Sr Discount Note & Warrant), Step
Coupon Step Coupon (12.00%, 02-01-01)
02-01-06 (A) Zero 200 158,000 200 158,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%,
05-01-02) (United Kingdom) 05-01-07 (A), (Y) Zero 200 48,000 200 48,000
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 13.000 100 106,500 100 106,500
IXC Communications, Inc.,
Sr Sub Note 04-15-08 (R) 9.000 100 99,000 100 99,000
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MetroNet Communications Corp.,
Sr Disc Note, Step Coupon (9.95%, 06-15-03)
(Canada) 06-15-08 (A), (Y) Zero 200 123,750 200 123,750
Sr Discount Note, Step Coupon (10.75%,
11-01-02) (Canada) 11-01-07 (A), (Y) Zero 100 66,000 100 66,000
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%, Zero 75 72,937 75 72,937
02-15-99) 08-15-04 (A)
Sr Disc Note, Step Coupon (9.95%,
02-15-03) 02-15-08 (A), (R) Zero 125 79,688 125 79,688
NTL Inc.,
Sr Note 04-01-08 (R) 9.500 60 103,064 60 103,064
Orion Network Systems,
Sr Note 01-15-07 11.250 100 111,500 100 111,500
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 10.875 100 115,250 100 115,250
RCN Corp.,
Sr Note 10-15-07 10.000 100 103,000 100 103,000
Teligent, Inc.,
Sr Note 12-01-07 11.500 100 101,250 100 101,250
Viatel, Inc.,
Unit (Sr Note & Preferred Stock) 04-15-08 (R) 11.250 200 209,500 200 209,500
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 12.500 100 114,000 100 114,000
---------- ----------
3,119,199 3,119,199
---------- ----------
Textile (1.13%)
Tropical Sportswear International Corp.,
Sr Sub Note 06-15-08 (R) 11.000 150 150,375 150 150,375
---------- ----------
Transport (1.47%)
Enterprises Shipholding Corp.,
Sr Note (Greece) 05-01-08 (R), (Y) 8.875 100 98,000 100 98,000
Fine Air Services, Inc.,
Sr Note 06-01-08 (R) 9.875 100 97,750 100 97,750
---------- ----------
195,750 195,750
---------- ----------
Utilities (1.61%)
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 100 120,294 100 120,294
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R), (Y) 9.625 100 93,500 100 93,500
---------- ----------
213,794 213,794
---------- ----------
TOTAL BONDS
(Cost $12,692,893) (95.63%) 10,427,284 2,292,968 12,720,252
------- ---------- ---------- ----------
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Allegiance Telecom, Inc., Warrant** 250 625 250 625
Comunicacion Celular S.A. Warrant (Colombia)
(Y)** 1,000 7,000 1,000 7,000
KLM Royal Dutch Air Lines N.V., Common Stock
(Netherlands) 500 20,469 500 20,469
Loral Space & Communications Ltd., Warrant** 100 1,000 100 1,000
Nextel Communications, Inc. (Class A),
Common Stock** 232 5,771 232 5,771
Nextlink Communications Inc., 14.00%,
Preferred Stock 1,662 99,720 1,662 99,720
SFX Broadcasting, Inc., 12.625%, Ser E,
Preferred Stock 1,130 134,482 1,130 134,482
---------- ----------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $242,008) (2.02%) 269,067 269,067
---------- ----------
<CAPTION>
EXPIRATION EXPIRATION
CURRENCY DATE/STRIKE CURRENCY DATE/STRIKE
CURRENCY PURCHASED SOLD PRICE SOLD PRICE
- ------------------ -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS
Japanese Yen USD 280,000 March
99/140-150 4,774 4,774
---------- ----------
TOTAL OPTIONS
(Premium Paid $2,450) (0.03%) 4,774 4,774
---------- ----------
</TABLE>
<PAGE>
Schedule of Investments
June 30, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all the securities owned by
the V.A. Strategic Income fund and the V.A. World Bond fund combined on June 30,
1998.
<TABLE>
<CAPTION>
=====================================================================================
John Hancock V.A.
Strategic Income John Hancock V.A.
Fund World Bond Fund Combined
=====================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.58%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion, Dated
06-30-98, due 07-01-98 (secured by U.S.
