File Nos. 33-64465
811-07437
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 9 [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 9 [X]
(Check appropriate box or boxes.)
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John Hancock Declaration Trust
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(617) 375-1760
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SUSAN S. NEWTON
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
( ) (Date) pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
(X) on May 1, 1999 pursuant to paragraph (a) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective admendment.
<PAGE>
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JOHN HANCOCK
Declaration
Funds
[LOGO] Prospectus
May 1, 1999
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As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[Clipart] Growth
V.A. Emerging Growth Fund
V.A. Financial Industries Fund
V.A. Growth Fund
V.A. International Fund
V.A. Regional Bank Fund
V.A. Special Opportunities Fund
[Clipart] Growth & Income
V.A. 500 Index Fund
V.A. Growth and Income Fund
V.A. Independence Equity Fund
V.A. Sovereign Investors Fund
[Clipart] Income
V.A. Bond Fund
V.A. High Yield Bond Fund
V.A. Money Market Fund
V.A. Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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General information about Overview 4
the Declaration funds.
Your investment choices 5
A fund-by-fund summary [Clipart] Growth
of goals, strategies V.A. Emerging Growth Fund 6
and risks. V.A. Financial Industries Fund 8
V.A. Growth Fund 10
V.A. International Fund 12
V.A. Regional Bank Fund 14
V.A. Special Opportunities Fund 16
[Clipart] Growth & Income
V.A. 500 Index Fund 18
V.A. Growth and Income Fund 20
V.A. Independence Equity Fund 22
V.A. Sovereign Investors Fund 24
[Clipart] Income
V.A. Bond Fund 26
V.A. High Yield Bond Fund 28
V.A. Money Market Fund 30
V.A. Strategic Income Fund 32
Transaction policies and Account information
other information affecting
your fund investment. Buying and selling fund shares 34
Valuing fund shares 34
Fund expenses 34
Dividends and taxes 34
Further information on the Fund details
Declaration funds.
Business structure 35
For more information back cover
<PAGE>
Overview
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JOHN HANCOCK DECLARATION FUNDS
These funds offer investment choices for the variable annuity contracts and
variable life insurance policies of certain insurance companies. You should read
this prospectus together with the attached prospectus of the insurance product
you are considering.
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the FDIC
or any other government agency. Because you could lose money by investing in
these funds, be sure to read all risk disclosure carefully before investing.
THE MANAGEMENT FIRM
All John Hancock Declaration funds are managed by John Hancock Advisers, Inc.
Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $30 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clipart] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clipart] Past perfomance The fund's total return, measured year-by-year and
over time
[Clipart] Main risks The major risk factors associated with the fund.
[Clipart] Financial highlights A table showing the fund's financial performance
for up to five years.
4
<PAGE>
Your Investment Choices
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The Declaration funds offer you 14 investment choices to suit a variety of
objectives. Each fund has its own strategy and its own risk/reward profile.
[Clipart] Growth Funds
o V.A. Emerging Growth Fund These funds seek long-term growth by
investing primarily in common stocks. They
o V.A. Financial Industries Fund may be appropriate if you are investing for
long-term goals such as retirement and are
o V.A. Growth Fund willing to accept higher short-term risk
along with higher potential long-term
o V.A. International Fund returns. Because growth funds will go up and
down in value, they may not be appropriate
o V.A. Regional Bank Fund if you are uncomfortable with stock market
risk or have a shorter investment time
o V.A. Special Opportunities Fund horizon.
[Clipart] Growth & Income Funds
o V.A. 500 Index Fund These funds invest for varying combinations
of income and capital appreciation. Because
o V.A. Growth and Income Fund of their income potential, they may be
appropriate if you are looking for a more
o V.A. Independence Equity Fund conservative alternative to exclusively
growth-oriented funds. However, they may not
o V.A. Sovereign Investors Fund be appropriate if you are investing for
maximum return over a long time horizon or
need stability of principal.
[Clipart] Income Funds
o V.A. Bond Fund These funds seek to provide current income
without sacrificing total return, and some
o V.A. High Yield Bond Fund also invest for stability of principal. They
may be appropriate if you are seeking a
o V.A. Money Market Fund regular stream of income. They may not be
appropriate if you are investing for maximum
o V.A. Strategic Income Fund return or need absolute stability of your
principal.
5
<PAGE>
V.A. Emerging Growth Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 80% of assets in stocks of U.S. and foreign
emerging growth companies with market capitalizations of no more than $1
billion. The fund managers look for companies that show rapid growth but are not
yet widely recognized. The fund also may invest in established companies that,
because of new management, products or opportunities, offer the possibility of
accelerating earnings.
In managing the portfolio, the managers emphasize diversification by sector and
company. The fund's investments by sector, or sector weightings, generally
reflect those of the Russell 2000 Growth Index. The fund normally invests in 150
to 220 companies.
In choosing individual securities, the managers use fundamental financial
analysis to identify companies that have demonstrated 20% annual growth over
three years and are projected to continue growing at a similar pace. The
managers favor companies that dominate their market niches or are poised to
become market leaders. They look for strong senior management teams and coherent
business strategies. They generally maintain personal contact with the senior
management of the companies the fund invests in.
The fund may invest up to 20% of assets in other types of companies and certain
other types of equity and debt securities. The fund may make limited use of
certain derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
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PORTFOLIO MANAGERS
Bernice S. Behar, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1986
Laura Allen, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1981
Anurag Pandit, CFA
- --------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1984
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market indices for reference). This information may help provide an indication
of the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
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Year-by-year total returns -- calendar years
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1997 1998
11.06% 15.94%
Best quarter: up 35.14%, fourth quarter 1998
Worst quarter: down 21.42%, third quarter 1998
Total return for the first three months of 1999: x.xx%
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Average annual total returns -- for periods ending 12/31/98
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Fund Index 1 Index 2
1 year 15.94% x.xx% x.xx%
Life of fund 8.20% x.xx% x.xx%
Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S.
small-capitalization common stocks.
Index 2: Russell 2000 Growth Index, an unmanaged index containing those stocks
from the Russell 2000 Index with a greater-than-average growth orientation.
(1) Began operations on August 29, 1996.
6
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Because the fund concentrates on
emerging growth companies, its performance may be more volatile than that of a
fund that invests primarily in larger companies.
Stocks of smaller emerging growth companies are more risky than stocks of larger
companies. Many of these companies are young and have a limited track record.
Because their businesses frequently rely on narrow product lines and niche
markets, they can suffer severely from isolated business setbacks.
The fund's management strategy will influence performance significantly.
Emerging growth stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on other types of stocks.
Similarly, if the managers' stock selection strategy doesn't perform as
expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o In a down market, small-capitalization stocks, derivatives and other
higher-risk securities could become harder to value or to sell at a fair
price.
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _________________________.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.32
Net investment income (loss)(2) 0.02 (0.02)
Net realized and unrealized gain (loss) on investments (0.68) 1.05
Total from investment operations (0.66) 1.03
Less distributions:
Dividends from net investment income (0.02) (0.00)(8)
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period $9.32 $10.35
Total investment return at net asset value(3) (%) (6.62)(4) 11.06
Total adjusted investment return at net asset value(3,5) (%) (8.05)(4) 9.34
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841
Ratio of expenses to average net assets (%) 1.00(6) 1.00
Ratio of adjusted expenses to average net assets(7) (%) 5.19(6) 2.72
Ratio of net investment income (loss) to average net assets (%) 0.62(6) (0.16)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (3.57)(6) (1.88)
Portfolio turnover rate (%) 31 79
Fee reduction per share(2) ($) 0.14 0.17
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
7
<PAGE>
V.A. Financial Industries Fund
GOAL AND STRATEGY
[Clipart] The fund seeks capital appreciation. To pursue this goal, the fund
normally invests at least 65% of assets in U.S. and foreign financial services
companies, including banks, thrifts, finance companies, brokerage and advisory
firms, real estate-related firms and insurance companies.
In managing the portfolio, the managers concentrate primarily on stock selection
rather than industry allocation. The portfolio may include financial services
companies of all sizes and types.
In choosing individual stocks, the managers use fundamental financial analysis
to identify securities that appear comparatively undervalued. Given the
industrywide trend toward consolidation, the managers also seek out companies
that appear to be positioned for a merger. The managers generally gather
firsthand information about companies from interviews and company visits.
The fund may invest in U.S. and foreign bonds, including up to 5% of net assets
in junk bonds (those rated below BBB/Baa and their unrated equivalents). It may
also invest up to 15% of assets in investment-grade short-term securities.
The fund may make limited use of certain derivatives (investments whose value is
based on indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest up to 80% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- -----------------------------------
Executive vice president of adviser
Joined team in 1997
Joined adviser in 1985
Began career in 1979
Thomas Finucane
- -----------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began career in 1990
Thomas Goggins
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
8.55%
Best quarter: up 16.06%, fourth quarter 1998
Worst quarter: down 16.78%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year x.xx% x.xx%
Life of fund x.xx% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 common
stocks.
(1) Began operations on April 30, 1997.
8
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Another major factor in this fund's
performance is the economic condition of the financial services sector. The
value of your investment may fluctuate more widely than it would in a fund that
is diversified across sectors.
When interest rates fall or economic conditions deteriorate, the stocks of
financial services companies often suffer greater losses than other stocks.
Rising interest rates can cut into profits by reducing the difference between
these companies' borrowing and lending rates.
The fund's management strategy will influence performance significantly. Stocks
of financial services companies as a group could fall out of favor with the
market, causing the fund to underperform funds that focus on other types of
stocks. Similarly, if the managers' stock selection strategy doesn't perform as
expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by __________________________.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period ended: 12/97(1) 12/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.11
Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.39
Total from investment operations 3.50
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 $13.44
Total investment return at net asset value(3) (%) 35.05(4)
Total adjusted investment return at net asset value(3,5) (%) 34.71(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465
Ratio of expenses to average net assets (%) 1.05(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.39(6)
Ratio of net investment income (loss) to average net assets (%) 1.32(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.98(6)
Portfolio turnover rate (%) 11
Fee reduction per share(2) ($) 0.03
</TABLE>
(1) Began operations on April 30, 1997.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
9
<PAGE>
V.A. Growth Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests in stocks of U.S. companies.
The fund generally invests in 30 to 60 companies -- most of which have large
market capitalizations -- that are diversified across sectors. The fund has
tended to emphasize, or overweight, certain sectors such as health care,
technology or consumer goods. These weightings may change in the future.
In choosing individual stocks, the managers use fundamental financial analysis
to indentify companies with:
o strong cash flows
o secure market franchises
o sales growth that outpaces their industries
The management team uses various means to assess the depth and stability of
companies' senior management, including interviews and company visits. The fund
favors companies for which the managers project at least 15% annual growth for
the next two years.
The fund may invest in certain other types of equity and debt securities. It may
also invest up to 15% of assets in foreign securities. In addition, it may make
limited use of certain derivatives (investments whose value is based on indices,
securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGER
Benjamin A. Hock, Jr., CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1973
Geoffrey R. Plume, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1996
Began career in 1987
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
14.27% 24.60%
Best quarter: up 22.53%, third quarter 1997
Worst quarter: down 15.55%, first quarter 1997
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 24.60% x.xx%
Life of fund 13.22% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 common
stocks.
(1) Began operations on August 29, 1996.
10
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. If the fund concentrates its
investments in certain sectors or companies, its performance could be tied more
closely to those sectors or companies than to the market as a whole.
The fund's management strategy will influence performance significantly.
Large-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on small- or
medium-capitalization stocks. Similarly, if the managers' stock selection
strategy doesn't perform as expected, the fund could underperform its peers or
lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ___________________________.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.39
Net investment income (loss)(2) (0.01) (0.04)
Net realized and unrealized gain (loss) on investments (0.60) 1.38
Total from investment operations (0.61) 1.34
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period $9.39 $10.73
Total investment return at net asset value(3) (%) (6.10)(4) 14.27
Total adjusted investment return at net asset value(3,5) (%) (7.39)(4) 12.90
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733
Ratio of expenses to average net assets (%) 1.00(6) 1.00
Ratio of adjusted expenses to average net assets(7) (%) 4.76(6) 2.37
Ratio of net investment income (loss) to average net assets (%) (0.23)(6) (0.39)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (3.99)(6) (1.76)
Portfolio turnover rate (%) 68 136
Fee reduction per share(2) ($) 0.13 0.13
</TABLE>
(1) Began operations on August 29, 1996
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
11
<PAGE>
V.A. International Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital. To pursue this goal, the
fund normally invests at least 65% of assets in common stocks of companies
outside the United States. The fund does not maintain a fixed allocation of
assets, either with respect to securities type or geography.
In managing the portfolio, the managers concentrate on country allocation and
securities selection. They also seek to diversify the fund across countries and
sectors. The managers base the fund's country allocation on a quantitative model
as well as analysis of political trends and macroeconomic factors such as
projected currency exchange rates.
The investment analysis team is organized by sector and regularly screens large
companies, such as those listed in the MSCI All Country World ex-US Index (an
unmanaged global index that excludes U.S. companies). The team then uses
fundamental financial analysis to identify companies that appear most promising
in terms of stable growth, reasonable valuations and management strength. The
team conducts on-site visits and typically establishes target buy and sell
prices based on the team's valuation estimates.
Although the fund invests primarily in common stocks, it may invest in virtually
any type of equity or debt security, foreign or domestic. The fund may use
certain derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Miren Etcheverry
- ---------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1977
Gerardo J. Espinoza
- ---------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1979
John L.F. Wills
- ---------------------------------
Senior vice president of adviser
Managing director of subadviser
Joined team in 1996
Joined adviser in 1987
Began career in 1969
SUBADVISER
John Hancock Advisers
International Limited
- ---------------------------------
London-based affiliate of adviser
Founded in 1986
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
-0.54% 16.75%
Best quarter: up 21.62%, fourth quarter 1998
Worst quarter: down 17.11%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 16.75% x.xx%
Life of fund 12.20% x.xx%
Index: MSCI All Country World-Ex U.S. Free Index, an unmanaged index of freely
traded stocks of foreign companies.
(1) Began operations on August 29, 1996.
12
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's management strategy will influence performance significantly. If the
fund invests in countries or regions that experience economic downturns,
performance could suffer. Similarly, if certain investments or industries don't
perform as expected, or if the managers' stock selection strategy doesn't
perform as expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Emerging market securities, derivatives and other higher-risk securities can
be hard to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ________________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.23
Net investment income (loss)(2) 0.07 0.05
Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.20 (0.13)
Total from investment operations 1.27 (0.08)
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 $10.50
Total investment return at net asset value(3) (%) 12.75(4) (0.54)
Total adjusted investment return at net asset value(3,5) (%) 12.07(4) (1.43)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,267 3,792
Ratio of expenses to average net assets (%) 1.15(6) 1.15
Ratio of adjusted expenses to average net assets(7) (%) 3.13(6) 2.04
Ratio of net investment income (loss) to average net assets (%) 2.03(6) 0.43
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.05(6) (0.46)
Portfolio turnover rate (%) 14 273
Fee reduction per share(2) ($) 0.07 0.10
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
13
<PAGE>
V.A. Regional Bank Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 65% of assets in a portfolio of stocks of
regional banks and lending institutions, including commercial and industrial
banks, savings and loan associations and bank holding companies. These financial
institutions provide full-service banking, have primarily domestic assets and
are typically based outside of money centers, such as New York City and Chicago.
In managing the portfolio, the managers concentrate primarily on stock
selection.
In choosing individual stocks, the managers use fundamental financial analysis
to identify securities that appear comparatively undervalued. The managers look
for low price/earnings (P/E) ratios, high-quality assets and sound loan review
processes. Given the industrywide trend toward consolidation, the managers also
seek out companies that appear to be positioned for a merger. The fund's
portfolio may be concentrated in geographic regions where consolidation activity
is high. The managers generally gather firsthand information about companies
from interviews and company visits.
The fund may also invest in other U.S. and foreign financial services companies,
such as lending companies and money center banks. The fund may invest up to 5%
of net assets in stocks of companies outside the financial services sector and
up to 5% of net assets in junk bonds (those rated below BBB/Baa and their
unrated equivalents).
The fund may make limited use of certain derivatives (investments whose value is
based on indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest up to 80% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- -----------------------------------
Executive vice president of adviser
Joined team in 1998
Joined adviser in 1985
Began career in 1979
Thomas Finucane
- -----------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1990
Began career in 1990
Thomas Goggins
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clipart] This section normally shows how the fund's total return has varied
from year to year, along with a broad based market index for reference. Because
the fund is less than a year old, there is not a full year of performance to
report.
14
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Another major factor in this fund's
performance is the economic condition of the regional banking industry.
When interest rates fall or economic conditions deteriorate, regional bank
stocks often suffer greater losses than other stocks. Rising interest rates can
cut into profits by reducing the difference between these companies' borrowing
and lending rates.
The fund's management strategy will influence performance significantly. If the
fund concentrates its investments in regions that experience economic downturns,
performance could suffer. Regional bank stocks as a group could fall out of
favor with the market, causing the fund to underperform funds that focus on
other types of stocks. Similarly, if the managers' stock selection strategy
doesn't perform as expected, the fund could underperform its peers or lose
money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by __________________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on May 1, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
15
<PAGE>
V.A. Special Opportunities Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 75% of assets in stocks of companies in up to
five economic sectors that appear to offer the highest earnings growth
potential.
In managing the portfolio, the managers seek to identify promising sectors for
investment. The managers consider broad economic trends, demographic factors,
technological changes, consolidation trends and legislative initiatives.
Although the fund concentrates on a few sectors, it diversifies broadly within
those sectors. At times, the fund may focus on a single sector. The fund
normally invests in more than 100 medium-capitalization companies.
In choosing individual securities, the managers conduct fundamental financial
analysis to identify companies that appear able to sustain 15% annual earnings
growth for the next three to five years. The managers look for companies with
growth stemming from a combination of gains in market share and increasing
operating efficiency. Before investing, the managers identify a specific
catalyst for growth, such as a new product, business reorganization or merger.
The management team generally maintains personal contact with the senior
management of the companies the fund invests in.
The fund may invest up to 25% of assets in stocks and investment-grade bonds in
additional sectors. The fund may invest in foreign stocks. It may also make
limited use of certain derivatives (investments whose value is based on indices,
securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 25% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barbara C. Friedman, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1973
Susan E. Kelly
- --------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1988
PAST PERFORMANCE
[Clipart] The graph and table show the fund's total return for its first full
calendar year along with broad-based market indices for reference. This
information may help provide an indication of the fund's risks and potential
rewards. All figures assume dividend reinvestment. Past performance does not
indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
10.35%
Best quarter: up 20.60%, fourth quarter 1998
Worst quarter: down 19.74%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 10.35% x.xx% x.xx%
Index 1: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S.
common stocks.
Index 2: Russell Midcap Growth Index, an unmanaged index containing those stocks
from the Russell Midcap Index with a greater-than-average growth orientation.
(1) Began operations on January 7, 1998.
16
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Stocks of medium-capitalization
companies tend to be more volatile than those of larger companies. Similarly,
medium-capitalization stocks are generally traded in lower volumes than
large-capitalization stocks.
Because the fund concentrates on a few sectors of the market, its performance
may be more volatile than that of a fund that invests across many sectors.
The fund's management strategy will influence performance significantly.
Medium-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on other types of stocks.
Similarly, if the industries or companies the fund invests in don't perform as
expected, or if the managers' stock selection strategy doesn't perform as
expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise.
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _______________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on January 7, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
17
<PAGE>
V.A. 500 Index Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to provide investment results that correspond to the
total return performance of the Standard & Poor's 500 Stock Price Index. To
pursue this goal, the fund normally invests at least 80% of assets in common
stocks of S&P 500(R) companies in approximately the same proportions as they are
represented in this index.
This fund is passively managed, meaning that the manager does not use any broad
economic analysis or fundamental financial analysis to select investments. The
manager monitors the portfolio daily and rebalances periodically to maintain the
proportions of the index. The fund also invests in futures contracts and options
based on S&P 500 stocks.
Under normal circumstances, the fund is fully invested -- directly or through
futures and options contracts -- in all 500 stocks represented in the index. It
may, however, invest in fewer stocks or in stocks of non-S&P 500 companies. The
fund normally maintains less than 1% of assets in cash or cash equivalents.
================================================================================
PORTFOLIO MANAGER
ROGER C. HAMILTON, CFA
- -----------------------------
Vice president of the adviser
Joined team in 1997
Joined adviser in 1994
Began career in 1980
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
29.51% 28.44%
Best quarter: up 21.39%, fourth quarter 1998
Worst quarter: down 10.01%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 28.44% x.xx%
Life of fund 30.24% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on August 29, 1996.
18
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down with the index. The
fund does not attempt to temper volatility or avoid losses associated with a
decline in the index. The large-capitalization stocks that make up the index
could fall out of favor with the market, causing the fund to underperform funds
that focus on small- or medium-capitalization stocks.
Certain investment practices may cause the fund to track the index less closely:
o Transaction expenses can reduce fund performance.
o Certain derivatives could produce disproportionate gains or losses.
o The performance of S&P futures could correlate less strongly with the index
than investments in the underlying securities.
o The relative proportions of stocks in the fund's portfolio could drift over
time, which could increase tracking error.
Note: Standard & Poor's and S&P 500(R) are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by the adviser. A description of
this license is provided in the statement of additional information.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ____________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.44
Net investment income (loss)(2) 0.17 0.30
Net realized and unrealized gain (loss) on investments 0.98 2.72
Total from investment operations 1.15 3.02
Less distributions:
Dividends from net investment income (0.16) (0.30)
Distributions from net realized gain on investments sold (0.55) (0.54)
Total distributions (0.71) (0.84)
Net asset value, end of period $10.44 $12.62
Total investment return at net asset value(3) (%) 11.49(4) 29.51
Total adjusted investment return at net asset value(3,5) (%) 11.25(4) 29.27
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,049 20,008
Ratio of expenses to average net assets (%) 0.60(6) 0.36
Ratio of adjusted expenses to average net assets(7) (%) 1.31(6) 0.60
Ratio of net investment income (loss) to average net assets (%) 4.57(6) 2.45
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.86(6) 2.21
Portfolio turnover rate (%) -- 9
Fee reduction per share(2) ($) 0.03 0.03
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
19
<PAGE>
V.A. Growth and Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks the highest total return (capital appreciation plus
current income) that is consistent with reasonable safety of capital. To pursue
this goal, the fund invests in a diversified portfolio of stocks, bonds and
money market securities. Although the fund may concentrate in any of these asset
classes, under normal circumstances it invests primarily in stocks.
In managing the portfolio, the managers emphasize a value-oriented approach to
individual stock selection. With the aid of proprietary financial models, the
management team looks for companies that are selling at what appear to be
substantial discounts to their long-term intrinsic and "franchise" values. These
companies often have identifiable catalysts for growth, such as new products,
business reorganizations or mergers.
The management team uses fundamental financial analysis to identify individual
companies with substantial cash flows, reliable revenue streams, superior
competitive positions and strong management.
The fund's portfolio typically includes between 50 and 150 large companies that
are diversified across industry sectors. The fund may also attempt to take
advantage of short-term market volatility by investing in corporate
restructurings or pending acquisitions.
In selecting bonds, the manager look for the most favorable risk/return ratios.
The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca
and their unrated equivalents.
The fund may invest up to 25% of assets in foreign securities (35% during
adverse U.S. market conditions). The fund may also make limited use of certain
derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Timothy E. Keefe, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1996
Began career in 1987
Timothy E. Quinlisk, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1985
PAST PERFORMANCE
[Clipart] The graph and table show the fund's total return for its first full
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks and potential
rewards. All figures assume dividend reinvestment. Past performance does not
indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
21.39%
Best quarter: up 26.50%, fourth quarter 1998
Worst quarter: down 16.61%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 21.39% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on January 6, 1998.
20
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down in response to stock
and bond market movements. The fund's management strategy will influence
performance significantly. Large-capitalization stocks as a group could fall out
of favor with the market, causing the fund to underperform funds that focus on
small- or medium-capitalization stocks. Similarly, if the managers' securities
selection strategies don't perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _____________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on January 6, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
21
<PAGE>
V.A. Independence Equity Fund
GOAL AND STRATEGY
[Clipart] The fund seeks above-average total return (capital appreciation plus
income). To pursue this goal, the fund invests primarily in a diversified
portfolio of mainly large-capitalization stocks. The portfolio's risk profile is
similar to that of the S&P 500 Index.
In actively managing the portfolio, the managers select from a "menu" of stocks
of approximately 550 companies that evolves over time. Approximately 70% to 80%
of these companies are also included in the S&P 500 Index. The subadviser's
investment research team is organized by industry and tracks these companies to
develop earnings estimates and five-year projections for growth. A series of
proprietary computer models uses this in-house research to rank the stocks
according to their combination of:
o value, meaning they appear to be underpriced
o momentum, meaning they show potential for strong growth
This process, together with a risk/return analysis against the S&P 500 Index,
results in a portfolio of approximately 100 to 130 of the stocks from the top
60% of the menu. The fund sells any stocks that fall into the bottom 20% of the
menu. It may also sell for other reasons.
In normal market conditions, the fund is almost entirely invested in stocks. The
fund may, however, invest in certain other types of equity and debt securities,
including dollar-denominated foreign securities. It may also make limited use of
certain derivatives (investments whose value is based on indices or securities).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
SUBADVISER
Independence Investment
Associates, Inc.
- -------------------------------
Team responsible for day-to-day
investment management
A subsidiary of John Hancock
Mutual Life Insurance Company
Founded in 1982
Supervised by the adviser
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
30.68% 28.42%
Best quarter: up 23.16%, fourth quarter 1998
Worst quarter: down 13.01%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 28.42% x.xx%
Life of fund 30.85% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on August 29, 1998.
22
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down in response to stock
market movements. Large-capitalization stocks as a group could fall out of favor
with the market, causing the fund to underperform funds that focus on small- or
medium-capitalization stocks.
The fund's management strategy will influence performance significantly. If the
investment research team's earnings estimates or projections turn out to be
inaccurate, or if the proprietary computer models don't perform as expected, the
fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political upheavals.
o Certain derivatives could produce disproportionate gains or losses.
o In a down market, higher-risk securites and derivatives could become harder
to value or to sell at a fair price.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ______________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.11
Net investment income (loss)(2) 0.06 0.16
Net realized and unrealized gain (loss) on investments 1.12 3.23
Total from investment operations 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 $11.11 $14.11
Total investment return at net asset value(3) (%) 11.78(4) 30.68
Total adjusted investment return at net asset value(3,5) (%) 10.66(4) 30.04
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719
Ratio of expenses to average net assets (%) 0.95(6) 0.95
Ratio of adjusted expenses to average net assets(7) (%) 4.23(6) 1.59
Ratio of net investment income (loss) to average net assets (%) 1.60(6) 1.24
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.68)(6) 0.60
Portfolio turnover rate (%) 24 53
Fee reduction per share(2) ($) 0.12 0.08
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
23
<PAGE>
V.A. Sovereign Investors Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital and of income without
assuming undue market risks. To pursue these goals, the fund normally invests
most of its assets in a diversified portfolio of stocks, although it may respond
to market conditions by investing in other types of securities, such as bonds or
short-term securities.
All of the fund's stock investments are "dividend performers" -- companies whose
dividend payments have increased steadily for ten years. The managers use
fundamental financial analysis to identify individual companies with
high-quality income statements, substantial cash reserves and identifiable
catalysts for growth, which may be new products or benefits from industrywide
growth. The team generally visits companies to evaluate the strength and
consistency of their management strategy. Finally, the managers look for stocks
that are reasonably priced relative to their earnings and industry.
Historically, companies that meet these criteria have tended to have large or
medium capitalizations.
The fund may invest in bonds, with up to 5% of assets in junk bonds rated as low
as C and their unrated equivalents.
The fund typically invests in U.S. companies but may invest in
dollar-denominated foreign securities. It may also make limited use of certain
derivatives (investments whose value is based on indices and securities).
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- -----------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1994
Began career in 1971
Barry H. Evans, CFA
- -----------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1987
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
28.43% 16.88%
Best quarter: up 15.75%, fourth quarter 1998
Worst quarter: down 6.87%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 16.88% x.xx%
Life of fund 23.08% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on August 29, 1996.
24
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down in response to stock
and bond market movements.
The fund's management strategy will influence fund performance significantly.
Large- or medium capitalization stocks as a group could fall out of favor with
the market, causing the fund to underperform funds that focus on small
capitalization stocks. Similarly, if the managers' securities selection
strategies don't perform as expected, the fund could underperform its peers or
lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political upheavals.
o In a down market, higher-risk securites and derivatives could become harder
to value or to sell at a fair price.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ________________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.74
Net investment income (loss)(2) 0.07 0.22
Net realized and unrealized gain (loss) on investments 0.76 2.82
Total from investment operations 0.83 3.04
Less distributions:
Dividends from net investment income (0.07) (0.18)
Distributions from net realized gain on investments sold (0.02) (0.01)
Total distributions (0.09) (0.19)
Net asset value, end of period $10.74 $13.59
Total investment return at net asset value(3) (%) 8.30(4) 28.43
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 28.12
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187
Ratio of expenses to average net assets (%) 0.85(6) 0.85
Ratio of adjusted expenses to average net assets(7) (%) 3.78(6) 1.16
Ratio of net investment income (loss) to average net assets (%) 1.90(6) 1.81
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.03)(6) 1.50
Portfolio turnover rate (%) 17 11
Fee reduction per share(2) ($) 0.11 0.04
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
25
<PAGE>
V.A. Bond Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
in a diversified portfolio of U.S. and foreign debt securities. These include
corporate bonds and debentures, as well as U.S. government and agency
securities. Most of these securities are investment-grade, although the fund may
invest up to 25% of assets in junk bonds rated as low as CC/Ca and their unrated
equivalents.
In managing the fund's portfolio, the managers concentrate on sector allocation,
industry allocation and securities selection: deciding which types of bonds and
industries to emphasize at a given time, and then which individual bonds to buy.
When making sector and industry allocations, the managers try to anticipate
shifts in the business cycle, using top-down analysis to determine which sectors
and industries may benefit over the next 12 months.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at bonds of
all different quality levels and maturities from many different issuers,
potentially including foreign governments and corporations.
The fund intends to keep its exposure to interest rate movements generally in
line with that of the markets it invests in. The fund may use certain
derivatives (investments whose value is based on indices, securities or
currencies), especially in managing its exposure to interest rate risk, although
it does not intend to use them extensively.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- -----------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began career in 1977
Anthony A. Goodchild
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1968
Benjamin Matthews
- -----------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1970
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
9.30% 9.41%
Best quarter: up 4.76%, third quarter 1998
Worst quarter: down 0.96%, first quarter 1997
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 9.41% x.xx%
Life of fund 9.96% x.xx%
Index: An unmanaged index of corporate bonds.
(1) Began operations on August 29, 1996.
26
<PAGE>
MAIN RISKS
[Clipart] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to market
or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could be hurt.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _________________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19
Net investment income (loss)(2) 0.23 0.68
Net realized and unrealized gain (loss) on investments 0.21 0.24
Total from investment operations 0.44 0.92
Less distributions:
Dividends from net investment income (0.23) (0.68)
Distributions from net realized gain on investments sold (0.02) (0.07)
Total distributions (0.25) (0.75)
Net asset value, end of period $10.19 $10.36
Total investment return at net asset value(3) (%) 4.42(4) 9.30
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682
Ratio of expenses to average net assets (%) 0.75(6) 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79
Portfolio turnover rate (%) 45 193
Fee reduction per share(2) ($) 0.12 0.18
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
27
<PAGE>
V.A. High Yield Bond Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to maximize current income without assuming undue risk.
Capital appreciation is a secondary goal. In pursuing these goals, the fund
normally invests at least 65% of assets in U.S. and foreign bonds rated BBB/Baa
or lower and their unrated equivalents. The fund may invest up to 30% of assets
in junk bonds rated CC/Ca and their unrated equivalents.
In managing the fund's portfolio, the managers concentrate on industry
allocation and securities selection: deciding which types of industries to
emphasize at a given time, and then which individual bonds to buy. The managers
use top-down analysis to determine which industries may benefit from current and
future changes in the economy.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves.
The managers also look at companies' financing cycles to determine which types
of securities (for example, bonds, preferred stocks or common stocks) to favor.
The fund typically invests in a broad range of industries, although it may
invest up to 40% of assets in electric utilities and telecommunications
companies.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund may invest up to 20% of
net assets in U.S. and foreign stocks.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- --------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1988
Began career in 1986
Frederick L. Cavanaugh, Jr.
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1975
Janet L. Clay, CFA
- --------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
PAST PERFORMANCE
[Clipart] The graph and table show the fund's total return for its first full
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks and potential
rewards. All figures assume dividend reinvestment. Past performance does not
indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
-9.80%
Best quarter: up 3.90%, fourth quarter 1998
Worst quarter: down 14.84%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year -9.80% x.xx%
Index: An unmanaged index of high yield bonds.
(1) Began operations on January 6, 1998.
28
<PAGE>
MAIN RISKS
[Clipart] The major factors in the fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Credit risk depends largely on the perceived financial health of bond issuers.
In general, lower-rated bonds have higher credit risks. Junk bond prices can
fall on bad news about the economy, an industry or a company. Share price, yield
and total return may fluctuate more than with less aggressive bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain industries or investments don't perform as the
fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o If interest rate movements cause the fund's callable securities to be paid
off substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o If the fund concentrates its investments in telecommunications or electric
utilities, its performance could be tied more closely to those industries
than to the market as a whole.
o Stock investments may go down in value due to stock market movements or
negative company or industry events.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ____________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on January 6, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
29
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clipart] The fund seeks maximum current income consistent with capital
preservation and liquidity. It invests only in high-quality money market
instruments and seeks to maintain a stable share price of $1.
The fund invests only in dollar-denominated securities rated within the two
highest short-term credit categories (and their unrated equivalents). These
securities have a maximum remaining maturity of 397 days and may be issued by:
o U.S. and foreign corporations
o U.S. and foreign banks
o U.S. and foreign governments
o U.S. agencies, states, and municipalities
o Supranational organizations such as the World Bank and the International
Monetary Fund
The fund may also invest in repurchase agreements based on these securities. The
fund maintains an average dollar-weighted maturity of 90 days or less.
In managing the portfolio, the manager searches aggressively for the best values
on securities that meet the find's credit and maturity requirements. The manager
tends to favor corporate securities and looks for relative yield advantages
between, for example, a company's secured and unsecured short-term debt
obligations.
================================================================================
PORTFOLIO MANAGERS
Team of money market research
analysts and portfolio managers
YIELD INFORMATION
For the fund's 7-day effective
yield, call 1-800-824-0335
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time. This information may help
provide an indication of the fund's risks and potential rewards. All figures
assume dividend reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
4.88% 4.83%
Best quarter: up x.xx%, quarter 19XX
Worst quarter: down x.xx%, quarter 19XX
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund
1 year x.xx%
Life of fund x.xx%
(1) Began operations on August 29, 1996.
30
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will be most affected by short-term
interest rates. If interest rates rise sharply, the fund could underperform its
peers or lose money.
An issuer of securities held by the fund could default, or have its credit
rating downgraded.
Foreign investments carry additional risks, including inadequate or inaccurate
financial information, and social or political upheavals.
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund seeks to
preserve the value of your investment at $1.00 share, it is possible to lose
money by investing in the fund.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _____________________.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.00 $1.00
Net investment income (loss)(2) 0.02 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05)
Net asset value, end of period $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377
Ratio of expenses to average net assets (%) 0.75(6) 0.75
Ratio of adjusted expenses to average net assets(7) (%) 27.48(6) 1.27
Ratio of net investment income (loss) to average net assets (%) 4.68(6) 4.86
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (22.05)(6) 4.34
Fee reduction per share(2) ($) 0.08 0.00(8)
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
31
<PAGE>
V.A. Strategic Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income. In pursuing this goal,
the fund invests primarily in the following types of securities:
o foreign government and corporate debt securities from developed and emerging
markets
o U.S. government and agency securities
o U.S. junk bonds rated as low as CC/Ca and their unrated equivalents
The fund generally intends to keep its average credit quality in the
investment-grade range.
In managing its portfolio, the managers use top-down analysis to allocate assets
among the three major sectors mentioned above. Although the fund could invest
all assets in one sector, it generally expects to remain diversified among all
three.
Within the foreign sector, the managers use a combination of bottom-up research
and economic analysis to select individual securities from a range of regions,
countries and industries. These securities may be rated as low as CC/Ca and
their unrated equivalents.
Within the U.S. government sector, the managers select investments primarily for
current yield and total return.
Within the junk bond sector, the managers use bottom-up research to select
individual securities from a wide range of industries.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund may invest up to 10% of
net assets in U.S. or foreign stocks.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund
might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- --------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began career in 1975
Arthur N. Calavritinos, CFA
- --------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1988
Began career in 1986
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
11.77% 4.92%
Best quarter: up 6.28%, second quarter 1997
Worst quarter: down 2.79%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 4.92% x.xx%
Life of fund 9.94% x.xx%
Index: An unmanaged index of U.S. government, U.S. corporate and Yankee bonds.
(1) Began operations on August 29, 1996.
32
<PAGE>
MAIN RISKS
[Clipart] The fund's risk profile depends on its sector allocation. In general,
investors should expect fluctuations in share price, yield and total return that
are above average for bond funds.
When interest rates rise, bond prices generally fall. Generally, an increase in
the fund's average maturity will make it more sensitive to interest rate risk.
There is no limit on the fund's average maturity.
A fall in worldwide demand for U.S. government securities could lower the prices
of these securities. The fund could lose money if any bonds it owns are
downgraded in credit rating or go into default. In general, lower-rated bonds
have higher credit risks, and their prices can fall on bad news about the
economy, an industry or a company. If certain allocation strategies or certain
industries or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals. These risks are greater in emerging markets.
o If interest rate movements cause the fund's callable securities to be paid
off substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o Stock investments may go down in value due to stock market movements or
negative company or industry events.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ________________________.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.30
Net investment income (loss)(2) 0.27 0.91
Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.36 0.26
Total from investment operations 0.63 1.17
Less distributions:
Dividends from net investment income (0.27) (0.91)
Distributions from net realized gain on investments sold (0.06) (0.09)
Total distributions (0.33) (1.00)
Net asset value, end of period $10.30 $10.47
Total investment return at net asset value(3) (%) 6.45(4) 11.77
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540
Ratio of expenses to average net assets (%) 0.85(6) 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25
Portfolio turnover rate (%) 73 110
Fee reduction per share(2) ($) 0.05 0.05
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
33
<PAGE>
Account information
- --------------------------------------------------------------------------------
BUYING AND SELLING FUND SHARES
When you invest in a Declaration fund through a variable contract, your premium
payments are used to buy units of an insurance company separate account that
then buys shares of the fund. The shares are purchased at net asset value (NAV)
and are generally credited to the separate account immediately after the fund
accepts payment from the insurance company. In unusual circumstances or to
protect shareholders, a fund may refuse a purchase order, especially when the
adviser believes the order might be large enough to disrupt the fund's
management. A fund may also temporarily suspend the offering of its shares.
Shares are sold at the next NAV to be determined after the fund accepts the sell
request. The sales proceeds are normally forwarded by bank wire to the insurance
company on the next business day. In unusual circumstances, the fund may
temporarily suspend the processing of sell requests. It may also postpone the
payment of sales proceeds for up to seven days or longer, as allowed by federal
securities laws.
- --------------------------------------------------------------------------------
VALUING FUND SHARES
The NAV for each fund is determined each business day at the close of business
on the New York Stock Exchange (typically 4:00 P.M. Eastern time). The Exchange
is typically open Monday through Friday.
Except for V.A. Money Market Fund, which values its securities at amortized
cost, securities in a fund's portfolio are generally valued on the basis of
market quotations and valuations provided by independent pricing services. The
fund may also value securities at fair value, especially if market quotations
are not readily available or if the securities' value has been materially
affected by events following the close of a foreign market. Fair value is
determined according to procedures approved by the fund's board. If the fund
uses this method, the securities' prices may be higher or lower than the same
securities held by another fund using market quotations.
- --------------------------------------------------------------------------------
FUND EXPENSES
Management fees The management fees paid to the investment adviser by the John
Hancock Declaration funds last year are as follows:
- --------------------------------------------------------------------------------
Growth Funds % of net assets
- --------------------------------------------------------------------------------
V.A. Emerging Growth Fund x.xx%
V.A. Financial Industries Fund x.xx%
V.A. Growth Fund x.xx%
V.A. International Fund x.xx%
V.A. Regional Bank Fund x.xx%
V.A. Special Opportunities Fund x.xx%
- --------------------------------------------------------------------------------
Growth & Income Funds
- --------------------------------------------------------------------------------
V.A. 500 Index Fund x.xx%
V.A. Growth and Income Fund x.xx%
V.A. Independence Equity Fund x.xx%
V.A. Sovereign Investors Fund x.xx%
- --------------------------------------------------------------------------------
Income Funds
- --------------------------------------------------------------------------------
V.A. Bond Fund x.xx%
V.A. High Yield Bond Fund x.xx%
V.A. Money Market Fund x.xx%
V.A. Strategic Income Fund x.xx%
The adviser pays subadvisory fees out of its own assets and no fund is
responsible for paying a fee to its sub-adviser.
Expense limitation The adviser has agreed to limit temporarily each fund's
expenses to .25% of average net assets, excluding advisory fees, at least until
May 1, 2000. If annual expenses fall below this limitation at the end of any
fund's fiscal year, the adviser can impose the full fee and recover any other
payments up to the amount of the limitation.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. 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.
34 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
When you invest in a Declaration fund through a variable contract, your premium
payments are used to buy units of an insurance company separate account that
then buys shares of the fund. The diagram below shows the basic business
structure used by the Declaration funds. The funds' board of trustees oversees
the funds' business activities and retains the services of the various firms
that carry out the funds' operations.
The trustees of the Declaration funds have the power to change the funds'
investment goals without shareholder or contract holder approval.
Year 2000 compliance The adviser and the funds' service providers are taking
steps to address any year 2000-related computer problems. However, there is some
risk that these problems could disrupt the issuers in which the funds' invest,
the funds' operations or financial markets generally.
[The following information was represented as a flow chart in the printed
material.]