Treasury Notes, 5.000% thru 8.750%, due
12-13-98 thru 04-30-03 and U.S. Treasury
Bond,9.125%, due 05-15-18) 5.750% 56 56,000 5.750% 153 153,000 209 209,000
----------- ---------- ----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account Current
Rate 4.95% 617 -- 617
----------- ---------- ----------
TOTAL SHORT-TERM INVESTMENTS (1.58%) 56,617 153,000 209,617
-------- ----------- ---------- ----------
TOTAL INVESTMENTS (99.26%) 10,752,968 2,450,742 13,203,710
-------- ----------- ---------- ----------
OTHER ASSETS AND LIABILITIES, NET (0.74%) 91,365 6,864 98,229
-------- ----------- ---------- ----------
TOTAL NET ASSETS (100.00%) $10,844,333 $2,457,606 $13,301,93
======== =========== ========== ==========
</TABLE>
<PAGE>
NOTES TO THE SCHEDULE OF INVESTMENTS
* Represents rate in effect on June 30, 1998.
** Non-income producing security.
# Par value of foreign bonds is expressed in local currency, as shown
parathentically in security description.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
See Note A of the Notes to Financial Statements for valuation policy. Rule
144A securities amounted to $3,505,315 or 26.35% of the fund's net assets
as of June 30, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of 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.
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Declaration Trust (the "Registrant") on Form N-1A
under the Securities Act of 1933 and the Investment company Act of 1940 (File
Nos. 33-64465 and 811-07437), which information is incorporated herein
by reference.
ITEM 16. EXHIBITS:
1. Registrant's Declaration of Trust Filed as Exhibit 99.B1 to
Registrant's Registration
Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no.2
(file nos. 811-07437 and 33-64465
on November 14, 1997; accession
no. 0001010521-97-000212)
("PEA 2")
2 Amendment to Filed as Exhibit 99.B1.1 to
Registrant's Declaration Registrant's Registration
of Trust Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no. 3
(file nos. 811-07437 and 33-64465
on April 29, 1997; accession
no. 0001010521-97-000278)
("PEA 3")
3 Amendment to Filed as Exhibit 99.B1.2 to
Registrant's Declaration Registrant's Registration
of Trust Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no. 6
(file nos. 811-07437 and 33-64465
on October 1, 1997 accession
no. 0001010521-97-000403)
("PEA 6")
4 Amendment to Filed as Exhibit 99.B1.3
Registrant's Declaration to PEA 6 and incorporated
of Trust herein by reference.
5 Amended and Restated By-Laws of Filed as Exhibit 99.B2
Registrant. and incorporated herein by
reference.
6 Not applicable
7 Form of Agreement and Plan of Filed herewith as Exhibit A to
reorganization between the the Proxy Statement and
Registrant and John Hancock V.A. Prospectus included as Part A of
World Bond Fund this Registration Statement.
8 Not applicable
<PAGE>
9 Investment Management Contract Filed as Exhibit 99.B5 to PEA 2
between the Registrant and John and incorporated herein by
Hancock Advisers, Inc. reference.
10 Distribution Agreement between Filed as Exhibit 99.B6 to PEA 2
the Registrant and John Hancock and incorporated herein by
Funds, Inc. (formerly named John reference.
Hancock Broker Distribution
Services, Inc.)
11 Not applicable.
12 Master Custodian Agreement Filed as Exhibit 8.1 to PEA 1 to
between John Hancock Mutual Funds Registrant's Statement on form
(including Registrant) and N-1A and incorporated herein by
Investors Bank & Trust Company. reference to post-effective
amendment no. 1 (file nos. 811-
07437 and 33-64465 on November
20, 1995; accession no.
0000950146-95-000740)
13 Opinion as to legality of shares Filed herewith as Exhibit 11
and consent.
14 Form of opinion as to tax matters Filed herewith as Exhibit 12
and consent.
<PAGE>
15 Not applicable
16 Consents of Ernst & Young LLP Filed herewith as Exhibit 14
regarding the audited financial
statements of John Hancock V.A.
World Bond Fund and John Hancock
V.A. Strategic Income Fund.
17 Not applicable
18 Powers of Attorney Filed as addendum to signature
pages of post-effective amendment
no. 2 (file nos. 811-07437 and
33-64465 on February 14, 1997;
accession no. 0001010521-97-
000212) ("PEA 2")and incorporated
herein by reference.
19 Prospectus of John Hancock V.A. Included in Part A as part of the
World Bond Fund combined Prospectus with V.A.
dated May 1, 1998 World Bond Fund.
20 Statement of Additional Filed herewith as Exhibit B to
Information of John Hancock V.A Part B of this Registration
World Bond Fund Statement.
dated May 1, 1998
ITEM 17
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a propectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of 1933,
as amended (the "1933 Act"), the reoffering prospectus will contain the
information called for by the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 7th day of January, 1999.
JOHN HANCOCK DECLARATION TRUST
By: *
-----------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman
- ----------------------- (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/James J. Stokowski Vice President, Treasurer and January 7, 1999
- ----------------------- Chief Accounting Officer
James J. Stokowski
* Trustee
- -----------------------
Dennis S. Aronowitz
* Trustee
- -----------------------
Richard P. Chapman, Jr.
* Trustee
- -----------------------
Douglas M. Costle
* Trustee
- -----------------------
William J. Cosgrove
* Trustee
- -----------------------
Leland O. Erdahl
* Trustee
- -----------------------
Richard A. Farrell
* Trustee
- -----------------------
Gail D. Fosler
* Trustee
- -----------------------
William F. Glavin
* Trustee
- -----------------------
Anne C. Hodsdon
<PAGE>
Signature Title Date
--------- ----- ----
* Trustee
- -----------------------
Dr. John A. Moore
* Trustee
- -----------------------
Patti McGill Peterson
* Trustee
- -----------------------
John W. Pratt
* Trustee
- -----------------------
Richard S. Scipone
*By:/s/Susan S. Newton January 7, 1999
-------------------
Susan S. Newton
Attorney-in-Fact
Powers of Attorney
dated May 21, 1996
and August 27, 1996
</TABLE>
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
- ----------- -----------
4. Agreement and Plan of Regorganization between
John Hancock V.A. World Bond Fund and John Hancock
V.A. Strategic Income Fund(filed as EXHIBIT A to
Part A of this Registration Statement).
11. Opinion as to legality of shares and consent.
12. Form of opinion as to tax matters and consent.
14. Consent of Ernst & Young LLP regarding the
audited financial statements and highlights of
John Hancock V.A. World Bond Fund and John Hancock
V.A. Strategic Income Fund.
January 7, 1999
John Hancock Declaration Trust
on behalf of John Hancock V.A. Strategic Income Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under the Securities
Act of 1933, as amended (the "Act"), on Form N-14, with respect to the shares of
beneficial interest of John Hancock V.A. Strategic Income Fund (the "Fund"), a
series of John Hancock Declaration Trust (the "Trust"), a Massachusetts business
trust, it is the opinion of the undersigned that these shares when issued, will
be legally issued, fully paid and non-assessable.
In connection with this opinion it should be noted that the Trust is an entity
of the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for obligations of the
Trust and indemnifies any shareholder of the Fund, with this indemnification to
be paid solely out of the assets of the Fund. Therefore, the shareholder's risk
is limited to circumstances in which the assets of the Fund are insufficient to
meet the obligations asserted against the Fund's assets.
The undersigned hereby consents to the filing of a copy of this opinion as an
exhibit to the Trust's registration statement on Form N-14 and with the
Securities and Exchange Commission.
Sincerely,
/s/Alfred Ouellette
Alfred Ouellette
Attorney and Assistant Secretary
John Hancock Advisers, Inc.