---------------------------
Variable
contract holders
---------------------------
---------------------------
Insurance company
separate accounts
---------------------------
---------------------------
Declaration
funds
---------------------------
Asset management
------------------------------------
Subadvisers
John Hancock Advisers
International Limited
32-36 Duke Street
St. James SWIY6DF
London, U.K.
Independence Investment
Associates, Inc.
53 State Street
Boston, MA 02109
Provide portfolio management
to certain funds.
------------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
State Street Bank and Trust Company
Hold the funds' assets, settle all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 35
<PAGE>
For more information
This prospectus should be used with the variable contract/product prospectus.
Two documents are available that offer further information on the John Hancock
Declaration funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, and the auditors'
report (in the annual report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Servicing Center
P.O. Box 9298
Boston, MA 02205-9298
By phone: 1-800-824-0335
On the Internet:
www.jhancock.com/funds
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public
Reference Room in Washington, DC
By phone: 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number: 811-07437
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts
02199-7603
(C) 1999 John Hancock Funds, Inc.
VA00P 5/99
John Hancock(R)
<PAGE>
- --------------------------------------------------------------------------------
JOHN HANCOCK
Declaration
Funds
[LOGO] Prospectus
May 1, 1999
- --------------------------------------------------------------------------------
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[Clipart] Growth
V.A. Emerging Growth Fund
V.A. Financial Industries Fund
V.A. Growth Fund
V.A. Special Opportunities Fund
[Clipart] Growth & Income
V.A. Growth and Income Fund
V.A. Independence Equity Fund
V.A. Sovereign Investors Fund
[Clipart] Income
V.A. Bond Fund
V.A. High Yield Bond Fund
V.A. Money Market Fund
V.A. Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
Contents
- --------------------------------------------------------------------------------
General information about Overview 4
the Declaration funds.
Your investment choices 5
A fund-by-fund summary [Clipart] Growth
of goals, strategies V.A. Emerging Growth Fund 6
and risks. V.A. Financial Industries Fund 8
V.A. Growth Fund 10
V.A. Special Opportunities Fund 12
[Clipart] Growth & Income
V.A. Growth and Income Fund 14
V.A. Independence Equity Fund 16
V.A. Sovereign Investors Fund 18
[Clipart] Income
V.A. Bond Fund 20
V.A. High Yield Bond Fund 22
V.A. Money Market Fund 24
V.A. Strategic Income Fund 26
Transaction policies and Account information
other information affecting
your fund investment. Buying and selling fund shares 28
Valuing fund shares 28
Fund expenses 28
Dividends and taxes 28
Further information on the Fund details
Declaration funds.
Business structure 29
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
JOHN HANCOCK DECLARATION FUNDS
These funds offer investment choices for the variable annuity contracts and
variable life insurance policies of certain insurance companies. You should read
this prospectus together with the attached prospectus of the insurance product
you are considering.
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the FDIC
or any other government agency. Because you could lose money by investing in
these funds, be sure to read all risk disclosure carefully before investing.
THE MANAGEMENT FIRM
All John Hancock Declaration funds are managed by John Hancock Advisers, Inc.
Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $30 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clipart] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clipart] Past perfomance The fund's total return, measured year-by-year and
over time
[Clipart] Main risks The major risk factors associated with the fund.
[Clipart] Financial highlights A table showing the fund's financial performance
for up to five years.
4
<PAGE>
Your Investment Choices
- --------------------------------------------------------------------------------
The Declaration funds offer you 11 investment choices to suit a variety of
objectives. Each fund has its own strategy and its own risk/reward profile.
[Clipart] Growth Funds
o V.A. Emerging Growth Fund These funds seek long-term growth by
investing primarily in common stocks. They
o V.A. Financial Industries Fund may be appropriate if you are investing for
long-term goals such as retirement and are
o V.A. Growth Fund willing to accept higher short-term risk
along with higher potential long-term
o V.A. Special Opportunities Fund returns. Because growth funds will go up and
down in value, they may not be appropriate
if you are uncomfortable with stock market
risk or have a shorter investment time
horizon.
[Clipart] Growth & Income Funds
o V.A. Growth and Income Fund These funds invest for varying combinations
of income and capital appreciation. Because
o V.A. Independence Equity Fund of their income potential, they may be
appropriate if you are looking for a more
o V.A. Sovereign Investors Fund conservative alternative to exclusively
growth-oriented funds. However, they may not
be appropriate if you are investing for
maximum return over a long time horizon or
need stability of principal.
[Clipart] Income Funds
o V.A. Bond Fund These funds seek to provide current income
without sacrificing total return, and some
o V.A. High Yield Bond Fund also invest for stability of principal. They
may be appropriate if you are seeking a
o V.A. Money Market Fund regular stream of income. They may not be
appropriate if you are investing for maximum
o V.A. Strategic Income Fund return or need absolute stability of your
principal.
5
<PAGE>
V.A. Emerging Growth Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 80% of assets in stocks of U.S. and foreign
emerging growth companies with market capitalizations of no more than $1
billion. The fund managers look for companies that show rapid growth but are not
yet widely recognized. The fund also may invest in established companies that,
because of new management, products or opportunities, offer the possibility of
accelerating earnings.
In managing the portfolio, the managers emphasize diversification by sector and
company. The fund's investments by sector, or sector weightings, generally
reflect those of the Russell 2000 Growth Index. The fund normally invests in 150
to 220 companies.
In choosing individual securities, the managers use fundamental financial
analysis to identify companies that have demonstrated 20% annual growth over
three years and are projected to continue growing at a similar pace. The
managers favor companies that dominate their market niches or are poised to
become market leaders. They look for strong senior management teams and coherent
business strategies. They generally maintain personal contact with the senior
management of the companies the fund invests in.
The fund may invest up to 20% of assets in other types of companies and certain
other types of equity and debt securities. The fund may make limited use of
certain derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Bernice S. Behar, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1986
Laura Allen, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1981
Anurag Pandit, CFA
- --------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1984
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market indices for reference). This information may help provide an indication
of the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
11.06% 15.94%
Best quarter: up 35.14%, fourth quarter 1998
Worst quarter: down 21.42%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 15.94% x.xx% x.xx%
Life of fund 8.20% x.xx% x.xx%
Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S.
small-capitalization common stocks.
Index 2: Russell 2000 Growth Index, an unmanaged index containing those stocks
from the Russell 2000 Index with a greater-than-average growth orientation.
(1) Began operations on August 29, 1996.
6
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Because the fund concentrates on
emerging growth companies, its performance may be more volatile than that of a
fund that invests primarily in larger companies.
Stocks of smaller emerging growth companies are more risky than stocks of larger
companies. Many of these companies are young and have a limited track record.
Because their businesses frequently rely on narrow product lines and niche
markets, they can suffer severely from isolated business setbacks.
The fund's management strategy will influence performance significantly.
Emerging growth stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on other types of stocks.
Similarly, if the managers' stock selection strategy doesn't perform as
expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o In a down market, small-capitalization stocks, derivatives and other
higher-risk securities could become harder to value or to sell at a fair
price.
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _________________________.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.32
Net investment income (loss)(2) 0.02 (0.02)
Net realized and unrealized gain (loss) on investments (0.68) 1.05
Total from investment operations (0.66) 1.03
Less distributions:
Dividends from net investment income (0.02) (0.00)(8)
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period $9.32 $10.35
Total investment return at net asset value(3) (%) (6.62)(4) 11.06
Total adjusted investment return at net asset value(3,5) (%) (8.05)(4) 9.34
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841
Ratio of expenses to average net assets (%) 1.00(6) 1.00
Ratio of adjusted expenses to average net assets(7) (%) 5.19(6) 2.72
Ratio of net investment income (loss) to average net assets (%) 0.62(6) (0.16)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (3.57)(6) (1.88)
Portfolio turnover rate (%) 31 79
Fee reduction per share(2) ($) 0.14 0.17
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
7
<PAGE>
V.A. Financial Industries Fund
GOAL AND STRATEGY
[Clipart] The fund seeks capital appreciation. To pursue this goal, the fund
normally invests at least 65% of assets in U.S. and foreign financial services
companies, including banks, thrifts, finance companies, brokerage and advisory
firms, real estate-related firms and insurance companies.
In managing the portfolio, the managers concentrate primarily on stock selection
rather than industry allocation. The portfolio may include financial services
companies of all sizes and types.
In choosing individual stocks, the managers use fundamental financial analysis
to identify securities that appear comparatively undervalued. Given the
industrywide trend toward consolidation, the managers also seek out companies
that appear to be positioned for a merger. The managers generally gather
firsthand information about companies from interviews and company visits.
The fund may invest in U.S. and foreign bonds, including up to 5% of net assets
in junk bonds (those rated below BBB/Baa and their unrated equivalents). It may
also invest up to 15% of assets in investment-grade short-term securities.
The fund may make limited use of certain derivatives (investments whose value is
based on indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest up to 80% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- -----------------------------------
Executive vice president of adviser
Joined team in 1997
Joined adviser in 1985
Began career in 1979
Thomas Finucane
- -----------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began career in 1990
Thomas Goggins
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
8.55%
Best quarter: up 16.06%, fourth quarter 1998
Worst quarter: down 16.78%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year x.xx% x.xx%
Life of fund x.xx% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 common
stocks.
(1) Began operations on April 30, 1997.
8
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Another major factor in this fund's
performance is the economic condition of the financial services sector. The
value of your investment may fluctuate more widely than it would in a fund that
is diversified across sectors.
When interest rates fall or economic conditions deteriorate, the stocks of
financial services companies often suffer greater losses than other stocks.
Rising interest rates can cut into profits by reducing the difference between
these companies' borrowing and lending rates.
The fund's management strategy will influence performance significantly. Stocks
of financial services companies as a group could fall out of favor with the
market, causing the fund to underperform funds that focus on other types of
stocks. Similarly, if the managers' stock selection strategy doesn't perform as
expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by __________________________.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period ended: 12/97(1) 12/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.11
Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.39
Total from investment operations 3.50
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 $13.44
Total investment return at net asset value(3) (%) 35.05(4)
Total adjusted investment return at net asset value(3,5) (%) 34.71(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465
Ratio of expenses to average net assets (%) 1.05(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.39(6)
Ratio of net investment income (loss) to average net assets (%) 1.32(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.98(6)
Portfolio turnover rate (%) 11
Fee reduction per share(2) ($) 0.03
</TABLE>
(1) Began operations on April 30, 1997.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
9
<PAGE>
V.A. Growth Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests in stocks of U.S. companies.
The fund generally invests in 30 to 60 companies -- most of which have large
market capitalizations -- that are diversified across sectors. The fund has
tended to emphasize, or overweight, certain sectors such as health care,
technology or consumer goods. These weightings may change in the future.
In choosing individual stocks, the managers use fundamental financial analysis
to indentify companies with:
o strong cash flows
o secure market franchises
o sales growth that outpaces their industries
The management team uses various means to assess the depth and stability of
companies' senior management, including interviews and company visits. The fund
favors companies for which the managers project at least 15% annual growth for
the next two years.
The fund may invest in certain other types of equity and debt securities. It may
also invest up to 15% of assets in foreign securities. In addition, it may make
limited use of certain derivatives (investments whose value is based on indices,
securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGER
Benjamin A. Hock, Jr., CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1973
Geoffrey R. Plume, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1996
Began career in 1987
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
14.27% 24.60%
Best quarter: up 22.53%, third quarter 1997
Worst quarter: down 15.55%, first quarter 1997
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 24.60% x.xx%
Life of fund 13.22% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 common
stocks.
(1) Began operations on August 29, 1996.
10
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. If the fund concentrates its
investments in certain sectors or companies, its performance could be tied more
closely to those sectors or companies than to the market as a whole.
The fund's management strategy will influence performance significantly.
Large-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on small- or
medium-capitalization stocks. Similarly, if the managers' stock selection
strategy doesn't perform as expected, the fund could underperform its peers or
lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ___________________________.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.39
Net investment income (loss)(2) (0.01) (0.04)
Net realized and unrealized gain (loss) on investments (0.60) 1.38
Total from investment operations (0.61) 1.34
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period $9.39 $10.73
Total investment return at net asset value(3) (%) (6.10)(4) 14.27
Total adjusted investment return at net asset value(3,5) (%) (7.39)(4) 12.90
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733
Ratio of expenses to average net assets (%) 1.00(6) 1.00
Ratio of adjusted expenses to average net assets(7) (%) 4.76(6) 2.37
Ratio of net investment income (loss) to average net assets (%) (0.23)(6) (0.39)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (3.99)(6) (1.76)
Portfolio turnover rate (%) 68 136
Fee reduction per share(2) ($) 0.13 0.13
</TABLE>
(1) Began operations on August 29, 1996
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
11
<PAGE>
V.A. Special Opportunities Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 75% of assets in stocks of companies in up to
five economic sectors that appear to offer the highest earnings growth
potential.
In managing the portfolio, the managers seek to identify promising sectors for
investment. The managers consider broad economic trends, demographic factors,
technological changes, consolidation trends and legislative initiatives.
Although the fund concentrates on a few sectors, it diversifies broadly within
those sectors. At times, the fund may focus on a single sector. The fund
normally invests in more than 100 medium-capitalization companies.
In choosing individual securities, the managers conduct fundamental financial
analysis to identify companies that appear able to sustain 15% annual earnings
growth for the next three to five years. The managers look for companies with
growth stemming from a combination of gains in market share and increasing
operating efficiency. Before investing, the managers identify a specific
catalyst for growth, such as a new product, business reorganization or merger.
The management team generally maintains personal contact with the senior
management of the companies the fund invests in.
The fund may invest up to 25% of assets in stocks and investment-grade bonds in
additional sectors. The fund may invest in foreign stocks. It may also make
limited use of certain derivatives (investments whose value is based on indices,
securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 25% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barbara C. Friedman, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1973
Susan E. Kelly
- --------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1988
PAST PERFORMANCE
[Clipart] The graph and table show the fund's total return for its first full
calendar year along with broad-based market indices for reference. This
information may help provide an indication of the fund's risks and potential
rewards. All figures assume dividend reinvestment. Past performance does not
indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
10.35%
Best quarter: up 20.60%, fourth quarter 1998
Worst quarter: down 19.74%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 10.35% x.xx% x.xx%
Index 1: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S.
common stocks.
Index 2: Russell Midcap Growth Index, an unmanaged index containing those stocks
from the Russell Midcap Index with a greater-than-average growth orientation.
(1) Began operations on January 7, 1998.
12
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Stocks of medium-capitalization
companies tend to be more volatile than those of larger companies. Similarly,
medium-capitalization stocks are generally traded in lower volumes than
large-capitalization stocks.
Because the fund concentrates on a few sectors of the market, its performance
may be more volatile than that of a fund that invests across many sectors.
The fund's management strategy will influence performance significantly.
Medium-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on other types of stocks.
Similarly, if the industries or companies the fund invests in don't perform as
expected, or if the managers' stock selection strategy doesn't perform as
expected, the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise.
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _______________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on January 7, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
13
<PAGE>
V.A. Growth and Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks the highest total return (capital appreciation plus
current income) that is consistent with reasonable safety of capital. To pursue
this goal, the fund invests in a diversified portfolio of stocks, bonds and
money market securities. Although the fund may concentrate in any of these asset
classes, under normal circumstances it invests primarily in stocks.
In managing the portfolio, the managers emphasize a value-oriented approach to
individual stock selection. With the aid of proprietary financial models, the
management team looks for companies that are selling at what appear to be
substantial discounts to their long-term intrinsic and "franchise" values. These
companies often have identifiable catalysts for growth, such as new products,
business reorganizations or mergers.
The management team uses fundamental financial analysis to identify individual
companies with substantial cash flows, reliable revenue streams, superior
competitive positions and strong management.
The fund's portfolio typically includes between 50 and 150 large companies that
are diversified across industry sectors. The fund may also attempt to take
advantage of short-term market volatility by investing in corporate
restructurings or pending acquisitions.
In selecting bonds, the manager look for the most favorable risk/return ratios.
The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca
and their unrated equivalents.
The fund may invest up to 25% of assets in foreign securities (35% during
adverse U.S. market conditions). The fund may also make limited use of certain
derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Timothy E. Keefe, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1996
Began career in 1987
Timothy E. Quinlisk, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1985
PAST PERFORMANCE
[Clipart] The graph and table show the fund's total return for its first full
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks and potential
rewards. All figures assume dividend reinvestment. Past performance does not
indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
21.39%
Best quarter: up 26.50%, fourth quarter 1998
Worst quarter: down 16.61%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 21.39% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on January 6, 1998.
14
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down in response to stock
and bond market movements. The fund's management strategy will influence
performance significantly. Large-capitalization stocks as a group could fall out
of favor with the market, causing the fund to underperform funds that focus on
small- or medium-capitalization stocks. Similarly, if the managers' securities
selection strategies don't perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _____________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on January 6, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
15
<PAGE>
V.A. Independence Equity Fund
GOAL AND STRATEGY
[Clipart] The fund seeks above-average total return (capital appreciation plus
income). To pursue this goal, the fund invests primarily in a diversified
portfolio of mainly large-capitalization stocks. The portfolio's risk profile is
similar to that of the S&P 500 Index.
In actively managing the portfolio, the managers select from a "menu" of stocks
of approximately 550 companies that evolves over time. Approximately 70% to 80%
of these companies are also included in the S&P 500 Index. The subadviser's
investment research team is organized by industry and tracks these companies to
develop earnings estimates and five-year projections for growth. A series of
proprietary computer models uses this in-house research to rank the stocks
according to their combination of:
o value, meaning they appear to be underpriced
o momentum, meaning they show potential for strong growth
This process, together with a risk/return analysis against the S&P 500 Index,
results in a portfolio of approximately 100 to 130 of the stocks from the top
60% of the menu. The fund sells any stocks that fall into the bottom 20% of the
menu. It may also sell for other reasons.
In normal market conditions, the fund is almost entirely invested in stocks. The
fund may, however, invest in certain other types of equity and debt securities,
including dollar-denominated foreign securities. It may also make limited use of
certain derivatives (investments whose value is based on indices or securities).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
SUBADVISER
Independence Investment
Associates, Inc.
- -------------------------------
Team responsible for day-to-day
investment management
A subsidiary of John Hancock
Mutual Life Insurance Company
Founded in 1982
Supervised by the adviser
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
30.68% 28.42%
Best quarter: up 23.16%, fourth quarter 1998
Worst quarter: down 13.01%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 28.42% x.xx%
Life of fund 30.85% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on August 29, 1998.
16
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down in response to stock
market movements. Large-capitalization stocks as a group could fall out of favor
with the market, causing the fund to underperform funds that focus on small- or
medium-capitalization stocks.
The fund's management strategy will influence performance significantly. If the
investment research team's earnings estimates or projections turn out to be
inaccurate, or if the proprietary computer models don't perform as expected, the
fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political upheavals.
o Certain derivatives could produce disproportionate gains or losses.
o In a down market, higher-risk securites and derivatives could become harder
to value or to sell at a fair price.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ______________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.11
Net investment income (loss)(2) 0.06 0.16
Net realized and unrealized gain (loss) on investments 1.12 3.23
Total from investment operations 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 $11.11 $14.11
Total investment return at net asset value(3) (%) 11.78(4) 30.68
Total adjusted investment return at net asset value(3,5) (%) 10.66(4) 30.04
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719
Ratio of expenses to average net assets (%) 0.95(6) 0.95
Ratio of adjusted expenses to average net assets(7) (%) 4.23(6) 1.59
Ratio of net investment income (loss) to average net assets (%) 1.60(6) 1.24
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.68)(6) 0.60
Portfolio turnover rate (%) 24 53
Fee reduction per share(2) ($) 0.12 0.08
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
17
<PAGE>
V.A. Sovereign Investors Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital and of income without
assuming undue market risks. To pursue these goals, the fund normally invests
most of its assets in a diversified portfolio of stocks, although it may respond
to market conditions by investing in other types of securities, such as bonds or
short-term securities.
All of the fund's stock investments are "dividend performers" -- companies whose
dividend payments have increased steadily for ten years. The managers use
fundamental financial analysis to identify individual companies with
high-quality income statements, substantial cash reserves and identifiable
catalysts for growth, which may be new products or benefits from industrywide
growth. The team generally visits companies to evaluate the strength and
consistency of their management strategy. Finally, the managers look for stocks
that are reasonably priced relative to their earnings and industry.
Historically, companies that meet these criteria have tended to have large or
medium capitalizations.
The fund may invest in bonds, with up to 5% of assets in junk bonds rated as low
as C and their unrated equivalents.
The fund typically invests in U.S. companies but may invest in
dollar-denominated foreign securities. It may also make limited use of certain
derivatives (investments whose value is based on indices and securities).
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- -----------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1994
Began career in 1971
Barry H. Evans, CFA
- -----------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1987
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
28.43% 16.88%
Best quarter: up 15.75%, fourth quarter 1998
Worst quarter: down 6.87%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 16.88% x.xx%
Life of fund 23.08% x.xx%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
(1) Began operations on August 29, 1996.
18
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will go up and down in response to stock
and bond market movements.
The fund's management strategy will influence fund performance significantly.