[IMPORT OMITTED]
Washington, DC Boston, MA London, UK*
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
Counsellors at Law
<PAGE>
60 State Street, Boston, Massachusetts 02109
617-526-6000 o fax 617-526-5000
DRAFT: 12/30/98
March 26, 1999
Board of Trustees
John Hancock Declaration Trust, on behalf of
John Hancock V.A. World Bond Fund and
John Hancock V.A. Strategic Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Board of Trustees:
You have requested our opinion regarding certain federal income tax
consequences described below of the acquisition by John Hancock V.A. Strategic
Income Fund ("Acquiring Fund"), a series of John Hancock Declaration Trust
("Trust"), of all of the assets of John Hancock V.A. World Bond Fund ("Acquired
Fund"), a different series of Trust, in exchange solely for (i) the assumption
by Acquiring Fund of all of the liabilities of Acquired Fund and (ii) the
issuance of voting shares of beneficial interest of Acquiring Fund (the
"Acquiring Fund Shares") to Acquired Fund, followed by the distribution by
Acquired Fund, in liquidation of Acquired Fund, of the Acquiring Fund Shares to
the shareholders of Acquired Fund and the termination of Acquired Fund (the
foregoing together constituting the "reorganization" or the "transaction").
In rendering this opinion, we have examined and relied upon the facts
stated and representations made in (i) the combined prospectus for Acquiring
Fund and Acquired Fund, dated May 1, 1998, (ii) the combined statement of
additional information for Acquiring Fund and Acquired Fund, dated May 1, 1998,
(iii) the Notice of Meeting of Shareholders Scheduled for March 18, 1999 and the
accompanying proxy statement and prospectus relating to the transaction dated
February 12, 1999 (the "Proxy Statement"), (iv) the Agreement and Plan of
Reorganization, made December 9, 1998, between Acquiring Fund and Acquired Fund
(the "Agreement"), (v) the representation letters on behalf of Acquiring Fund
and Acquired Fund referred to below and (vi) such other documents as we deemed
appropriate.
<PAGE>
Board of Trustees
John Hancock V.A. World Bond Fund
John Hancock V.A. Strategic Income Fund
March 26, 1999
Page 1
In our examination of documents, we have assumed the authenticity of
original documents, the accuracy of copies, the genuineness of signatures, and
the legal capacity of signatories. We have assumed that all parties to the
Agreement have acted and will act in accordance with the terms of the Agreement
and all other documents relating to the transaction and that the transaction
will be consummated pursuant to the terms and conditions set forth in the
Agreement without the waiver or modification of any such terms and conditions.
Furthermore, we have assumed that all representations contained in the
Agreement, as well as those representations contained in the representation
letters referred to below are, on the date hereof, true and complete in all
material respects, and that any representation made in any of the documents
referred to herein "to the best of the knowledge and belief" (or similar
qualification) of any person or party is correct without such qualification. We
have not attempted to verify independently such representations, but in the
course of our representation, nothing has come to our attention that would cause
us to question the accuracy thereof.
The conclusions expressed herein represent our judgment regarding the
proper treatment of certain aspects of the transaction affecting Acquiring Fund,
Acquired Fund and the shareholders of Acquired Fund on the basis of our analysis
of the Internal Revenue Code of 1986, as amended (the "Code"), case law,
Treasury regulations and the rulings and other pronouncements of the Internal
Revenue Service (the "Service") which exist at the time this opinion is
rendered. Such authorities are subject to prospective or retroactive change, and
we do not undertake any responsibility to advise you of any such change. Our
opinion represents our best judgment regarding how a court would decide if
presented with the issues addressed herein and is not binding upon the Service
or any court. Moreover, our opinion does not provide any assurance that a
position taken in reliance on such opinion will not be challenged by the Service
and does not constitute any representation or warranty that such position, if so
challenged, will not be rejected by a court.
This opinion addresses only the specific United States federal income
tax consequences of the transaction set forth below, and does not address any
other federal, state, local, or foreign income, estate, gift, transfer, sales,
or other tax consequences that may result from the transaction or any other
transaction.
FACTS
We understand that the facts relating to the transaction are as
described hereinafter.
Acquiring Fund is a series of Trust, a business trust established under
the laws of The Commonwealth of Massachusetts in 1995. Trust is registered as an
open-end investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"). Acquiring Fund has been operating as an investment company
since the inception of business in 1996. Acquiring Fund is one of fifteen series
of Trust. Acquired Fund is a separate, different series of Trust. Acquired Fund
has been operating as an investment company since the inception of business in
1996. Each series of Trust has assets and liabilities that are separate from
those of each other series of Trust, and each such series is treated as a
separate corporation and regulated investment company under Section 851(g) of
the Code.
The investment objective of Acquiring Fund is to seek a high level of
current income. Acquiring Fund invests primarily in foreign government and
corporate fixed income securities; U.S. Government securities; and lower-rated,
high yield, high risk fixed income securities of U.S. issuers.
The investment objective of Acquired Fund is to seek a high total
investment return, a combination of current income and capital appreciation.
Acquired Fund invests primarily in a global portfolio of fixed income
securities, including U.S. Government, municipal and foreign governmental
securities; obligations of supranational organizations; and obligations of
foreign corporations or financial institutions.
Shares of Acquiring Fund and Acquired Fund are available only to
insurance company separate accounts of John Hancock Mutual Life Insurance
Company (the "Company") and other life insurance companies, in order to fund the
benefits under variable annuity contracts and/or variable life insurance
contracts (individually, a "Contract," and collectively, the "Contracts") issued
by the Company or such other companies.
The steps comprising the reorganization, as set forth in the Agreement,
are as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its assets
(consisting, without limitation, of portfolio securities and instruments,
dividend and interest receivables, cash and other assets). In exchange for the
assets transferred to it, Acquiring Fund will (A) assume all of the liabilities
of Acquired Fund (comprising all of its known and unknown liabilities and
referred to hereinafter as the "Acquired Fund Liabilities") and (B) issue
Acquiring Fund Shares to Acquired Fund that have an aggregate net asset value
equal to the value of the assets transferred to Acquiring Fund by Acquired Fund,
less the Acquired Fund Liabilities assumed by Acquiring Fund.
(ii) Promptly after the transfer of its assets to Acquiring Fund,
Acquired Fund will distribute in liquidation the Acquiring Fund Shares it
receives in the exchange to Acquired Fund shareholders pro rata in exchange for
their surrender of their shares of beneficial interest of Acquired Fund
("Acquired Fund Shares").
(iii) After such exchanges, liquidation and distribution, the existence
of Acquired Fund will be promptly terminated in accordance with Massachusetts
law.
The Agreement and the transactions contemplated thereby were approved
by the Board of Trustees of Trust, on behalf of Acquiring Fund and Acquired
Fund, at a meeting held on December 8, 1998. Acquired Fund shareholders approved
the transaction at a meeting held on March 18, 1999. Acquiring Fund shareholders
are not required and were not asked to approve the transaction.
Massachusetts law does not provide dissenters' rights for Acquired Fund
shareholders in the transaction. Additionally, it is the position of the
Division of Investment Management of the Securities and Exchange Commission that
appraisal rights, in contexts such as the reorganization, are inconsistent with
Rule 22c-1 under the 1940 Act and are therefore preempted and invalidated by
such rule. Consequently, Acquired Fund shareholders will not have dissenters' or
appraisal rights in the transaction.
Our opinions set forth below are subject to the following factual
assumptions being true and correct (including statements relating to future
actions and facts represented to be to the best knowledge of management, whether
or not known). To the extent any such fact relates to a "shareholder," we assume
that the fact is true and correct whether the term "shareholder" is interpreted
to refer to (1) the Company or another life insurance company that is the record
owner of the Acquired Fund Shares or the Acquiring Fund Shares or (2) the holder
of a Contract issued by the Company or another life insurance company that is
based in whole or in part upon the performance of Acquired Fund or Acquiring
Fund. Authorized representatives of Acquiring Fund and Acquired Fund have
represented to us by letters of even date herewith that the following
assumptions are true and correct:
(a) Neither Acquiring Fund nor any person treated as related to
Acquiring Fund under Treasury Regulation Section 1.368-1(e)(3) has any plan or
intention to redeem or otherwise reacquire any of the Acquiring Fund Shares
received by shareholders of Acquired Fund in the transaction except in the
ordinary course of Acquiring Fund's business in connection with its legal
obligation under Section 22(e) of the 1940 Act as a registered open-end
investment company to redeem its own shares (which obligation is not in
connection with, modified in connection with, or in any way related to the
transaction).
(b) After the transaction, Acquiring Fund will continue the historic
business of Acquired Fund and will use all of the assets acquired from Acquired
Fund, which are Acquired Fund's historic business assets, i.e., assets not
acquired as part of or in contemplation of the transaction, in the ordinary
course of a business.