Large- or medium capitalization stocks as a group could fall out of favor with
the market, causing the fund to underperform funds that focus on small
capitalization stocks. Similarly, if the managers' securities selection
strategies don't perform as expected, the fund could underperform its peers or
lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
o Certain derivatives could produce disproportionate gains or losses.
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political upheavals.
o In a down market, higher-risk securites and derivatives could become harder
to value or to sell at a fair price.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ________________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.74
Net investment income (loss)(2) 0.07 0.22
Net realized and unrealized gain (loss) on investments 0.76 2.82
Total from investment operations 0.83 3.04
Less distributions:
Dividends from net investment income (0.07) (0.18)
Distributions from net realized gain on investments sold (0.02) (0.01)
Total distributions (0.09) (0.19)
Net asset value, end of period $10.74 $13.59
Total investment return at net asset value(3) (%) 8.30(4) 28.43
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 28.12
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187
Ratio of expenses to average net assets (%) 0.85(6) 0.85
Ratio of adjusted expenses to average net assets(7) (%) 3.78(6) 1.16
Ratio of net investment income (loss) to average net assets (%) 1.90(6) 1.81
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.03)(6) 1.50
Portfolio turnover rate (%) 17 11
Fee reduction per share(2) ($) 0.11 0.04
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
19
<PAGE>
V.A. Bond Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
in a diversified portfolio of U.S. and foreign debt securities. These include
corporate bonds and debentures, as well as U.S. government and agency
securities. Most of these securities are investment-grade, although the fund may
invest up to 25% of assets in junk bonds rated as low as CC/Ca and their unrated
equivalents.
In managing the fund's portfolio, the managers concentrate on sector allocation,
industry allocation and securities selection: deciding which types of bonds and
industries to emphasize at a given time, and then which individual bonds to buy.
When making sector and industry allocations, the managers try to anticipate
shifts in the business cycle, using top-down analysis to determine which sectors
and industries may benefit over the next 12 months.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at bonds of
all different quality levels and maturities from many different issuers,
potentially including foreign governments and corporations.
The fund intends to keep its exposure to interest rate movements generally in
line with that of the markets it invests in. The fund may use certain
derivatives (investments whose value is based on indices, securities or
currencies), especially in managing its exposure to interest rate risk, although
it does not intend to use them extensively.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- -----------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began career in 1977
Anthony A. Goodchild
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1968
Benjamin Matthews
- -----------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1970
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
9.30% 9.41%
Best quarter: up 4.76%, third quarter 1998
Worst quarter: down 0.96%, first quarter 1997
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 9.41% x.xx%
Life of fund 9.96% x.xx%
Index: An unmanaged index of corporate bonds.
(1) Began operations on August 29, 1996.
20
<PAGE>
MAIN RISKS
[Clipart] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to market
or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could be hurt.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _________________________.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19
Net investment income (loss)(2) 0.23 0.68
Net realized and unrealized gain (loss) on investments 0.21 0.24
Total from investment operations 0.44 0.92
Less distributions:
Dividends from net investment income (0.23) (0.68)
Distributions from net realized gain on investments sold (0.02) (0.07)
Total distributions (0.25) (0.75)
Net asset value, end of period $10.19 $10.36
Total investment return at net asset value(3) (%) 4.42(4) 9.30
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682
Ratio of expenses to average net assets (%) 0.75(6) 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79
Portfolio turnover rate (%) 45 193
Fee reduction per share(2) ($) 0.12 0.18
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
21
<PAGE>
V.A. High Yield Bond Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to maximize current income without assuming undue risk.
Capital appreciation is a secondary goal. In pursuing these goals, the fund
normally invests at least 65% of assets in U.S. and foreign bonds rated BBB/Baa
or lower and their unrated equivalents. The fund may invest up to 30% of assets
in junk bonds rated CC/Ca and their unrated equivalents.
In managing the fund's portfolio, the managers concentrate on industry
allocation and securities selection: deciding which types of industries to
emphasize at a given time, and then which individual bonds to buy. The managers
use top-down analysis to determine which industries may benefit from current and
future changes in the economy.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves.
The managers also look at companies' financing cycles to determine which types
of securities (for example, bonds, preferred stocks or common stocks) to favor.
The fund typically invests in a broad range of industries, although it may
invest up to 40% of assets in electric utilities and telecommunications
companies.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund may invest up to 20% of
net assets in U.S. and foreign stocks.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- --------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1988
Began career in 1986
Frederick L. Cavanaugh, Jr.
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1975
Janet L. Clay, CFA
- --------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
PAST PERFORMANCE
[Clipart] The graph and table show the fund's total return for its first full
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks and potential
rewards. All figures assume dividend reinvestment. Past performance does not
indicate future results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998
-9.80%
Best quarter: up 3.90%, fourth quarter 1998
Worst quarter: down 14.84%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year -9.80% x.xx%
Index: An unmanaged index of high yield bonds.
(1) Began operations on January 6, 1998.
22
<PAGE>
MAIN RISKS
[Clipart] The major factors in the fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Credit risk depends largely on the perceived financial health of bond issuers.
In general, lower-rated bonds have higher credit risks. Junk bond prices can
fall on bad news about the economy, an industry or a company. Share price, yield
and total return may fluctuate more than with less aggressive bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain industries or investments don't perform as the
fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o If interest rate movements cause the fund's callable securities to be paid
off substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o If the fund concentrates its investments in telecommunications or electric
utilities, its performance could be tied more closely to those industries
than to the market as a whole.
o Stock investments may go down in value due to stock market movements or
negative company or industry events.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ____________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)(2)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Total adjusted investment return at net asset value(3,5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of adjusted expenses to average net assets(7) (%)
Ratio of net investment income (loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(7) (%)
Portfolio turnover rate (%)
Fee reduction per share(2) ($)
</TABLE>
(1) Began operations on January 6, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
23
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clipart] The fund seeks maximum current income consistent with capital
preservation and liquidity. It invests only in high-quality money market
instruments and seeks to maintain a stable share price of $1.
The fund invests only in dollar-denominated securities rated within the two
highest short-term credit categories (and their unrated equivalents). These
securities have a maximum remaining maturity of 397 days and may be issued by:
o U.S. and foreign corporations
o U.S. and foreign banks
o U.S. and foreign governments
o U.S. agencies, states, and municipalities
o Supranational organizations such as the World Bank and the International
Monetary Fund
The fund may also invest in repurchase agreements based on these securities. The
fund maintains an average dollar-weighted maturity of 90 days or less.
In managing the portfolio, the manager searches aggressively for the best values
on securities that meet the find's credit and maturity requirements. The manager
tends to favor corporate securities and looks for relative yield advantages
between, for example, a company's secured and unsecured short-term debt
obligations.
================================================================================
PORTFOLIO MANAGERS
Team of money market research
analysts and portfolio managers
YIELD INFORMATION
For the fund's 7-day effective
yield, call 1-800-824-0335
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time. This information may help
provide an indication of the fund's risks and potential rewards. All figures
assume dividend reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
4.88% 4.83%
Best quarter: up x.xx%, quarter 19XX
Worst quarter: down x.xx%, quarter 19XX
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund
1 year x.xx%
Life of fund x.xx%
(1) Began operations on August 29, 1996.
24
<PAGE>
MAIN RISKS
[Clipart] The value of your investment will be most affected by short-term
interest rates. If interest rates rise sharply, the fund could underperform its
peers or lose money.
An issuer of securities held by the fund could default, or have its credit
rating downgraded.
Foreign investments carry additional risks, including inadequate or inaccurate
financial information, and social or political upheavals.
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund seeks to
preserve the value of your investment at $1.00 share, it is possible to lose
money by investing in the fund.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by _____________________.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.00 $1.00
Net investment income (loss)(2) 0.02 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05)
Net asset value, end of period $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377
Ratio of expenses to average net assets (%) 0.75(6) 0.75
Ratio of adjusted expenses to average net assets(7) (%) 27.48(6) 1.27
Ratio of net investment income (loss) to average net assets (%) 4.68(6) 4.86
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (22.05)(6) 4.34
Fee reduction per share(2) ($) 0.08 0.00(8)
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
25
<PAGE>
V.A. Strategic Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income. In pursuing this goal,
the fund invests primarily in the following types of securities:
o foreign government and corporate debt securities from developed and emerging
markets
o U.S. government and agency securities
o U.S. junk bonds rated as low as CC/Ca and their unrated equivalents
The fund generally intends to keep its average credit quality in the
investment-grade range.
In managing its portfolio, the managers use top-down analysis to allocate assets
among the three major sectors mentioned above. Although the fund could invest
all assets in one sector, it generally expects to remain diversified among all
three.
Within the foreign sector, the managers use a combination of bottom-up research
and economic analysis to select individual securities from a range of regions,
countries and industries. These securities may be rated as low as CC/Ca and
their unrated equivalents.
Within the U.S. government sector, the managers select investments primarily for
current yield and total return.
Within the junk bond sector, the managers use bottom-up research to select
individual securities from a wide range of industries.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund may invest up to 10% of
net assets in U.S. or foreign stocks.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund
might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- --------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began career in 1975
Arthur N. Calavritinos, CFA
- --------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1988
Began career in 1986
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. All figures assume dividend
reinvestment. Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
11.77% 4.92%
Best quarter: up 6.28%, second quarter 1997
Worst quarter: down 2.79%, third quarter 1998
Total return for the first three months of 1999: x.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 4.92% x.xx%
Life of fund 9.94% x.xx%
Index: An unmanaged index of U.S. government, U.S. corporate and Yankee bonds.
(1) Began operations on August 29, 1996.
26
<PAGE>
MAIN RISKS
[Clipart] The fund's risk profile depends on its sector allocation. In general,
investors should expect fluctuations in share price, yield and total return that
are above average for bond funds.
When interest rates rise, bond prices generally fall. Generally, an increase in
the fund's average maturity will make it more sensitive to interest rate risk.
There is no limit on the fund's average maturity.
A fall in worldwide demand for U.S. government securities could lower the prices
of these securities. The fund could lose money if any bonds it owns are
downgraded in credit rating or go into default. In general, lower-rated bonds
have higher credit risks, and their prices can fall on bad news about the
economy, an industry or a company. If certain allocation strategies or certain
industries or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals. These risks are greater in emerging markets.
o If interest rate movements cause the fund's callable securities to be paid
off substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o Stock investments may go down in value due to stock market movements or
negative company or industry events.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[Clipart] This table details the performance of the fund's shares, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Figures audited by ________________________.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.30
Net investment income (loss)(2) 0.27 0.91
Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.36 0.26
Total from investment operations 0.63 1.17
Less distributions:
Dividends from net investment income (0.27) (0.91)
Distributions from net realized gain on investments sold (0.06) (0.09)
Total distributions (0.33) (1.00)
Net asset value, end of period $10.30 $10.47
Total investment return at net asset value(3) (%) 6.45(4) 11.77
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540
Ratio of expenses to average net assets (%) 0.85(6) 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25
Portfolio turnover rate (%) 73 110
Fee reduction per share(2) ($) 0.05 0.05
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation which does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
27
<PAGE>
Account information
- --------------------------------------------------------------------------------
BUYING AND SELLING FUND SHARES
When you invest in a Declaration fund through a variable contract, your premium
payments are used to buy units of an insurance company separate account that
then buys shares of the fund. The shares are purchased at net asset value (NAV)
and are generally credited to the separate account immediately after the fund
accepts payment from the insurance company. In unusual circumstances or to
protect shareholders, a fund may refuse a purchase order, especially when the
adviser believes the order might be large enough to disrupt the fund's
management. A fund may also temporarily suspend the offering of its shares.
Shares are sold at the next NAV to be determined after the fund accepts the sell
request. The sales proceeds are normally forwarded by bank wire to the insurance
company on the next business day. In unusual circumstances, the fund may
temporarily suspend the processing of sell requests. It may also postpone the
payment of sales proceeds for up to seven days or longer, as allowed by federal
securities laws.
- --------------------------------------------------------------------------------
VALUING FUND SHARES
The NAV for each fund is determined each business day at the close of business
on the New York Stock Exchange (typically 4:00 P.M. Eastern time). The Exchange
is typically open Monday through Friday.
Except for V.A. Money Market Fund, which values its securities at amortized
cost, securities in a fund's portfolio are generally valued on the basis of
market quotations and valuations provided by independent pricing services. The
fund may also value securities at fair value, especially if market quotations
are not readily available or if the securities' value has been materially
affected by events following the close of a foreign market. Fair value is
determined according to procedures approved by the fund's board. If the fund
uses this method, the securities' prices may be higher or lower than the same
securities held by another fund using market quotations.
- --------------------------------------------------------------------------------
FUND EXPENSES
Management fees The management fees paid to the investment adviser by the John
Hancock Declaration funds last year are as follows:
- --------------------------------------------------------------------------------
Growth Funds % of net assets
- --------------------------------------------------------------------------------
V.A. Emerging Growth Fund x.xx%
V.A. Financial Industries Fund x.xx%
V.A. Growth Fund x.xx%
V.A. Special Opportunities Fund x.xx%
- --------------------------------------------------------------------------------
Growth & Income Funds
- --------------------------------------------------------------------------------
V.A. Growth and Income Fund x.xx%
V.A. Independence Equity Fund x.xx%
V.A. Sovereign Investors Fund x.xx%
- --------------------------------------------------------------------------------
Income Funds
- --------------------------------------------------------------------------------
V.A. Bond Fund x.xx%
V.A. High Yield Bond Fund x.xx%
V.A. Money Market Fund x.xx%
V.A. Strategic Income Fund x.xx%
The adviser pays subadvisory fees out of its own assets and no fund is
responsible for paying a fee to its sub-adviser.
Expense limitation The adviser has agreed to limit temporarily each fund's
expenses to .25% of average net assets, excluding advisory fees, at least until
May 1, 2000. If annual expenses fall below this limitation at the end of any
fund's fiscal year, the adviser can impose the full fee and recover any other
payments up to the amount of the limitation.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. 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.
28 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
When you invest in a Declaration fund through a variable contract, your premium
payments are used to buy units of an insurance company separate account that
then buys shares of the fund. The diagram below shows the basic business
structure used by the Declaration funds. The funds' board of trustees oversees
the funds' business activities and retains the services of the various firms
that carry out the funds' operations.
The trustees of the Declaration funds have the power to change the funds'
investment goals without shareholder or contract holder approval.
Year 2000 compliance The adviser and the funds' service providers are taking
steps to address any year 2000-related computer problems. However, there is some
risk that these problems could disrupt the issuers in which the funds' invest,
the funds' operations or financial markets generally.
[The following information was represented as a flow chart in the printed
material.]
---------------------------
Variable
contract holders
---------------------------
---------------------------
Insurance company
separate accounts
---------------------------
---------------------------
Declaration
funds
---------------------------
Asset management
------------------------------------
Subadvisers
John Hancock Advisers
International Limited
32-36 Duke Street
St. James SWIY6DF
London, U.K.
Independence Investment
Associates, Inc.
53 State Street
Boston, MA 02109
Provide portfolio management
to certain funds.
------------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
State Street Bank and Trust Company
Hold the funds' assets, settle all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 29
<PAGE>
For more information
This prospectus should be used with the variable contract/product prospectus.
Two documents are available that offer further information on the John Hancock
Declaration funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, and the auditors'
report (in the annual report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Servicing Center
P.O. Box 9298
Boston, MA 02205-9298
By phone: 1-800-824-0335
On the Internet:
www.jhancock.com/funds
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public
Reference Room in Washington, DC
By phone: 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number: 811-07437
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts
02199-7603
(C) 1999 John Hancock Funds, Inc.
PVA00P 5/99
John Hancock(R)
<PAGE>
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
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. Bond Fund
John Hancock V.A. Strategic Income Fund
John Hancock V.A. High Yield Bond Fund
John Hancock V.A. Money Market Fund
Boston, Massachusetts 02199-7603
(each, a "Fund" and collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
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, 1999 (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
VASAI 5/98
<PAGE>
TABLE OF CONTENTS
Page
Organization of the Trust.............................................. 3
Eligible Investors..................................................... 3
Investment Policies and Strategies..................................... 3
Risk Factors Investments and Techniques................................ 12
Investment Restrictions................................................ 32
Those Responsible for Management....................................... 36
Investment Advisory and Other Services................................. 45
Distribution Contract.................................................. 48
Net Asset Value........................................................ 48
Special Redemptions.................................................... 49
Description of the Trust's Shares...................................... 49
Dividends.............................................................. 50
Tax Status............................................................. 51
Calculation of Performance............................................. 54
Brokerage Allocation................................................... 56
Shareholder Servicing Agent............................................ 58
Custody of Portfolio................................................... 58
Independent Auditors .................................................. 58
Appendix - Description of Bond Ratings.................................. A-1
Financial Statements................................................... F-1
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 fourteen
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. Bond Fund ("Bond
Fund")(formerly John Hancock V.A. Sovereign Bond), John Hancock V.A. Strategic
Income Fund ("Strategic Income Fund"), John Hancock V.A. High Yield Bond Fund
("High Yield 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"). Together, JHAI and IIA 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
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.
INVESTMENT POLICIES AND STRATEGIES
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 ""Goal and Stratetegy and
Main Riskes": of each Fund in the Prospectus and "Investment Restrictions" in
this Statement of Additional Information.
3
<PAGE>
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."
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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 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."
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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
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.
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<PAGE>
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 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 of
what might best achieve the Fund's investment objective.
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<PAGE>
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 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. 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.
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<PAGE>
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 and
HIGH YIELD 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 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 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.
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<PAGE>
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 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."
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<PAGE>
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 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 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.
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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.
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 investment
restrictions section. 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.
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.
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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%).
"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 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.
BANKING INDUSTRY. Since the Regional Bank 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.
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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 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.
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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.
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.
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, Bond Fund, Strategic
Income Fund and High Yield 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: Bond Fund and
High Yield Bond Fund: 100% and Strategic Income Fund: 200%. 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.
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SWAP AGREEMENTS. As one way of managing exposure to different types of
investments, Bond Fund, Strategic Income Fund and High Yield 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.
PARTICIPATION INTERESTS. The 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 acquired
from banks who have made these loans or are members of a lending syndicate. A
Fund's investments in participation interests may be 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.
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 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.
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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 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.
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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.
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
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.
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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.
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 Bond Fund, Strategic Income Fund and High Yield
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.
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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.
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 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.
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<PAGE>
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.
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.
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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.
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, Bond Fund and High Yield 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 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.
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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
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.
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 and High Yield 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.
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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
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 and Emerging Growth 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.
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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,
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.
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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 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 (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. 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.
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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
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.
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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
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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<PAGE>
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.
29
<PAGE>
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.
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.
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. 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.
30
<PAGE>
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.
31
<PAGE>
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
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
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.
32
<PAGE>
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, 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.
33
<PAGE>
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
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.
34
<PAGE>
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
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.
35
<PAGE>
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").
36
<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
and Chief Executive Officer, 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.
37
<PAGE>
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 1996); Trustee, Brookline Savings
June 1931 Bank.
Stephen L. Brown* Trustee Chairman and Chief Executive
John Hancock Place Officer, John Hancock Mutual Life
P.O. Box 111 Insurance Company; Director, the
Boston, MA 02117 Adviser, Trustee, John Hancock
July 1937 Funds, Inc. ("John Hancock Funds"),
John Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Subsidiaries, Inc., The
Berkeley Financial Group ("The
Berkeley Group"), Federal Reserve,
Bank of Boston; Director, John
Hancock Signature Services
("Signature Service") (until
January 1997).
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank
160 Washington Street (lending); Director, Lumber
Brookline, MA 02147 Insurance Companies (fire and
February 1935 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.
38
<PAGE>
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 and Distinguished
RR2 Box 480 Senior Fellow, Institute for
Woodstock, VT 05091 Sustainable Communities, Montpelier,
July 1939 Vermont (since 1991); Dean, Vermont
Law School (until 1991); Director,
Air and Water Technologies (until
1996) (environmental services and
equipment), Niagara Mohawk Power
Corp. (electric services); Concept
Five Technologies (until 1997);
Mitretek Systems (governmental
consulting services); Conversion
Technologies, Inc.; Living
Technologies, Inc.
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Uranium Resources Corporation;
December 1928 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.
39
<PAGE>
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.,
The Venture Capital Fund of New England (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980,
23rd Floor headed the venture capital group at
Boston, MA 02110 Bank of 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; Executive Vice
April 1953 President and Director, John
Hancock Funds; Director, 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.
40
<PAGE>
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
CIES International Exchange of Scholars
3007 Tilden Street, N.W. (since January 1998), Vice
Washington, D.C. 20008 President, Institute of
May 1943 International Education (since
January 1998); Senior Fellow,
Cornell Institute of Public
Affairs, Cornell University (until
December 1997); President Emerita
of Wells College and St. Lawrence
University; Director, Niagara
Mohawk Power Corporation (electric
utility).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East Emeritus, Harvard University
Cambridge, MA 02138 Graduate School of Business
September 1931 Administration (as of June 1998).
- -------------------
* 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.
41
<PAGE>
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, Signatue Investors, Inc.,
August 1937 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).