(c) Acquiring Fund has no plan or intention to sell or otherwise
dispose of any assets of Acquired Fund acquired in the transaction, except for
dispositions made in the ordinary course of its business (i.e., dispositions
resulting from investment decisions made after the reorganization on the basis
of investment considerations independent of the reorganization) or to maintain
its qualification as a regulated investment company under Subchapter M of the
Code or its compliance with the diversification requirements of Section 817(h)
of the Code.
(d) The shareholders of Acquiring Fund and the shareholders of Acquired
Fund will bear their respective expenses, if any, in connection with the
transaction.
(e) Acquiring Fund and Acquired Fund will each bear its own expenses
incurred in connection with the transaction. Any liabilities of Acquired Fund
attributable to such expenses that remain unpaid on the closing date of the
transaction and are assumed by Acquiring Fund in the transaction are
attributable to Acquired Fund's expenses that are solely and directly related to
the transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(f) There is no indebtedness between Acquiring Fund and Acquired Fund.
(g) Acquired Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since inception, and qualifies as such for its
taxable year ending on the closing date of the transaction.
(h) Acquiring Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since inception, and qualifies as such as of the
date of the transaction.
(i) Neither Acquiring Fund nor Acquired Fund is under the jurisdiction
of a court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(j) Acquiring Fund does not own and has never owned, directly or
indirectly, any shares of Acquired Fund.
(k) Acquiring Fund will not pay cash in lieu of fractional shares in
connection with the transaction.
(l) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares issued to Acquired Fund in exchange for the assets of
Acquired Fund is approximately equal to the fair market value of the assets of
Acquired Fund received by Acquiring Fund, minus the Acquired Fund Liabilities
assumed by Acquiring Fund. Acquiring Fund will not furnish any consideration in
connection with the acquisition of Acquired Fund's assets other than the
assumption of these Acquired Fund Liabilities and the issuance of these
Acquiring Fund Shares.
(m) The principal business purposes of the transaction are to combine
the assets of Acquiring Fund and Acquired Fund in order to capitalize on
economies of scale in expenses, including the costs of accounting, legal,
transfer agency, insurance, custodial, and administrative services, to benefit
from Acquiring Fund's anticipated better performance and better potential for
asset growth and expense reduction, and to increase diversification.
(n) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares received by each shareholder that holds Acquired Fund
Shares is approximately equal to the fair market value of the Acquired Fund
Shares surrendered by such shareholder. No property other than Acquiring Fund
Shares will be distributed to shareholders of Acquired Fund in exchange for
their Acquired Fund Shares, nor will any such shareholder receive cash or other
property as part of the transaction.
(o) There is no plan or intention on the part of any shareholder of
Acquired Fund that owns beneficially 5% or more of the Acquired Fund Shares and,
to the best knowledge of management of Acquired Fund, there is no plan or
intention on the part of the remaining shareholders of Acquired Fund, in
connection with the transaction, to engage in any transaction with Acquired
Fund, Acquiring Fund, or any person treated as related to Acquired Fund or
Acquiring Fund under the standards made applicable by Treasury Regulation
Section 1.368-1(e)(1)(i) involving the sale, redemption, exchange, transfer,
pledge, or other disposition resulting in a direct or indirect transfer of the
risks of ownership (a "Sale") of any of the Acquired Fund Shares or any of the
Acquiring Fund Shares to be received in the transaction that, considering all
Sales, would reduce the aggregate ownership of the Acquiring Fund Shares by
former Acquired Fund shareholders to a number of shares having a value, as of
the date of the transaction, of less than fifty percent (50%) of the value of
all of the formerly outstanding Acquired Fund Shares as of the same date. All
Sales involving shares of Acquired Fund and Acquiring Fund held by Acquired Fund
shareholders that have occurred or will occur in connection with the transaction
are taken into account for purposes of this representation. No such Sale that is
in connection with the transaction has, to the best knowledge of the management
of Acquired Fund, occurred on or prior to the date of the transaction.
(p) Acquired Fund assets transferred to Acquiring Fund comprise at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets held by
Acquired Fund immediately prior to the transaction. For purposes of this
representation, amounts used by Acquired Fund to pay its outstanding
liabilities, including reorganization expenses, and all redemptions and
distributions (except for redemptions in the ordinary course of business upon
demand of a shareholder that Acquired Fund is required to make as an open-end
investment company pursuant to Section 22(e) of the 1940 Act and regular, normal
dividends, which dividends include any final distribution of previously
undistributed investment company taxable income and net capital gain for
Acquired Fund's final taxable year ending on the date of the transaction) made
by Acquired Fund immediately preceding the transaction are taken into account as
assets of Acquired Fund held immediately prior to the transaction.
(q) The Acquired Fund Liabilities assumed by Acquiring Fund plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Acquired Fund in the ordinary course of its business or are expenses of the
transaction.
(r) The fair market value of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(s) The total adjusted basis of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(t) Acquired Fund does not pay compensation to any
shareholder-employee.
OPINION
On the basis of and subject to the foregoing and in reliance upon the
representations described above, we are of the opinion that:
(a) The acquisition by Acquiring Fund of all of the assets of Acquired
Fund solely in exchange for the issuance of Acquiring Fund Shares to Acquired
Fund and the assumption of all of the Acquired Fund Liabilities by Acquiring
Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired
Fund, of Acquiring Fund Shares to Acquired Fund shareholders in exchange for
their Acquired Fund Shares and the termination of Acquired Fund, will constitute
a "reorganization" within the meaning of Section 368(a) of the Code. Acquiring
Fund and Acquired Fund will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by Acquired Fund upon (i) the
transfer of all of its assets to Acquiring Fund solely in exchange for the
issuance of Acquiring Fund Shares to Acquired Fund and the assumption of all of
the Acquired Fund Liabilities by Acquiring Fund and (ii) the distribution by
Acquired Fund of such Acquiring Fund Shares to the shareholders of Acquired Fund
(Sections 361(a) and 361(c) of the Code).
(c) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund solely in exchange for the issuance of
Acquiring Fund Shares to Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by Acquiring Fund (Section 1032(a) of the Code).
(d) The basis of the assets of Acquired Fund acquired by Acquiring Fund
will be, in each instance, the same as the basis of those assets in the hands of
Acquired Fund immediately prior to the transfer (Section 362(b) of the Code).
(e) The tax holding period of the assets of Acquired Fund in the hands
of Acquiring Fund will, in each instance, include Acquired Fund's tax holding
period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or loss
upon the exchange of all of their Acquired Fund Shares solely for Acquiring Fund
Shares as part of the transaction (Section 354(a)(1) of the Code).
(g) The basis of the Acquiring Fund Shares received by the Acquired
Fund shareholders in the transaction will be the same as the basis of the
Acquired Fund Shares surrendered in exchange therefor (Section 358(a)(1) of the
Code).
(h) The tax holding period of the Acquiring Fund Shares received by
Acquired Fund shareholders will include, for each shareholder, the tax holding
period for the Acquired Fund Shares surrendered in exchange therefor, provided
that the Acquired Fund Shares were held as capital assets on the date of the
exchange (Section 1223(1) of the Code).
No opinion is expressed or implied regarding the federal income tax
consequences to Acquiring Fund, Acquired Fund or Acquired Fund shareholders of
any conditions existing at the time of, effects resulting from, or other aspects
of the transaction except as expressly set forth above. In particular, and
without limitation of the foregoing, no opinion is expressed regarding whether
the Company or any other life insurance company or any holder of any Contract is
properly treated under the Code as the owner of Acquired Fund Shares or
Acquiring Fund Shares. This opinion may not be relied upon except with respect
to the consequences specifically discussed herein nor may it be relied upon by
persons or entities to whom it is not addressed, other than with our prior
written consent.
Very truly yours,
Hale and Dorr LLP
H:\convert\tmp\arneth.wpf
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference of our report dated February 6, 1998 for the John
Hancock V.A. World Bond Fund and the John Hancock V.A. Strategic Income Fund in
the Proxy Statement of the John Hancock V.A. World Bond Fund and Prospectus for
John Hancock V.A. Strategic Income Fund filed with the Securities and Exchange
Commission in this Registration Statement (Form N-14) under the Securities Act
of 1933.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
January 6, 1999