Osbert M. Hood Senior Vice President and Chief Senior Vice President, Treasurer and
101 Huntington Avenue Financial Officer Chief Financial Officer, the
Boston, MA 02199 Adviser, the Berkeley Group and John
August 1952 Hancock Funds, Inc.; Vice President
and Chief Financial Officer, John
Hancock Mutual Life Insurance
Company Retail Sector (until 1997).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services, John Hancock
July 1950 Funds, NM Capital and SAMCorp.;
Clerk, Insurance Agency, Inc.;
Counsel, John Hancock Mutual Life
Insurance Company (until February
1996).
- -------------------
* 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.
42
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services,
Boston, MA 02199 The Berkeley Group, NM Capital and
March 1950 SAMCo.
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer.
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>
43
<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, 1998, all shares were held by the Life Co. and the Variable
Life Co. except the Adviser owns the following: International Fund %,
Emerging Growth Fund %, Growth Fund %, Independence Equity Fund %,
Sovereign Investors Fund %, 500 Index Fund %, Sovereign Bond %,
Strategic Income Fund % and Money Market Fund %.
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.
Independent Trustees Aggregate Compensation Total Compensation From
- -------------------- From the Funds Fiscal Year All Funds in John Hancock
Ended December 31, 1999 Fund Complex to
----------------------- Trustees(*)
-----------
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+
John A. Moore+
Patti McGill Peterson
John W. Pratt
Edward J. Spellman
(*) 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, 1998, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for Mr.
Chapman was $ , for Mr. Cosgrove was $ and for Mr. Glavin was $ ,
and for Dr. Moore was $ under the John Hancock Deferred Compensation
Plan for Independent Trustees.
44
<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 but not
limited to 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
maintaining a committed line of credit 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 which was terminated effective January 1, 1999. 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.
45
<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 and 1998, the Adviser's management fee
for each Fund is listed below.
46
<PAGE>
<TABLE>
<CAPTION>
Fund Management fee before expense Management fee received by the
reduction Adviser
--------- -------
<S> <C> <C>
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
Strategic Income Fund 19,377 2,512
Bond Fund 8,924 0
Money Market Fund 12,328 0
1998
Fund Management fee before expense Management fee received by the
reduction Adviser
--------- -------
International Fund
Financial Industries Fund
Emerging Growth Fund
Growth Fund
Independence Equity Fund
500 Index Fund
Sovereign Investors Fund
Strategic Income Fund
Bond Fund
Money Market Fund
</TABLE>
For the fiscal year ended December 31, 1997 and 1998, the Adviser paid the
Subadviser of International Fund $18,127and $ , respectively. For the fiscal
year ended December 31, 1997 and 1998 , respectively, 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 and 1998, the Funds paid the Adviser
the following for services under this agreement: $133,535 and $ for
International Fund, $0,$909 and $ for Financial Industries Fund, $64,$349
and $ for Emerging Growth Fund, $65, $400 and $ for Growth Fund, $70,
$600 and $ for Independence Equity Fund, $245, $1,862 and $ for 500 Index
Fund, $68, $829 and $ for Sovereign Investors Fund and $132, $583 and $
for Strategic Income Fund, $66, $322 and $ for Bond Fund and $7, $439 and
$ 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.
47
<PAGE>
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.
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.
48
<PAGE>
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.
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.
49
<PAGE>
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.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. Information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
loss that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
DIVIDENDS
Dividends from net investment income are declared and paid as follows:
FUND DECLARED PAID
- ---- -------- ----
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
Bond Fund Daily Monthly
Strategic Income Fund Daily Monthly
High Yield Bond Fund Daily Monthly
Money Market Fund Daily Monthly
Capital gains distributions are generally declared annually. Dividends are
automatically reinvested in additional shares of the Funds.
50
<PAGE>
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
federal and state income taxation of all of its taxable income and gain, whether
or not distributed to shareholders.
51
<PAGE>
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, 1998, 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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<PAGE>
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 and High Yield
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.
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.
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<PAGE>
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1998, the annualized yield was:
Bond Fund %
Strategic Income Fund %
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:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-----
cd
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
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:
54
<PAGE>
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, 1998 and since, the commencement of operations through December 31,
1998 is as follows:
Commencement of
1 year period ended Operations to
December 31, 1998 December 31, 1998*
V.A. International Fund
V.A. Financial Industries Fund
V.A. Emerging Growth Fund
V.A. Growth Fund
V.A. Independence Equity Fund
V.A. Sovereign Investors Fund
V.A. 500 Index Fund
V.A. Bond Fund
V.A. Strategic Income Fund
* 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.
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.
55
<PAGE>
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.
Purchases of securities for Bond Fund, Strategic Income Fund and High Yield 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.
56
<PAGE>
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, Bond Fund $0, Strategic Income Fund
$0 and Financial Industries 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, Bond Fund $0, Strategic
Income Fund $0 and Financial Industries Fund $16.780. For the year ended
December 31, 1998, the Fund paid broker commissions as follows: International
Fund $ , Emerging Growth Fund $ , Growth Fund $ , Independence
Equity Fund $ , Sovereign Investors Fund $ , 500 Index Fund $0, Bond
Fund $0, Strategic Income Fund $0 and Financial Industries Fund $16.780.
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, 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, and during the fiscal year ended December 31, 1998, Growth Fund, Emerging
Growth Fund, Financial Industries Fund, International Fund, Sovereign Investors
directed commissions in the amounts of $ , $ , $ , $ , and $ ,
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 Signator Investors, Inc., a broker dealer ("Signator" 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 Signator. During the fiscal year
ended December 31, 1997 and 1998, the Funds did not execute any portfolio
transactions with Affiliated Brokers.
Signator 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
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.
57
<PAGE>
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, 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
__________________, 200 Clarendon Street, Boston, Massachusetts 02116, has been
selected as the independent auditor of the Trust. The financial statements of
the Funds __________________________________________________ included in the
Prospectus and this Statement of Additional Information have been audited by
__________________ for the periods indicated in their report thereon appearing
elsewhere herein, and have been included in reliance on their report as experts
in accounting and auditing.
58
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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.
A-1
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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.
A-2
<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.
A-3
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK DECLARATION TRUST
PART C.
OTHER INFORMATION
Item. 23. Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by or under common control with
Registrant.
Item. 25. Indemnification.
Indemnification provisions relating to the Registrant's Trustees, officers,
employees and agents is set forth in Article VII of the Registrant's By Laws
included as Exhibit 2 herein.
Under Section 12 of the Distribution Agreement, John Hancock Funds, Inc. ("John
Hancock Funds") has agreed to indemnify the Registrant and its Trustees,
officers and controlling persons against claims arising out of certain acts and
statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company ("the
Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the Insurance Company who serves as a Trustee or officer
of the Registrant at the direction or request of the Insurance Company against
litigation expenses and liabilities incurred while acting as such, except that
such indemnification does not cover any expense or liability incurred or imposed
in connection with any matter as to which such person shall be finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Insurance Company. In addition, no such
person will be indemnified by the Insurance Company in respect of any final
adjudication unless such settlement shall have been approved as in the best
interests of the Insurance Company either by vote of the Board of Directors at a
meeting composed of directors who have no interest in the outcome of such vote,
or by vote of the policyholders. The Insurance Company may pay expenses incurred
in defending an action or claim in advance of its final disposition, but only
upon receipt of an undertaking by the person indemnified to repay such payment
if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc. ("the Adviser") provide as follows:
"Section 9.01. Indemnity. Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
<PAGE>
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 26. Business and Other Connections of Investment Advisers.
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 27. Principal Underwriters.
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Special Equities
Fund, John Hancock Bond Fund, John Hancock Tax-Exempt Series, John Hancock
Strategic Series, John Hancock World Fund, John Hancock Investment Trust, John
Hancock Institutional Series Trust, John Hancock Investment Trust II and John
Hancock Investment Trust III.
(b) The following table lists, for each director and officer of John Hancock
Funds, the information indicated.
C-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Principal Positions and Offices
------------------ ---------------------
Business Address Positions and Offices with Registrant
---------------- --------------------- ---------------
with Underwriter
----------------
Edward J. Boudreau, Jr. Director, Chairman, President and Trustee, Chairman, and Chief
101 Huntington Avenue Chief Executive Officer Executive Officer
Boston, Massachusetts
Anne C. Hodsdon Director, Executive Vice President President
101 Huntington Avenue
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Osbert M. Hood Senior Vice President, Chief Senior Vice President
101 Huntington Avenue Financial Officer and Treasurer and Chief Financial Officer
Boston, Massachusetts
David A. King Director None
380 Stuart Street
Boston, Massachusetts
Richard O. Hansen Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
C-3
<PAGE>
Name and Principal Positions and Offices
------------------ ---------------------
Business Address Positions and Offices with Registrant
---------------- --------------------- ---------------
With Underwriter
----------------
Susan S. Newton Vice President Vice President and Secretary
101 Huntington Avenue
Boston, Massachusetts
Stephen L. Brown Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-4
<PAGE>
Name and Principal Positions and Offices
------------------ ---------------------
Business Address Positions and Offices with Registrant
---------------- --------------------- ---------------
With Underwriter
----------------
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers President None
101 Huntington Avenue
Boston, Massachusetts
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kathleen M. Graveline Senior Vice President None
P.O. Box 111
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith F. Hartstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Peter Mawn Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Bennintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
Renee Humphrey Vice President None
101 Huntington Avenue
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address With Underwriter with Registrant
---------------- ---------------- ---------------
Karen F. Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Gary Cronin Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kristine Pancare Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
Item 28. Location of Accounts and Records.
The Registrant maintains the records required to be maintained by it
under Rules 31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment
Company Act of 1940 at its principal executive offices at 101
Huntington Avenue, Boston Massachusetts 02199-7603. Certain records,
including records relating to Registrant's shareholders and the
physical possession of its securities, may be maintained pursuant to
Rule 31a-3 at the main office of Registrant's Transfer Agent and
Custodian.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston, and The Commonwealth of Massachusetts on the 23rd day of
February, 1999.
JOHN HANCOCK CAPITAL SERIES
By: * /s/Edward J. Boudreau, Jr.
--------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement 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 and Chief Executive February 23, 1999
- ------------------------- Officer (Principal Executive
Edward J. Boudreau, Jr. Officer)
/s/James J. Stokowski Vice President and Chief Accounting
- ------------------------- Officer)
James J. Stokowski
* Trustee
- -------------------------
Dennis S. Aronowitz
* Trustee
- -------------------------
Stephen L. Brown
* Trustee
- -------------------------
Richard P. Chapman, Jr.
* Trustee
- -------------------------
William J. Cosgrove
* Trustee
- -------------------------
Douglas M. Costle
* Trustee
- -------------------------
Leland O. Erdahl
C-7
<PAGE>
* Trustee
- -------------------------
Richard A. Farrell
* Trustee
- -------------------------
Gail D. Fosler
* Trustee
- -------------------------
William F. Glavin
* Trustee
- -------------------------
Anne C. Hodsdon
* Trustee
- -------------------------
John A. Moore
* Trustee
- -------------------------
Patti McGill Peterson
* Trustee
- -------------------------
Richard S. Scipione
By: /s/Susan S. Newton February 23, 1999
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
May 21, 1996 and June 27, 1996.
</TABLE>
<PAGE>
John Hancock Declaration Trust
INDEX TO EXHIBITS
99.(a) Articles of Incorporation. Declaration of Trust dated
November 15, 1995.*
99.(a).1 Establishment and Designation of shares of beneficial interest of V.A.
Growth and Income Fund. V.A. High Yield Bond Fund, V.A. Special
Opportunities Fund dated September 9, 1997.******
99.(a).2 Instrument changing names of series dated May 21, 1996.+
99.(a).3 Amendment and Designation of shares of beneficial interest of John
Hancock Financial Industries Fund dated March 11, 1997 ****
99.(a).4 Instrument changing names of series of shares of the trust (V.A.
Discover to V.A Growth) dated January 2, 1998*****
99.(a).5 Establishing and Designation of shares of beneficial interest of John
Hancock V.A. Regional Bank Fund date March 10, 1998.+
99.(a).6 Instrument changing names of series of shares of the Trust (V.A.
Sovereign Bond to V.A. Bond Fund).+
99.(b) By-Laws. Amended and Restated By-Laws dated December 3, 1996.***
99.(c) Instruments Defining Rights of Securities Holders. See exhibits
99.(a) and 99.(b).
99.(d) Investment Advisory Contracts. Investment Advisory Agreement between
John Hancock V.A. International Fund, John Hancock V.A. Emerging Growth
Fund, John Hancock V.A. Growth 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. Bond Fund, John Hancock V.A.
Strategic Income Fund and John Hancock V.A. Money Market Fund and John
Hancock Advisers, Inc.**
99.(d).1 Investment Advisory Agreement between John Hancock V.A Financial
Industries Fund dated May 1, 1997.+
99.(d).2 Investment Advisory Agreement between John Hancock V.A Special
Opportunities Fund, John Hancock V.A. Growth and Income Fund and
John Hancock V.A. High Yield Bond Fund and John Hancock Advisers, Inc.
dated January 2, 1998.+
99.(d).3 Investment Advisory Agreement between John Hancock V.A Regional Bank
Fund dated May 1, 1998.+
99.(d).4 Sub-Investment Management Contracts among the Registrant on behalf of
John Hancock V.A. International Fund, John Hancock Advisers, Inc. and
John Hancock Advisers International, Ltd..**
99.(d).5 Sub-Investment Management Contracts among the Registrant on behalf of
John Hancock V.A. Independence Equity Fund, John Hancock Advisers, Inc.
and Independence Investment Associates, Inc.**
99.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Funds, Inc. and the Registrant dated July 22, 1996.***
99.(e).1 Amendment to Distribution Agreement between V.A. Financial Industries
and John Hancock Funds, Inc. dated May 1, 1997.+
99.(e).2 Amendment to Distribution Agreement between V.A. High Yield Bond, V.A.
Growth and Income and V.A. Special Opportunities Funds and John Hancock
Funds, Inc. dated January 2, 1998.+
99.(e).3 Amendment to Distribution Agreement between V.A. Regional Bank Fund and
John Hancock Funds, Inc. dated May 1, 1998.+
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
<PAGE>
99.(g) Custodian Agreements. Master Custodian Agreement between John Hancock
Mutual Funds and Investors Bank and Trust Company dated
December 15, 1992 as amended October 2, 1995.*
99.(g).1 Master Custodian Agreement between John Hancock Mutual Funds and State
Street Bank and Trust Company dated June 15, 1994 as amended October 2,
1995.*
99.(g).2 Amendment to Master Custodian Agreement with Investors Bank and Trust
Company dated May 1, 1997.****
99.(g).3 Amendment to Master Custodian Agreement with Investors Bank and Trust
Company dated January 2, 1998. +
99.(g).4 Amendment to Master Custodian Agreement with Investors Bank and
Trust Company dated May 1, 1998.+
99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency
and Service Agreement between John Hancock funds and John Hancock
Signature Services, Inc. dated June 1, 1998.+
99.(h).1 Accounting Services Agreement between John Hancock Advisers, Inc. and
Registrant as of January 1, 1996.**
99.(I) Legal Opinion. Not Applicable.
99.(j) Other Opinions. Not Applicable
99.(k) Omitted Financial Statements. Not Applicable.
99.(l) Initial Capital Agreements. Not Applicable.
99.(m) Rule 12b-1 Plans. Not Applicable
99.(n) Financial Data Schedule. Not applicable
99.(o) Rule 18f-3 Plan. Not Applicable
* Previously filed electronically with Registration Statement file nos.
811-07437 and 33-64465 on November 20, 1995, accession number
0000950146-95-000740.
** Previously filed electronically with Registration Statement and/or
pre-effective amendment no.1 file nos. 811-07437 and 33-64465 on
August 7, 1996, accession number 0001010521-96-000139.
*** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 3. file nos. 811-07437 and 33-64465 on
February 14, 1997, accession number 0001010521-97-000212-.
**** Previously filed electronically with Registration Statement and/or
post-effective amendment no.4. file nos. 811-07437 and 33-64465 on
April 29, 1997 accession number 0001010521-97-000278.
***** Previously filed electronically with Registration Statement and/or
post-effective amendment no.6. file nos. 811-07437 and 33-64465 on
October 1, 1997 accession number 0001010521-97-000403.
+ Filed herewith.
JOHN HANCOCK DECLARATION TRUST
Instrument Changing Names of Series of Shares of the Trust
The Trustees of John Hancock Declaration Trust (the "Trust"), hereby
amend the Trust's Declaration of Trust dated November 15, 1995, to the extent
necessary to reflect the change of the name of John Hancock V.A. Emerging
Equities Fund to John Hancock V.A. Emerging Growth Fund, John Hancock V.A.
Diversified Core Equity Fund to John Hancock V.A. Independence Equity Fund and
John Hancock V.A. Global Income Fund to John Hancock V.A. World Bond Fund,
effective July 1, 1996.
IN WITNESS WHEREOF, the Trustees of the Trust have executed this
Instrument on the 21st day of May, 1996.
/s/Edward J. Boudreau, Jr. /s/William F. Glavin
- -------------------------- --------------------------
Edward J. Boudreau, Jr. William F. Glavin
/s/Dennis S. Aronowitz /s/Anne C. Hodsdon
- -------------------------- --------------------------
Dennis S. Aronowitz Anne C. Hodsdon
/s/Richard P. Chapman, Jr.
- -------------------------- --------------------------
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
- -------------------------- --------------------------
William J. Cosgrove Patti McGill Peterson
/s/Douglas M. Costle /s/John W. Pratt
- -------------------------- --------------------------
Douglas M. Costle John W. Pratt
/s/Leland O. Erdahl /s/Richard S. Scipione
- -------------------------- --------------------------
Leland O. Erdahl Richard S. Scipione
/s/Richard A. Farrell /s/Edward J. Spellman
- -------------------------- --------------------------
Richard A. Farrell Edward J. Spellman
/s/Gail D. Fosler
- --------------------------
Gail D. Fosler
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties with respect to such Person; and all such Persons shall
look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
<PAGE>
COMMONWEALTH OF MASSACHUSETTS )
)ss
COUNTY OF SUFFOLK )
Then personally appeared the above-named 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, Patti McGill Peterson, John W. Pratt, Richard S. Scipione, and
Edward J. Spellman, who each acknowledged the foregoing instrument to be his or
her free act and deed, before me, this 21st day of May 1996.
/s/ Carmen M. Pelissier
-----------------------
Notary Public
My commission expires: July 28, 2000
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. Regional Bank Fund
Establishment and Designation
of Shares of Beneficial Interest of
John Hancock V.A. Regional Bank Fund, a Series of
John Hancock Declaration Trust
The undersigned, being a majority of the Trustees of John Hancock
Declaration Trust, a Massachusetts business trust (the "Trust"), acting pursuant
to the Declaration of Trust dated November 10, 1995 of the Trust, as amended
from time to time, do hereby establish an additional series of shares of the
Trust (the "Shares"), having rights and preferences set forth in the Declaration
of Trust and in the Trust's Registration Statement on Form N-1A, which Shares
shall represent undivided beneficial interests in a separate portfolio of assets
of the Trust (the "Fund") designated "John Hancock V.A. Regional Bank Fund".
The Declaration of Trust is hereby amended to the extent necessary to
reflect the establishment of such additional series of Shares, effective May 1,
1998.
Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
10th day of March, 1998.
/s/Dennis S. Aronowitz /s/William F. Glavin
- -------------------------- --------------------------
Dennis S. Aronowitz William F. Glavin
/s/Edward J. Boudreau, Jr. /s/Anne C. Hodsdon
- -------------------------- --------------------------
Edward J. Boudreau, Jr. Anne C. Hodsdon
/s/Richard P. Chapman, Jr /s/John A. Moore
- -------------------------- --------------------------
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
- -------------------------- --------------------------
William J. Cosgrove Patti McGill Peterson
/s/Douglas M. Costle /s/John W. Pratt
- -------------------------- --------------------------
Douglas M. Costle John W. Pratt
/s/Leland O. Erdahl
- -------------------------- --------------------------
Leland O. Erdahl Richard S. Scipione
/s/Richard A. Farrell /s /Edward J. Spellman
- -------------------------- --------------------------
Richard A. Farrell Edward J. Spellman
/s/Gail D. Fosler
- --------------------------
Gail D. Fosler
<PAGE>
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his/her duties with respect to such Person; and all such Persons
shall look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
STATE OF FLORIDA )
)ss
COUNTY OF )
Then personally appeared the above-named Dennis S. Aronowitz, Edward J.
Boudreau, Jr., Richard P. Chapman, Jr., William J. Cosgrove, Douglas M. Costle,
Leland O. Erdahl, Richard A. Farrell, Gail D. Fosler, William F. Glavin, Anne C.
Hodsdon, John A. Moore, Patti McGill Peterson, John W. Pratt, Richard S.
Scipione, and Edward J. Spellman, who acknowledged the foregoing instrument to
be his or her free act and deed, before me, this 10th day of March, 1998.
/s/ Michele Jones
-----------------
Notary Public
My Commission Expires:8/25/00
JOHN HANCOCK DECLARATION TRUST
Instrument Changing Names of Series of Shares of the Trust
The Trustees of John Hancock Declaration Trust (the "Trust"), hereby
amend the Trust's Declaration of Trust dated November 15, 1995, as amended from
time to time, to the extent necessary to reflect the change of the name of John
Hancock V.A. Sovereign Bond Fund to John Hancock V.A. Bond Fund, effective
October 1, 1998.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
15th day of September, 1998.
/s/Dennis S. Aronowitz /s/William F. Glavin
- -------------------------- ------------------------
Dennis S. Aronowitz William F. Glavin
/s/Edward J. Boudreau, Jr. /s/Anne C. Hodsdon
- -------------------------- ------------------------
Edward J. Boudreau, Jr. Anne C. Hodsdon
/s/Richard P. Chapman, Jr /s/John A. Moore
- -------------------------- ------------------------
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
- -------------------------- ------------------------
William J. Cosgrove Patti McGill Peterson
/s/Douglas M. Costle /s/John W. Pratt
- -------------------------- ------------------------
Douglas M. Costle John W. Pratt
/s/Leland O. Erdahl /s/ Richard S. Scipione
- -------------------------- ------------------------
Leland O. Erdahl Richard S. Scipione
/s/Richard A. Farrell /s /Edward J. Spellman
- -------------------------- ------------------------
Richard A. Farrell Edward J. Spellman
/s/Gail D. Fosler
- --------------------------
Gail D. Fosler
<PAGE>
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his/her duties with respect to such Person; and all such Persons
shall look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
COMMONWEALTH OF MASSACHUSETTS )
)ss
COUNTY OF SUFFOLK )
Then personally appeared the above-named Dennis S. Aronowitz, Edward J.
Boudreau, Jr., Richard P. Chapman, Jr., William J. Cosgrove, Douglas M. Costle,
Leland O. Erdahl, Richard A. Farrell, Gail D. Fosler, William F. Glavin, Anne C.
Hodsdon, John A. Moore, Patti McGill Peterson, John W. Pratt, Richard S.
Scipione, and Edward J. Spellman, who acknowledged the foregoing instrument to
be his or her free act and deed, before me, this 15th day of September, 1998.
/s/ AnnMarie White
------------------
Notary Public
My Commission Expires: 10/20/00
JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, Massachusetts
May 1, 1997
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Investment Management Contract
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") of which John Hancock V.A.
Financial Industries Fund (the "Fund") is a series, has been organized as a
business trust under the laws of the Commonwealth of Massachusetts to engage in
the business of an investment company. The Trust's shares of beneficial interest
are currently divided into eleven series (including the Fund), each series
representing the entire undivided interest in a separate portfolio of assets.
Series may be established or terminated from time to time by action of the Board
of Trustees of the Trust. This Agreement relates solely to the Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the Fund, and to provide certain other services, as more fully
set forth below, and the Adviser is willing to provide such advice, management
and services under the terms and conditions hereinafter set forth.
Accordingly, the Adviser and the Trust, on behalf of the Fund, agree as
follows:
1. Delivery of Documents. The Trust has furnished the Adviser
with copies, properly certified or otherwise authenticated, of
each of the following:
(a) Declaration of Trust of the Trust, dated November 15, 1995,
(the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees selecting the Adviser as the
investment adviser for the Fund and approving the form of this
Agreement and the resolution of the Fund's sole shareholder
approving this Agreement.
<PAGE>
(d) Commitments, limitations and undertakings made by the Fund to
state securities or "blue sky" authorities for the purpose of
qualifying shares of the Fund for sale in such states; and
(e) The Trust's Code of Ethics.
The Trust will furnish the Adviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
2. Investment and Management Services. The Adviser will use its best
efforts to provide to the Fund continuing and suitable investment
programs with respect to investments, consistent with the investment
objectives, policies and restrictions of the Fund. In the performance
of the Adviser's duties hereunder, subject always (x) to the provisions
contained in the documents delivered to the Adviser pursuant to Section
1, as each of the same may from time to time be amended or
supplemented, and (y) to the limitations set forth in the Fund's
then-current Prospectus and Statement of Additional Information
included in the registration statement of the Trust as in effect from
time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the
Adviser will, at its own expense:
(a) furnish the Fund with advice and recommendations, consistent
with the investment objectives, policies and restrictions of
the Fund, with respect to the purchase, holding and
disposition of portfolio securities including the purchase and
sale of options, alone or in consultation with any sub-adviser
or sub-advisers appointed pursuant to this Agreement and
subject to the provisions of any sub-investment management
contract respecting the responsibilities of such sub-adviser
or sub-advisers;
(b) advise the Fund in connection with policy decisions to be made
by the Trustees or any committee thereof with respect to the
Fund's investments and, as requested, furnish the Fund with
research, economic and statistical data in connection with the
Fund's investments and investment policies;
(c) provide administration of the day-to-day investment operations
of the Fund;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
(e) assist the Fund in any negotiations relating to the Fund's
investments with issuers, investment banking firms, securities
brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 8 of this Agreement,
place orders for the purchase, sale or exchange of portfolio
securities with brokers or dealers selected by the Adviser,
provided that in connection with the placing of such orders
and the selection of such brokers or dealers the Adviser shall
seek to obtain execution and pricing within the policy
guidelines determined by the Trustees and set forth in the
Prospectus and Statement of Additional Information of the Fund
as in effect from time to time;
(g) provide office space and equipment and supplies, the use of
accounting equipment when required, and necessary executive,
clerical and secretarial personnel for the administration of
the affairs of the Fund;
(h) from time to time or at any time requested by the Trustees,
make reports to the Fund of the Adviser's performance of the
foregoing services and furnish advice and recommendations with
respect to other aspects of the business and affairs of the
Fund;
<PAGE>
(i) maintain all books and records with respect to the Fund's
securities transactions required by the 1940 Act, including
sub-paragraphs (b)(5), (6), (9) and (10) and paragraph (f) of
Rule 31a-1 thereunder (other than those records being
maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by
Rule 31a-2 of the 1940 Act (the Adviser agrees that such
records are the property of the Fund and will be surrendered
to the Fund promptly upon request therefor);
(j) obtain and evaluate such information relating to economies,
industries, businesses, securities markets and securities as
the Adviser may deem necessary or useful in the discharge of
the Adviser's duties hereunder;
(k) oversee and use the Adviser's best efforts to assure the
performance of the activities and services of the custodian,
transfer agent or other similar agents retained by the Fund;
and
(l) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment
of cash for the account of the Fund.
3. Sub-advisers. The Adviser may engage one or more investment advisers
which are either registered as such or specifically exempt from
registration under the 1940 Act to act as sub-advisers to provide, with
respect to the Fund, certain services set forth in Section 2 of this
Agreement, all as shall be set forth in a written sub-advisory contract
to which the Trust and the Adviser shall be parties. The sub-advisory
contract shall be subject to approval by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Adviser,
the sub-adviser or of the Trust, cast in person at a meeting called for
the purpose of voting on such approval and by the vote of a majority of
the outstanding voting securities of the Fund and otherwise consistent
with the terms of the 1940 Act. Any fee, compensation or expense to be
paid to any sub-adviser shall be paid by the Adviser, and no obligation
to the sub-adviser shall be incurred on the Fund's or Trust's behalf,
except as agreed upon by the Trustees of the Trust and otherwise
consistent with the terms of the 1940 Act.
4. Expenses paid by the Adviser. The Adviser will pay:
(a) the compensation and expenses of all officers and employees of
the Fund;
(b) the expenses of office, rent, telephone and other utilities,
office furniture, equipment, supplies and other expenses of
the Fund;
(c) any other expenses incurred by the Adviser in connection with
the performance of its duties hereunder; and
(d) premiums for such insurance as may be agreed upon between the
Adviser and the Trustees.
5. Expenses of the Fund Not Paid by the Adviser. The Adviser will not
be required to pay any expenses which this Agreement does not expressly
make payable by it. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 4, the
Adviser will not be required to pay under this Agreement:
<PAGE>
(a) the expenses of organizing the Trust and the Fund (including
without limitation legal, accounting and auditing fees and
expenses incurred in connection with the matters referred to
in this clause (a)), of initially registering the shares of
the Trust under the Securities Act of 1933, as amended, and of
qualifying the shares for sale under state securities laws for
the initial offering and sale of shares;
(b) the compensation and expenses of Trustees who are not
interested persons (as used in this Agreement such term shall
have the meaning specified in the 1940 Act) of the Adviser,
and of independent advisers, independent contractors,
consultants, managers and other unaffiliated agents employed
by the Fund other than through the Adviser;
(c) legal (including an allocable portion of the cost of its
employees rendering legal services to the Fund), accounting
and auditing fees and expenses of the Fund;
(d) the fees and disbursements of custodians and depositories of
the Fund's assets, transfer agents, disbursing agents, plan
agents and registrars;
(e) taxes and governmental fees assessed against the Fund's
assets and payable by the Fund;
(f) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the
Fund;
(g) brokers' commissions and underwriting fees; and
(h) the expense of periodic calculations of the net asset value
of the shares of the Fund.
6. Compensation of the Adviser. For all services to be rendered,
facilities furnished and expenses paid or assumed by the Adviser as
herein provided, the Adviser shall be entitled to a fee, paid monthly
in arrears, equal to 0.80% of the average daily net assets of the Fund
for the preceding month.
The "average daily net assets" of the Fund shall be determined on the
basis set forth in the Fund's Prospectus or otherwise consistent with
the 1940 Act and the regulations promulgated thereunder. The Adviser
will receive a pro-rata portion of such monthly fee for any periods in
which the Adviser serves as investment adviser to the Fund for less
than a full month. On any day that the net asset value calculation is
suspended as specified in the Fund's Prospectus, the net asset value
for purposes of calculating the advisory fee shall be calculated as of
the date last determined.
In the event that normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any
limitation imposed by the law of a state where the Fund is registered
to sell shares of beneficial interest, the fee payable to the Adviser
will be reduced to the extent required by law, and the Adviser will
make any arrangements that the Adviser is required by law to make.
In addition, the Adviser may agree not to impose all or a portion of
its fee (in advance of the time its fee would otherwise accrue) and/or
undertake to make any other payments or arrangements necessary to limit
the fund's expenses to any level the Adviser may specify. Any fee
reduction or undertaking shall constitute a binding modification of
this agreement while it is in effect but may be discontinued or
modified prospectively by the adviser at any time.
<PAGE>
7. Other Activities of the Adviser and Its Affiliates. Nothing herein
contained shall prevent the Adviser or any affiliate or associate of
the Adviser from engaging in any other business or from acting as
investment adviser or investment manager for any other person or
entity, whether or not having investment policies or portfolios similar
to the Fund's; and it is specifically understood that officers,
directors and employees of the Adviser and those of its parent company,
John Hancock Mutual Life Insurance Company, or other affiliates may
continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, to
other investment advisory clients of the Adviser or of its affiliates
and to said affiliates themselves.
8. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Adviser nor any of its investment management subsidiaries, nor any of
the Adviser's or such investment management subsidiaries' directors,
officers or employees will act as principal or agent or receive any
commission except as may be permitted by the 1940 Act and rules and
regulations promulgated thereunder. If any occasions shall arise in
which the Adviser advises persons concerning the shares of the Fund,
the Adviser will act solely on its own behalf and not in any way on
behalf of the Fund.
Nothing herein contained shall limit or restrict the Adviser or any of
its officers, affiliates or employees from buying, selling or trading
in any securities for its or their own account or accounts. The Fund
acknowledges that the Adviser and its officers, affiliates, and
employees, and its other clients may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at
the same time being acquired or disposed of hereunder. The Adviser
shall have no obligation to acquire with respect to the Fund a position
in any investment which the Adviser, its officers, affiliates or
employees may acquire for its or their own accounts or for the account
of another client, if, in the sole discretion of the Adviser, it is not
feasible or desirable to acquire a position in such investment on
behalf of the Fund. Nothing herein contained shall prevent the Adviser
from purchasing or recommending the purchase of a particular security
for one or more funds or clients while other funds or clients may be
selling the same security.
9. No Partnership or Joint Venture. Neither the Trust, the Fund, nor
the Adviser are partners of or joint venturers with each other and
nothing herein shall be construed so as to make them such partners or
joint venturers or impose any liability as such on any of them.
10. Name of the Trust and Fund. The Trust and the Fund may use the name
"John Hancock" or any name or names derived from or similar to the
names "John Hancock Advisers, Inc." or "John Hancock Mutual Life
Insurance Company" only for so long as this Agreement (or similar
agreement with John Hancock Mutual Life Insurance Company or any of its
affiliates or subsidiaries) remains in effect. At such time as this
Agreement or such other agreement shall no longer be in effect, the
Fund will (to the extent that it lawfully can) cease to use such a name
or any other name indicating that the Fund is advised by or otherwise
connected with the Adviser. The Fund acknowledges that it has adopted
the name "John Hancock V.A. Financial Industries Fund" through
permission of John Hancock Mutual Life Insurance Company, a
Massachusetts
<PAGE>
insurance company, and agrees that John Hancock Mutual Life Insurance
Company reserves to itself and any successor to its business the right
to grant the non-exclusive right to use the name "John Hancock" or any
similar name or names to any other corporation or entity, including but
not limited to any investment company of which John Hancock Mutual Life
Insurance Company or any subsidiary or affiliate thereof shall be the
investment adviser.
11. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also employed by the Adviser, who may be or become an employee of and
paid by the Fund shall be deemed, when acting within the scope of his
employment by the Fund, to be acting in such employment solely for the
Fund and not as the Adviser's employee or agent.
12. Duration and Termination of this Agreement. This Agreement shall
remain in force until the second anniversary of the date upon which
this Agreement was executed by the parties hereto, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a majority of the Trustees who are
not interested persons of the Adviser or (other than as Board Members)
of the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and (b) either (i) the Trustees or (ii) a
majority of the outstanding voting securities of the Fund. This
Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the
Adviser. Termination of this Agreement shall not be deemed to terminate
or otherwise invalidate any provisions of any contract between the
Adviser and any other series of the Trust. This Agreement shall
automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 12, the definitions contained in Section
2(a) of the 1940 Act (particularly the definitions of "assignment,"
"interested person" and "voting security"), shall be applied.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, and no
amendment, transfer, assignment, sale, hypothecation or pledge of this
Agreement shall be effective until approved by (a) the Trustees,
including a majority of the Trustees who are not interested persons of
the Adviser or (other than as Board Members) of the Fund, cast in
person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15. Severability. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be deemed invalid or
unenforceable in whole or in part.
<PAGE>
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The name
John Hancock V.A. Financial Industries Fund is a series designation of
the Trustees under the Trust's Declaration of Trust, dated November 15,
1995, as amended from time to time. The Declaration of Trust has been
filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Fund are not personally binding upon, nor shall
resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the
Fund's property shall be bound. The Fund shall not be liable for the
obligations of any other series of the Trust and no other series shall
be liable for the Fund's obligations hereunder.
Yours very truly,
JOHN HANCOCK DECLARATION TRUST
On behalf of John Hancock V.A. Financial Industries Fund
By: /s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President
The foregoing contract is hereby
agreed to as of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/ John A. Morin
-----------------
John A. Morin
Vice President and Secretary
JOHN HANCOCK V.A. GROWTH AND INCOME FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, Massachusetts
January 2, 1998
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Investment Management Contract
------------------------------
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") of which John Hancock V.A.
Growth and Income Fund (the "Fund") is a series, has been organized as a
business trust under the laws of the Commonwealth of Massachusetts to engage in
the business of an investment company. The Trust's shares of beneficial interest
are currently divided into fourteen series (including the Fund), each series
representing the entire undivided interest in a separate portfolio of assets.
Series may be established or terminated from time to time by action of the Board
of Trustees of the Trust. This Agreement relates solely to the Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the Fund, and to provide certain other services, as more fully
set forth below, and the Adviser is willing to provide such advice, management
and services under the terms and conditions hereinafter set forth.
Accordingly, the Adviser and the Trust, on behalf of the Fund, agree as
follows:
1. Delivery of Documents. The Trust has furnished the Adviser
with copies, properly certified or otherwise authenticated, of
each of the following:
(a) Declaration of Trust of the Trust, dated November 15, 1995,
(the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees selecting the Adviser as the
investment adviser for the Fund and approving the form of this
Agreement and the resolution of the Fund's sole shareholder
approving this Agreement.
<PAGE>
(d) Commitments, limitations and undertakings made by the Fund to
state securities or "blue sky" authorities for the purpose of
qualifying shares of the Fund for sale in such states; and
(e) The Trust's Code of Ethics.
The Trust will furnish the Adviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
2. Investment and Management Services. The Adviser will use its best
efforts to provide to the Fund continuing and suitable investment
programs with respect to investments, consistent with the investment
objectives, policies and restrictions of the Fund. In the performance
of the Adviser's duties hereunder, subject always (x) to the provisions
contained in the documents delivered to the Adviser pursuant to Section
1, as each of the same may from time to time be amended or
supplemented, and (y) to the limitations set forth in the Fund's
then-current Prospectus and Statement of Additional Information
included in the registration statement of the Trust as in effect from
time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the
Adviser will, at its own expense:
(a) furnish the Fund with advice and recommendations, consistent
with the investment objectives, policies and restrictions of
the Fund, with respect to the purchase, holding and
disposition of portfolio securities including the purchase and
sale of options, alone or in consultation with any sub-adviser
or sub-advisers appointed pursuant to this Agreement and
subject to the provisions of any sub-investment management
contract respecting the responsibilities of such sub-adviser
or sub-advisers;
(b) advise the Fund in connection with policy decisions to be made
by the Trustees or any committee thereof with respect to the
Fund's investments and, as requested, furnish the Fund with
research, economic and statistical data in connection with the
Fund's investments and investment policies;
(c) provide administration of the day-to-day investment operations
of the Fund;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
(e) assist the Fund in any negotiations relating to the Fund's
investments with issuers, investment banking firms, securities
brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 8 of this Agreement,
place orders for the purchase, sale or exchange of portfolio
securities with brokers or dealers selected by the Adviser,
provided that in connection with the placing of such orders
and the selection of such brokers or dealers the Adviser shall
seek to obtain execution and pricing within the policy
guidelines determined by the Trustees and set forth in the
Prospectus and Statement of Additional Information of the Fund
as in effect from time to time;
(g) provide office space and equipment and supplies, the use of
accounting equipment when required, and necessary executive,
clerical and secretarial personnel for the administration of
the affairs of the Fund;
(h) from time to time or at any time requested by the Trustees,
make reports to the Fund of the Adviser's performance of the
foregoing services and furnish advice and recommendations with
respect to other aspects of the business and affairs of the
Fund;
<PAGE>
(i) maintain all books and records with respect to the Fund's
securities transactions required by the 1940 Act, including
sub-paragraphs (b)(5), (6), (9) and (10) and paragraph (f) of
Rule 31a-1 thereunder (other than those records being
maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by
Rule 31a-2 of the 1940 Act (the Adviser agrees that such
records are the property of the Fund and will be surrendered
to the Fund promptly upon request therefor);
(j) obtain and evaluate such information relating to economies,
industries, businesses, securities markets and securities as
the Adviser may deem necessary or useful in the discharge of
the Adviser's duties hereunder;
(k) oversee and use the Adviser's best efforts to assure the
performance of the activities and services of the custodian,
transfer agent or other similar agents retained by the Fund;
and
(l) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment
of cash for the account of the Fund.
3. Sub-advisers. The Adviser may engage one or more investment advisers
which are either registered as such or specifically exempt from
registration under the 1940 Act to act as sub-advisers to provide, with
respect to the Fund, certain services set forth in Section 2 of this
Agreement, all as shall be set forth in a written sub-advisory contract
to which the Trust and the Adviser shall be parties. The sub-advisory
contract shall be subject to approval by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Adviser,
the sub-adviser or of the Trust, cast in person at a meeting called for
the purpose of voting on such approval and by the vote of a majority of
the outstanding voting securities of the Fund and otherwise consistent
with the terms of the 1940 Act. Any fee, compensation or expense to be
paid to any sub-adviser shall be paid by the Adviser, and no obligation
to the sub-adviser shall be incurred on the Fund's or Trust's behalf,
except as agreed upon by the Trustees of the Trust and otherwise
consistent with the terms of the 1940 Act.
4. Expenses paid by the Adviser. The Adviser will pay:
(a) the compensation and expenses of all officers and employees of
the Fund;
(b) the expenses of office, rent, telephone and other utilities,
office furniture, equipment, supplies and other expenses of
the Fund;
(c) any other expenses incurred by the Adviser in connection with
the performance of its duties hereunder; and
(d) premiums for such insurance as may be agreed upon between
the Adviser and the Trustees.
5. Expenses of the Fund Not Paid by the Adviser. The Adviser will not
be required to pay any expenses which this Agreement does not expressly
make payable by it. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 4, the
Adviser will not be required to pay under this Agreement:
<PAGE>
(a) the expenses of organizing the Trust and the Fund (including
without limitation legal, accounting and auditing fees and
expenses incurred in connection with the matters referred to
in this clause (a)), of initially registering the shares of
the Trust under the Securities Act of 1933, as amended, and of
qualifying the shares for sale under state securities laws for
the initial offering and sale of shares;
(b) the compensation and expenses of Trustees who are not
interested persons (as used in this Agreement such term shall
have the meaning specified in the 1940 Act) of the Adviser,
and of independent advisers, independent contractors,
consultants, managers and other unaffiliated agents employed
by the Fund other than through the Adviser;
(c) legal (including an allocable portion of the cost of its
employees rendering legal services to the Fund), accounting
and auditing fees and expenses of the Fund;
(d) the fees and disbursements of custodians and depositories of
the Fund's assets, transfer agents, disbursing agents, plan
agents and registrars;
(e) taxes and governmental fees assessed against the Fund's assets
and payable by the Fund;
(f) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the
Fund;
(g) brokers' commissions and underwriting fees; and
(h) the expense of periodic calculations of the net asset value
of the shares of the Fund.
6. Compensation of the Adviser. For all services to be rendered,
facilities furnished and expenses paid or assumed by the Adviser as
herein provided, the Adviser shall be entitled to a fee, paid monthly
in arrears, equal to 0.60% of the average daily net assets of the Fund
for the preceding month.
The "average daily net assets" of the Fund shall be determined on the
basis set forth in the Fund's Prospectus or otherwise consistent with
the 1940 Act and the regulations promulgated thereunder. The Adviser
will receive a pro-rata portion of such monthly fee for any periods in
which the Adviser serves as investment adviser to the Fund for less
than a full month. On any day that the net asset value calculation is
suspended as specified in the Fund's Prospectus, the net asset value
for purposes of calculating the advisory fee shall be calculated as of
the date last determined.
In the event that normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any
limitation imposed by the law of a state where the Fund is registered
to sell shares of beneficial interest, the fee payable to the Adviser
will be reduced to the extent required by law, and the Adviser will
make any arrangements that the Adviser is required by law to make.
In addition, the Adviser may agree not to impose all or a portion of
its fee (in advance of the time its fee would otherwise accrue) and/or
undertake to make any other payments or arrangements necessary to limit
the fund's expenses to any level the Adviser may specify. Any fee
reduction or undertaking shall constitute a binding modification of
this agreement while it is in effect but may be discontinued or
modified prospectively by the adviser at any time.
<PAGE>
7. Other Activities of the Adviser and Its Affiliates. Nothing herein
contained shall prevent the Adviser or any affiliate or associate of
the Adviser from engaging in any other business or from acting as
investment adviser or investment manager for any other person or
entity, whether or not having investment policies or portfolios similar
to the Fund's; and it is specifically understood that officers,
directors and employees of the Adviser and those of its parent company,
John Hancock Mutual Life Insurance Company, or other affiliates may
continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, to
other investment advisory clients of the Adviser or of its affiliates
and to said affiliates themselves.
8. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Adviser nor any of its investment management subsidiaries, nor any of
the Adviser's or such investment management subsidiaries' directors,
officers or employees will act as principal or agent or receive any
commission except as may be permitted by the 1940 Act and rules and
regulations promulgated thereunder. If any occasions shall arise in
which the Adviser advises persons concerning the shares of the Fund,
the Adviser will act solely on its own behalf and not in any way on
behalf of the Fund.
Nothing herein contained shall limit or restrict the Adviser or any of
its officers, affiliates or employees from buying, selling or trading
in any securities for its or their own account or accounts. The Fund
acknowledges that the Adviser and its officers, affiliates, and
employees, and its other clients may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at
the same time being acquired or disposed of hereunder. The Adviser
shall have no obligation to acquire with respect to the Fund a position
in any investment which the Adviser, its officers, affiliates or
employees may acquire for its or their own accounts or for the account
of another client, if, in the sole discretion of the Adviser, it is not
feasible or desirable to acquire a position in such investment on
behalf of the Fund. Nothing herein contained shall prevent the Adviser
from purchasing or recommending the purchase of a particular security
for one or more funds or clients while other funds or clients may be
selling the same security.
9. No Partnership or Joint Venture. Neither the Trust, the Fund, nor
the Adviser are partners of or joint venturers with each other and
nothing herein shall be construed so as to make them such partners or
joint venturers or impose any liability as such on any of them.
10. Name of the Trust and Fund. The Trust and the Fund may use the name
"John Hancock" or any name or names derived from or similar to the
names "John Hancock Advisers, Inc." or "John Hancock Mutual Life
Insurance Company" only for so long as this Agreement (or similar
agreement with John Hancock Mutual Life Insurance Company or any of its
affiliates or subsidiaries) remains in effect. At such time as this
Agreement or such other agreement shall no longer be in effect, the
Fund will (to the extent that it lawfully can) cease to use such a name
or any other name indicating that the Fund is advised by or otherwise
connected with the Adviser. The Fund acknowledges that it has adopted
the name "John Hancock V.A. Growth and Income Fund" through permission
of John Hancock Mutual Life Insurance Company, a Massachusetts
insurance company, and agrees that John Hancock Mutual Life Insurance
Company reserves to itself and any successor to its business the right
to grant the non-exclusive right to use the name "John Hancock" or any
similar name or names to any other corporation or entity, including but
not limited to any investment company of which John Hancock Mutual Life
Insurance Company or any subsidiary or affiliate thereof shall be the
investment adviser.
<PAGE>
11. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also employed by the Adviser, who may be or become an employee of and
paid by the Fund shall be deemed, when acting within the scope of his
employment by the Fund, to be acting in such employment solely for the
Fund and not as the Adviser's employee or agent.
12. Duration and Termination of this Agreement. This Agreement shall
remain in force until the second anniversary of the date upon which
this Agreement was executed by the parties hereto, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a majority of the Trustees who are
not interested persons of the Adviser or (other than as Board Members)
of the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and (b) either (i) the Trustees or (ii) a
majority of the outstanding voting securities of the Fund. This
Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the
Adviser. Termination of this Agreement shall not be deemed to terminate
or otherwise invalidate any provisions of any contract between the
Adviser and any other series of the Trust. This Agreement shall
automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 12, the definitions contained in Section
2(a) of the 1940 Act (particularly the definitions of "assignment,"
"interested person" and "voting security"), shall be applied.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, and no
amendment, transfer, assignment, sale, hypothecation or pledge of this
Agreement shall be effective until approved by (a) the Trustees,
including a majority of the Trustees who are not interested persons of
the Adviser or (other than as Board Members) of the Fund, cast in
person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15. Severability. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be deemed invalid or
unenforceable in whole or in part.
<PAGE>
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The name
John Hancock V.A. Growth and Income Fund is a series designation of the
Trustees under the Trust's Declaration of Trust, dated November 15,
1995, as amended from time to time. The Declaration of Trust has been
filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Fund are not personally binding upon, nor shall
resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the
Fund's property shall be bound. The Fund shall not be liable for the
obligations of any other series of the Trust and no other series shall
be liable for the Fund's obligations hereunder.
Yours very truly,
JOHN HANCOCK DECLARATION TRUST
On behalf of John Hancock V.A. Growth and Income Fund
By: /s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President
The foregoing contract is hereby agreed to as of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/ John A, Morin
-----------------
John A. Morin
Vice President and Secretary
JOHN HANCOCK V.A. HIGH YIELD BOND FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, Massachusetts
January 2, 1998
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Investment Management Contract
------------------------------
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") of which John Hancock V.A.
High Yield Bond Fund (the "Fund") is a series, has been organized as a business
trust under the laws of the Commonwealth of Massachusetts to engage in the
business of an investment company. The Trust's shares of beneficial interest are
currently divided into fourteen series (including the Fund), each series
representing the entire undivided interest in a separate portfolio of assets.
Series may be established or terminated from time to time by action of the Board
of Trustees of the Trust. This Agreement relates solely to the Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the Fund, and to provide certain other services, as more fully
set forth below, and the Adviser is willing to provide such advice, management
and services under the terms and conditions hereinafter set forth.
Accordingly, the Adviser and the Trust, on behalf of the Fund, agree as
follows:
1. Delivery of Documents. The Trust has furnished the Adviser
with copies, properly certified or otherwise authenticated, of
each of the following:
(a) Declaration of Trust of the Trust, dated November 15, 1995,
(the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees selecting the Adviser as the
investment adviser for the Fund and approving the form of this
Agreement and the resolution of the Fund's sole shareholder
approving this Agreement.
<PAGE>
(d) Commitments, limitations and undertakings made by the Fund to
state securities or "blue sky" authorities for the purpose of
qualifying shares of the Fund for sale in such states; and
(e) The Trust's Code of Ethics.
The Trust will furnish the Adviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
2. Investment and Management Services. The Adviser will use its best
efforts to provide to the Fund continuing and suitable investment
programs with respect to investments, consistent with the investment
objectives, policies and restrictions of the Fund. In the performance
of the Adviser's duties hereunder, subject always (x) to the provisions
contained in the documents delivered to the Adviser pursuant to Section
1, as each of the same may from time to time be amended or
supplemented, and (y) to the limitations set forth in the Fund's
then-current Prospectus and Statement of Additional Information
included in the registration statement of the Trust as in effect from
time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the
Adviser will, at its own expense:
(a) furnish the Fund with advice and recommendations, consistent
with the investment objectives, policies and restrictions of
the Fund, with respect to the purchase, holding and
disposition of portfolio securities including the purchase and
sale of options, alone or in consultation with any sub-adviser
or sub-advisers appointed pursuant to this Agreement and
subject to the provisions of any sub-investment management
contract respecting the responsibilities of such sub-adviser
or sub-advisers;
(b) advise the Fund in connection with policy decisions to be made
by the Trustees or any committee thereof with respect to the
Fund's investments and, as requested, furnish the Fund with
research, economic and statistical data in connection with the
Fund's investments and investment policies;
(c) provide administration of the day-to-day investment operations
of the Fund;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
(e) assist the Fund in any negotiations relating to the Fund's
investments with issuers, investment banking firms, securities
brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 8 of this Agreement,
place orders for the purchase, sale or exchange of portfolio
securities with brokers or dealers selected by the Adviser,
provided that in connection with the placing of such orders
and the selection of such brokers or dealers the Adviser shall
seek to obtain execution and pricing within the policy
guidelines determined by the Trustees and set forth in the
Prospectus and Statement of Additional Information of the Fund
as in effect from time to time;
(g) provide office space and equipment and supplies, the use of
accounting equipment when required, and necessary executive,
clerical and secretarial personnel for the administration of
the affairs of the Fund;
(h) from time to time or at any time requested by the Trustees,
make reports to the Fund of the Adviser's performance of the
foregoing services and furnish advice and recommendations with
respect to other aspects of the business and affairs of the
Fund;
<PAGE>
(i) maintain all books and records with respect to the Fund's
securities transactions required by the 1940 Act, including
sub-paragraphs (b)(5), (6), (9) and (10) and paragraph (f) of
Rule 31a-1 thereunder (other than those records being
maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by
Rule 31a-2 of the 1940 Act (the Adviser agrees that such
records are the property of the Fund and will be surrendered
to the Fund promptly upon request therefor);
(j) obtain and evaluate such information relating to economies,
industries, businesses, securities markets and securities as
the Adviser may deem necessary or useful in the discharge of
the Adviser's duties hereunder;
(k) oversee and use the Adviser's best efforts to assure the
performance of the activities and services of the custodian,
transfer agent or other similar agents retained by the Fund;
and
(l) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment
of cash for the account of the Fund.
3. Sub-advisers. The Adviser may engage one or more investment advisers
which are either registered as such or specifically exempt from
registration under the 1940 Act to act as sub-advisers to provide, with
respect to the Fund, certain services set forth in Section 2 of this
Agreement, all as shall be set forth in a written sub-advisory contract
to which the Trust and the Adviser shall be parties. The sub-advisory
contract shall be subject to approval by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Adviser,
the sub-adviser or of the Trust, cast in person at a meeting called for
the purpose of voting on such approval and by the vote of a majority of
the outstanding voting securities of the Fund and otherwise consistent
with the terms of the 1940 Act. Any fee, compensation or expense to be
paid to any sub-adviser shall be paid by the Adviser, and no obligation
to the sub-adviser shall be incurred on the Fund's or Trust's behalf,
except as agreed upon by the Trustees of the Trust and otherwise
consistent with the terms of the 1940 Act.
4. Expenses paid by the Adviser. The Adviser will pay:
(a) the compensation and expenses of all officers and employees of
the Fund;
(b) the expenses of office, rent, telephone and other utilities,
office furniture, equipment, supplies and other expenses of
the Fund;
(c) any other expenses incurred by the Adviser in connection with
the performance of its duties hereunder; and
(d) premiums for such insurance as may be agreed upon between the
Adviser and the Trustees.
5. Expenses of the Fund Not Paid by the Adviser. The Adviser will not
be required to pay any expenses which this Agreement does not expressly
make payable by it. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 4, the
Adviser will not be required to pay under this Agreement:
<PAGE>
(a) the expenses of organizing the Trust and the Fund (including
without limitation legal, accounting and auditing fees and
expenses incurred in connection with the matters referred to
in this clause (a)), of initially registering the shares of
the Trust under the Securities Act of 1933, as amended, and of
qualifying the shares for sale under state securities laws for
the initial offering and sale of shares;
(b) the compensation and expenses of Trustees who are not
interested persons (as used in this Agreement such term shall
have the meaning specified in the 1940 Act) of the Adviser,
and of independent advisers, independent contractors,
consultants, managers and other unaffiliated agents employed
by the Fund other than through the Adviser;
(c) legal (including an allocable portion of the cost of its
employees rendering legal services to the Fund), accounting
and auditing fees and expenses of the Fund;
(d) the fees and disbursements of custodians and depositories of
the Fund's assets, transfer agents, disbursing agents, plan
agents and registrars;
(e) taxes and governmental fees assessed against the Fund's
assets and payable by the Fund;
(f) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the
Fund;
(g) brokers' commissions and underwriting fees; and
(h) the expense of periodic calculations of the net asset value
of the shares of the Fund.
6. Compensation of the Adviser. For all services to be rendered,
facilities furnished and expenses paid or assumed by the Adviser as
herein provided, the Adviser shall be entitled to a fee, paid monthly
in arrears, equal to 0.60% of the average daily net assets of the Fund
for the preceding month.
The "average daily net assets" of the Fund shall be determined on the
basis set forth in the Fund's Prospectus or otherwise consistent with
the 1940 Act and the regulations promulgated thereunder. The Adviser
will receive a pro-rata portion of such monthly fee for any periods in
which the Adviser serves as investment adviser to the Fund for less
than a full month. On any day that the net asset value calculation is
suspended as specified in the Fund's Prospectus, the net asset value
for purposes of calculating the advisory fee shall be calculated as of
the date last determined.
In the event that normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any
limitation imposed by the law of a state where the Fund is registered
to sell shares of beneficial interest, the fee payable to the Adviser
will be reduced to the extent required by law, and the Adviser will
make any arrangements that the Adviser is required by law to make.
In addition, the Adviser may agree not to impose all or a portion of
its fee (in advance of the time its fee would otherwise accrue) and/or
undertake to make any other payments or arrangements necessary to limit
the fund's expenses to any level the Adviser may specify. Any fee
reduction or undertaking shall constitute a binding modification of
this agreement while it is in effect but may be discontinued or
modified prospectively by the adviser at any time.
<PAGE>
7. Other Activities of the Adviser and Its Affiliates. Nothing herein
contained shall prevent the Adviser or any affiliate or associate of
the Adviser from engaging in any other business or from acting as
investment adviser or investment manager for any other person or
entity, whether or not having investment policies or portfolios similar
to the Fund's; and it is specifically understood that officers,
directors and employees of the Adviser and those of its parent company,
John Hancock Mutual Life Insurance Company, or other affiliates may
continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, to
other investment advisory clients of the Adviser or of its affiliates
and to said affiliates themselves.
8. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Adviser nor any of its investment management subsidiaries, nor any of
the Adviser's or such investment management subsidiaries' directors,
officers or employees will act as principal or agent or receive any
commission except as may be permitted by the 1940 Act and rules and
regulations promulgated thereunder. If any occasions shall arise in
which the Adviser advises persons concerning the shares of the Fund,
the Adviser will act solely on its own behalf and not in any way on
behalf of the Fund.
Nothing herein contained shall limit or restrict the Adviser or any of
its officers, affiliates or employees from buying, selling or trading
in any securities for its or their own account or accounts. The Fund
acknowledges that the Adviser and its officers, affiliates, and
employees, and its other clients may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at
the same time being acquired or disposed of hereunder. The Adviser
shall have no obligation to acquire with respect to the Fund a position
in any investment which the Adviser, its officers, affiliates or
employees may acquire for its or their own accounts or for the account
of another client, if, in the sole discretion of the Adviser, it is not
feasible or desirable to acquire a position in such investment on
behalf of the Fund. Nothing herein contained shall prevent the Adviser
from purchasing or recommending the purchase of a particular security
for one or more funds or clients while other funds or clients may be
selling the same security.
9. No Partnership or Joint Venture. Neither the Trust, the Fund, nor
the Adviser are partners of or joint venturers with each other and
nothing herein shall be construed so as to make them such partners or
joint venturers or impose any liability as such on any of them.
10. Name of the Trust and Fund. The Trust and the Fund may use the name
"John Hancock" or any name or names derived from or similar to the
names "John Hancock Advisers, Inc." or "John Hancock Mutual Life
Insurance Company" only for so long as this Agreement (or similar
agreement with John Hancock Mutual Life Insurance Company or any of its
affiliates or subsidiaries) remains in effect. At such time as this
Agreement or such other agreement shall no longer be in effect, the
Fund will (to the extent that it lawfully can) cease to use such a name
or any other name indicating that the Fund is advised by or otherwise
connected with the Adviser. The Fund acknowledges that it has adopted
the name "John Hancock V.A. High Yield Bond Fund" through permission of
John Hancock Mutual Life Insurance Company, a Massachusetts insurance
company, and agrees that John Hancock Mutual Life Insurance Company
reserves to itself and any successor to its business the right to grant
the non-exclusive right to use the name "John Hancock" or any similar
name or names to any other corporation or entity, including but not
limited to any investment company of which John Hancock Mutual Life
Insurance Company or any subsidiary or affiliate thereof shall be the
investment adviser.
<PAGE>
11. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also employed by the Adviser, who may be or become an employee of and
paid by the Fund shall be deemed, when acting within the scope of his
employment by the Fund, to be acting in such employment solely for the
Fund and not as the Adviser's employee or agent.
12. Duration and Termination of this Agreement. This Agreement shall
remain in force until the second anniversary of the date upon which
this Agreement was executed by the parties hereto, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a majority of the Trustees who are
not interested persons of the Adviser or (other than as Board Members)
of the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and (b) either (i) the Trustees or (ii) a
majority of the outstanding voting securities of the Fund. This
Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the
Adviser. Termination of this Agreement shall not be deemed to terminate
or otherwise invalidate any provisions of any contract between the
Adviser and any other series of the Trust. This Agreement shall
automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 12, the definitions contained in Section
2(a) of the 1940 Act (particularly the definitions of "assignment,"
"interested person" and "voting security"), shall be applied.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, and no
amendment, transfer, assignment, sale, hypothecation or pledge of this
Agreement shall be effective until approved by (a) the Trustees,
including a majority of the Trustees who are not interested persons of
the Adviser or (other than as Board Members) of the Fund, cast in
person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15. Severability. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be deemed invalid or
unenforceable in whole or in part.
<PAGE>
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The name
John Hancock V.A. High Yield Bond Fund is a series designation of the
Trustees under the Trust's Declaration of Trust, dated November 15,
1995, as amended from time to time. The Declaration of Trust has been
filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Fund are not personally binding upon, nor shall
resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the
Fund's property shall be bound. The Fund shall not be liable for the
obligations of any other series of the Trust and no other series shall
be liable for the Fund's obligations hereunder.
Yours very truly,
JOHN HANCOCK DECLARATION TRUST
On behalf of John Hancock V.A. High Yield Bond Fund
By: /s/Anne C. Hodson
-----------------
Anne C. Hodsdon
President
The foregoing contract is hereby agreed to as of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/John A. Morin
----------------
John A. Morin
Vice President and Secretary
JOHN HANCOCK V.A. SPECIAL OPPORTUNITIES FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, Massachusetts
January 2, 1998
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Investment Management Contract
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") of which John Hancock V.A.
Special Opportunities Fund (the "Fund") is a series, has been organized as a
business trust under the laws of the Commonwealth of Massachusetts to engage in
the business of an investment company. The Trust's shares of beneficial interest
are currently divided into fourteen series (including the Fund), each series
representing the entire undivided interest in a separate portfolio of assets.
Series may be established or terminated from time to time by action of the Board
of Trustees of the Trust. This Agreement relates solely to the Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the Fund, and to provide certain other services, as more fully
set forth below, and the Adviser is willing to provide such advice, management
and services under the terms and conditions hereinafter set forth.
Accordingly, the Adviser and the Trust, on behalf of the Fund, agree as
follows:
1. Delivery of Documents. The Trust has furnished the Adviser
with copies, properly certified or otherwise authenticated, of
each of the following:
(a) Declaration of Trust of the Trust, dated November 15, 1995,
(the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees selecting the Adviser as the
investment adviser for the Fund and approving the form of this
Agreement and the resolution of the Fund's sole shareholder
approving this Agreement.
<PAGE>
(d) Commitments, limitations and undertakings made by the Fund to
state securities or "blue sky" authorities for the purpose of
qualifying shares of the Fund for sale in such states; and
(e) The Trust's Code of Ethics.
The Trust will furnish the Adviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
2. Investment and Management Services. The Adviser will use its best
efforts to provide to the Fund continuing and suitable investment
programs with respect to investments, consistent with the investment
objectives, policies and restrictions of the Fund. In the performance
of the Adviser's duties hereunder, subject always (x) to the provisions
contained in the documents delivered to the Adviser pursuant to Section
1, as each of the same may from time to time be amended or
supplemented, and (y) to the limitations set forth in the Fund's
then-current Prospectus and Statement of Additional Information
included in the registration statement of the Trust as in effect from
time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the
Adviser will, at its own expense:
(a) furnish the Fund with advice and recommendations, consistent
with the investment objectives, policies and restrictions of
the Fund, with respect to the purchase, holding and
disposition of portfolio securities including the purchase and
sale of options, alone or in consultation with any sub-adviser
or sub-advisers appointed pursuant to this Agreement and
subject to the provisions of any sub-investment management
contract respecting the responsibilities of such sub-adviser
or sub-advisers;
(b) advise the Fund in connection with policy decisions to be made
by the Trustees or any committee thereof with respect to the
Fund's investments and, as requested, furnish the Fund with
research, economic and statistical data in connection with the
Fund's investments and investment policies;
(c) provide administration of the day-to-day investment operations
of the Fund;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
(e) assist the Fund in any negotiations relating to the Fund's
investments with issuers, investment banking firms, securities
brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 8 of this Agreement,
place orders for the purchase, sale or exchange of portfolio
securities with brokers or dealers selected by the Adviser,
provided that in connection with the placing of such orders
and the selection of such brokers or dealers the Adviser shall
seek to obtain execution and pricing within the policy
guidelines determined by the Trustees and set forth in the
Prospectus and Statement of Additional Information of the Fund
as in effect from time to time;
(g) provide office space and equipment and supplies, the use of
accounting equipment when required, and necessary executive,
clerical and secretarial personnel for the administration of
the affairs of the Fund;
(h) from time to time or at any time requested by the Trustees,
make reports to the Fund of the Adviser's performance of the
foregoing services and furnish advice and recommendations with
respect to other aspects of the business and affairs of the
Fund;
<PAGE>
(i) maintain all books and records with respect to the Fund's
securities transactions required by the 1940 Act, including
sub-paragraphs (b)(5), (6), (9) and (10) and paragraph (f) of
Rule 31a-1 thereunder (other than those records being
maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by
Rule 31a-2 of the 1940 Act (the Adviser agrees that such
records are the property of the Fund and will be surrendered
to the Fund promptly upon request therefor);
(j) obtain and evaluate such information relating to economies,
industries, businesses, securities markets and securities as
the Adviser may deem necessary or useful in the discharge of
the Adviser's duties hereunder;
(k) oversee and use the Adviser's best efforts to assure the
performance of the activities and services of the custodian,
transfer agent or other similar agents retained by the Fund;
and
(l) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment
of cash for the account of the Fund.
3. Sub-advisers. The Adviser may engage one or more investment advisers
which are either registered as such or specifically exempt from
registration under the 1940 Act to act as sub-advisers to provide, with
respect to the Fund, certain services set forth in Section 2 of this
Agreement, all as shall be set forth in a written sub-advisory contract
to which the Trust and the Adviser shall be parties. The sub-advisory
contract shall be subject to approval by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Adviser,
the sub-adviser or of the Trust, cast in person at a meeting called for
the purpose of voting on such approval and by the vote of a majority of
the outstanding voting securities of the Fund and otherwise consistent
with the terms of the 1940 Act. Any fee, compensation or expense to be
paid to any sub-adviser shall be paid by the Adviser, and no obligation
to the sub-adviser shall be incurred on the Fund's or Trust's behalf,
except as agreed upon by the Trustees of the Trust and otherwise
consistent with the terms of the 1940 Act.
4. Expenses paid by the Adviser. The Adviser will pay:
(a) the compensation and expenses of all officers and employees of
the Fund;
(b) the expenses of office, rent, telephone and other utilities,
office furniture, equipment, supplies and other expenses of
the Fund;
(c) any other expenses incurred by the Adviser in connection with
the performance of its duties hereunder; and
(d) premiums for such insurance as may be agreed upon between
the Adviser and the Trustees.
5. Expenses of the Fund Not Paid by the Adviser. The Adviser will not
be required to pay any expenses which this Agreement does not expressly
make payable by it. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 4, the
Adviser will not be required to pay under this Agreement:
<PAGE>
(a) the expenses of organizing the Trust and the Fund (including
without limitation legal, accounting and auditing fees and
expenses incurred in connection with the matters referred to
in this clause (a)), of initially registering the shares of
the Trust under the Securities Act of 1933, as amended, and of
qualifying the shares for sale under state securities laws for
the initial offering and sale of shares;
(b) the compensation and expenses of Trustees who are not
interested persons (as used in this Agreement such term shall
have the meaning specified in the 1940 Act) of the Adviser,
and of independent advisers, independent contractors,
consultants, managers and other unaffiliated agents employed
by the Fund other than through the Adviser;
(c) legal (including an allocable portion of the cost of its
employees rendering legal services to the Fund), accounting
and auditing fees and expenses of the Fund;
(d) the fees and disbursements of custodians and depositories of
the Fund's assets, transfer agents, disbursing agents, plan
agents and registrars;
(e) taxes and governmental fees assessed against the Fund's assets
and payable by the Fund;
(f) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the
Fund;
(g) brokers' commissions and underwriting fees; and
(h) the expense of periodic calculations of the net asset value of
the shares of the Fund.
6. Compensation of the Adviser. For all services to be rendered,
facilities furnished and expenses paid or assumed by the Adviser as
herein provided, the Adviser shall be entitled to a fee, paid monthly
in arrears, equal to 0.75% of the average daily net assets of the Fund
for the preceding month.
The "average daily net assets" of the Fund shall be determined on the
basis set forth in the Fund's Prospectus or otherwise consistent with
the 1940 Act and the regulations promulgated thereunder. The Adviser
will receive a pro-rata portion of such monthly fee for any periods in
which the Adviser serves as investment adviser to the Fund for less
than a full month. On any day that the net asset value calculation is
suspended as specified in the Fund's Prospectus, the net asset value
for purposes of calculating the advisory fee shall be calculated as of
the date last determined.
In the event that normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any
limitation imposed by the law of a state where the Fund is registered
to sell shares of beneficial interest, the fee payable to the Adviser
will be reduced to the extent required by law, and the Adviser will
make any arrangements that the Adviser is required by law to make.
In addition, the Adviser may agree not to impose all or a portion of
its fee (in advance of the time its fee would otherwise accrue) and/or
undertake to make any other payments or arrangements necessary to limit
the fund's expenses to any level the Adviser may specify. Any fee
reduction or undertaking shall constitute a binding modification of
this agreement while it is in effect but may be discontinued or
modified prospectively by the adviser at any time.
<PAGE>
7. Other Activities of the Adviser and Its Affiliates. Nothing herein
contained shall prevent the Adviser or any affiliate or associate of
the Adviser from engaging in any other business or from acting as
investment adviser or investment manager for any other person or
entity, whether or not having investment policies or portfolios similar
to the Fund's; and it is specifically understood that officers,
directors and employees of the Adviser and those of its parent company,
John Hancock Mutual Life Insurance Company, or other affiliates may
continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, to
other investment advisory clients of the Adviser or of its affiliates
and to said affiliates themselves.
8. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Adviser nor any of its investment management subsidiaries, nor any of
the Adviser's or such investment management subsidiaries' directors,
officers or employees will act as principal or agent or receive any
commission except as may be permitted by the 1940 Act and rules and
regulations promulgated thereunder. If any occasions shall arise in
which the Adviser advises persons concerning the shares of the Fund,
the Adviser will act solely on its own behalf and not in any way on
behalf of the Fund.
Nothing herein contained shall limit or restrict the Adviser or any of
its officers, affiliates or employees from buying, selling or trading
in any securities for its or their own account or accounts. The Fund
acknowledges that the Adviser and its officers, affiliates, and
employees, and its other clients may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at
the same time being acquired or disposed of hereunder. The Adviser
shall have no obligation to acquire with respect to the Fund a position
in any investment which the Adviser, its officers, affiliates or
employees may acquire for its or their own accounts or for the account
of another client, if, in the sole discretion of the Adviser, it is not
feasible or desirable to acquire a position in such investment on
behalf of the Fund. Nothing herein contained shall prevent the Adviser
from purchasing or recommending the purchase of a particular security
for one or more funds or clients while other funds or clients may be
selling the same security.
9. No Partnership or Joint Venture. Neither the Trust, the Fund, nor
the Adviser are partners of or joint venturers with each other and
nothing herein shall be construed so as to make them such partners or
joint venturers or impose any liability as such on any of them.
10. Name of the Trust and Fund. The Trust and the Fund may use the name
"John Hancock" or any name or names derived from or similar to the
names "John Hancock Advisers, Inc." or "John Hancock Mutual Life
Insurance Company" only for so long as this Agreement (or similar
agreement with John Hancock Mutual Life Insurance Company or any of its
affiliates or subsidiaries) remains in effect. At such time as this
Agreement or such other agreement shall no longer be in effect, the
Fund will (to the extent that it lawfully can) cease to use such a name
or any other name indicating that the Fund is advised by or otherwise
connected with the Adviser. The Fund acknowledges that it has adopted
the name "John Hancock V.A. Special Opportunities Fund" through
permission of John Hancock Mutual Life Insurance Company, a
Massachusetts insurance company, and agrees that John Hancock Mutual
Life Insurance Company reserves to itself and any successor to its
business the right to grant the non-exclusive right to use the name
"John Hancock" or any similar name or names to any other corporation or
entity, including but not limited to any investment company of which
John Hancock Mutual Life Insurance Company or any subsidiary or
affiliate thereof shall be the investment adviser.
<PAGE>
11. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also employed by the Adviser, who may be or become an employee of and
paid by the Fund shall be deemed, when acting within the scope of his
employment by the Fund, to be acting in such employment solely for the
Fund and not as the Adviser's employee or agent.
12. Duration and Termination of this Agreement. This Agreement shall
remain in force until the second anniversary of the date upon which
this Agreement was executed by the parties hereto, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a majority of the Trustees who are
not interested persons of the Adviser or (other than as Board Members)
of the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and (b) either (i) the Trustees or (ii) a
majority of the outstanding voting securities of the Fund. This
Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the
Adviser. Termination of this Agreement shall not be deemed to terminate
or otherwise invalidate any provisions of any contract between the
Adviser and any other series of the Trust. This Agreement shall
automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 12, the definitions contained in Section
2(a) of the 1940 Act (particularly the definitions of "assignment,"
"interested person" and "voting security"), shall be applied.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, and no
amendment, transfer, assignment, sale, hypothecation or pledge of this
Agreement shall be effective until approved by (a) the Trustees,
including a majority of the Trustees who are not interested persons of
the Adviser or (other than as Board Members) of the Fund, cast in
person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15. Severability. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be deemed invalid or
unenforceable in whole or in part.
<PAGE>
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The name
John Hancock V.A. Special Opportunities Fund is a series designation of
the Trustees under the Trust's Declaration of Trust, dated November 15,
1995, as amended from time to time. The Declaration of Trust has been
filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Fund are not personally binding upon, nor shall
resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the
Fund's property shall be bound. The Fund shall not be liable for the
obligations of any other series of the Trust and no other series shall
be liable for the Fund's obligations hereunder.
Yours very truly,
JOHN HANCOCK DECLARATION TRUST
On behalf of John Hancock V.A. Special Opportunities Fund
By: /s/ Anne C. Hodsdon
--- -------------------
Anne C. Hodsdon
President
The foregoing contract is hereby agreed to as of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/John A. Morin
----------------
John A. Morin
Vice President and Secretary
JOHN HANCOCK V.A. REGIONAL BANK FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, Massachusetts
May 1, 1998
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Investment Management Contract
------------------------------
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") of which John Hancock V.A.
Regional Bank Fund (the "Fund") is a series, has been organized as a business
trust under the laws of the Commonwealth of Massachusetts to engage in the
business of an investment company. The Trust's shares of beneficial interest are
currently divided into fifteen series (including the Fund), each series
representing the entire undivided interest in a separate portfolio of assets.
Series may be established or terminated from time to time by action of the Board
of Trustees of the Trust. This Agreement relates solely to the Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the Fund, and to provide certain other services, as more fully
set forth below, and the Adviser is willing to provide such advice, management
and services under the terms and conditions hereinafter set forth.
Accordingly, the Adviser and the Trust, on behalf of the Fund, agree as
follows:
1. Delivery of Documents. The Trust has furnished the Adviser
with copies, properly certified or otherwise authenticated,
of each of the following:
(a) Declaration of Trust of the Trust, dated November 15, 1995,
(the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees selecting the Adviser as the
investment adviser for the Fund and approving the form of this
Agreement and the resolution of the Fund's sole shareholder
approving this Agreement.
<PAGE>
(d) Commitments, limitations and undertakings made by the Fund to
state securities or "blue sky" authorities for the purpose of
qualifying shares of the Fund for sale in such states; and
(e) The Trust's Code of Ethics.
The Trust will furnish the Adviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
2. Investment and Management Services. The Adviser will use its best
efforts to provide to the Fund continuing and suitable investment
programs with respect to investments, consistent with the investment
objectives, policies and restrictions of the Fund. In the performance
of the Adviser's duties hereunder, subject always (x) to the provisions
contained in the documents delivered to the Adviser pursuant to Section
1, as each of the same may from time to time be amended or
supplemented, and (y) to the limitations set forth in the Fund's
then-current Prospectus and Statement of Additional Information
included in the registration statement of the Trust as in effect from
time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the
Adviser will, at its own expense:
(a) furnish the Fund with advice and recommendations, consistent
with the investment objectives, policies and restrictions of
the Fund, with respect to the purchase, holding and
disposition of portfolio securities including the purchase and
sale of options, alone or in consultation with any sub-adviser
or sub-advisers appointed pursuant to this Agreement and
subject to the provisions of any sub-investment management
contract respecting the responsibilities of such sub-adviser
or sub-advisers;
(b) advise the Fund in connection with policy decisions to be made
by the Trustees or any committee thereof with respect to the
Fund's investments and, as requested, furnish the Fund with
research, economic and statistical data in connection with the
Fund's investments and investment policies;
(c) provide administration of the day-to-day investment operations
of the Fund;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
(e) assist the Fund in any negotiations relating to the Fund's
investments with issuers, investment banking firms, securities
brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 8 of this Agreement,
place orders for the purchase, sale or exchange of portfolio
securities with brokers or dealers selected by the Adviser,
provided that in connection with the placing of such orders
and the selection of such brokers or dealers the Adviser shall
seek to obtain execution and pricing within the policy
guidelines determined by the Trustees and set forth in the
Prospectus and Statement of Additional Information of the Fund
as in effect from time to time;
(g) provide office space and equipment and supplies, the use of
accounting equipment when required, and necessary executive,
clerical and secretarial personnel for the administration of
the affairs of the Fund;
(h) from time to time or at any time requested by the Trustees,
make reports to the Fund of the Adviser's performance of the
foregoing services and furnish advice and recommendations with
respect to other aspects of the business and affairs of the
Fund;
<PAGE>
(i) maintain all books and records with respect to the Fund's
securities transactions required by the 1940 Act, including
sub-paragraphs (b)(5), (6), (9) and (10) and paragraph (f) of
Rule 31a-1 thereunder (other than those records being
maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by
Rule 31a-2 of the 1940 Act (the Adviser agrees that such
records are the property of the Fund and will be surrendered
to the Fund promptly upon request therefor);
(j) obtain and evaluate such information relating to economies,
industries, businesses, securities markets and securities as
the Adviser may deem necessary or useful in the discharge of
the Adviser's duties hereunder;
(k) oversee and use the Adviser's best efforts to assure the
performance of the activities and services of the custodian,
transfer agent or other similar agents retained by the Fund;
and
(l) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment
of cash for the account of the Fund.
3. Sub-advisers. The Adviser may engage one or more investment advisers
which are either registered as such or specifically exempt from
registration under the 1940 Act to act as sub-advisers to provide, with
respect to the Fund, certain services set forth in Section 2 of this
Agreement, all as shall be set forth in a written sub-advisory contract
to which the Trust and the Adviser shall be parties. The sub-advisory
contract shall be subject to approval by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Adviser,
the sub-adviser or of the Trust, cast in person at a meeting called for
the purpose of voting on such approval and by the vote of a majority of
the outstanding voting securities of the Fund and otherwise consistent
with the terms of the 1940 Act. Any fee, compensation or expense to be
paid to any sub-adviser shall be paid by the Adviser, and no obligation
to the sub-adviser shall be incurred on the Fund's or Trust's behalf,
except as agreed upon by the Trustees of the Trust and otherwise
consistent with the terms of the 1940 Act.
4. Expenses paid by the Adviser. The Adviser will pay:
(a) the compensation and expenses of all officers and employees of
the Fund;
(b) the expenses of office, rent, telephone and other utilities,
office furniture, equipment, supplies and other expenses of
the Fund;
(c) any other expenses incurred by the Adviser in connection with
the performance of its duties hereunder; and
(d) premiums for such insurance as may be agreed upon between
the Adviser and the Trustees.
5. Expenses of the Fund Not Paid by the Adviser. The Adviser will not
be required to pay any expenses which this Agreement does not expressly
make payable by it. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 4, the
Adviser will not be required to pay under this Agreement:
<PAGE>
(a) the expenses of organizing the Trust and the Fund (including
without limitation legal, accounting and auditing fees and
expenses incurred in connection with the matters referred to
in this clause (a)), of initially registering the shares of
the Trust under the Securities Act of 1933, as amended, and of
qualifying the shares for sale under state securities laws for
the initial offering and sale of shares;
(b) the compensation and expenses of Trustees who are not
interested persons (as used in this Agreement such term shall
have the meaning specified in the 1940 Act) of the Adviser,
and of independent advisers, independent contractors,
consultants, managers and other unaffiliated agents employed
by the Fund other than through the Adviser;
(c) legal (including an allocable portion of the cost of its
employees rendering legal services to the Fund), accounting
and auditing fees and expenses of the Fund;
(d) the fees and disbursements of custodians and depositories of
the Fund's assets, transfer agents, disbursing agents, plan
agents and registrars;
(e) taxes and governmental fees assessed against the Fund's
assets and payable by the Fund;
(f) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the
Fund;
(g) brokers' commissions and underwriting fees; and
(h) the expense of periodic calculations of the net asset value
of the shares of the Fund.
6. Compensation of the Adviser. For all services to be rendered,
facilities furnished and expenses paid or assumed by the Adviser as
herein provided, the Adviser shall be entitled to a fee, paid monthly
in arrears, equal to 0.80% of the average daily net assets of the Fund
for the preceding month.
The "average daily net assets" of the Fund shall be determined on the
basis set forth in the Fund's Prospectus or otherwise consistent with
the 1940 Act and the regulations promulgated thereunder. The Adviser
will receive a pro-rata portion of such monthly fee for any periods in
which the Adviser serves as investment adviser to the Fund for less
than a full month. On any day that the net asset value calculation is
suspended as specified in the Fund's Prospectus, the net asset value
for purposes of calculating the advisory fee shall be calculated as of
the date last determined.
In the event that normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any
limitation imposed by the law of a state where the Fund is registered
to sell shares of beneficial interest, the fee payable to the Adviser
will be reduced to the extent required by law, and the Adviser will
make any arrangements that the Adviser is required by law to make.
In addition, the Adviser may agree not to impose all or a portion of
its fee (in advance of the time its fee would otherwise accrue) and/or
undertake to make any other payments or arrangements necessary to limit
the fund's expenses to any level the Adviser may specify. Any fee
reduction or undertaking shall constitute a binding modification of
this agreement while it is in effect but may be discontinued or
modified prospectively by the adviser at any time.
<PAGE>
7. Other Activities of the Adviser and Its Affiliates. Nothing herein
contained shall prevent the Adviser or any affiliate or associate of
the Adviser from engaging in any other business or from acting as
investment adviser or investment manager for any other person or
entity, whether or not having investment policies or portfolios similar
to the Fund's; and it is specifically understood that officers,
directors and employees of the Adviser and those of its parent company,
John Hancock Mutual Life Insurance Company, or other affiliates may
continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, to
other investment advisory clients of the Adviser or of its affiliates
and to said affiliates themselves.
8. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Adviser nor any of its investment management subsidiaries, nor any of
the Adviser's or such investment management subsidiaries' directors,
officers or employees will act as principal or agent or receive any
commission except as may be permitted by the 1940 Act and rules and
regulations promulgated thereunder. If any occasions shall arise in
which the Adviser advises persons concerning the shares of the Fund,
the Adviser will act solely on its own behalf and not in any way on
behalf of the Fund.
Nothing herein contained shall limit or restrict the Adviser or any of
its officers, affiliates or employees from buying, selling or trading
in any securities for its or their own account or accounts. The Fund
acknowledges that the Adviser and its officers, affiliates, and
employees, and its other clients may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at
the same time being acquired or disposed of hereunder. The Adviser
shall have no obligation to acquire with respect to the Fund a position
in any investment which the Adviser, its officers, affiliates or
employees may acquire for its or their own accounts or for the account
of another client, if, in the sole discretion of the Adviser, it is not
feasible or desirable to acquire a position in such investment on
behalf of the Fund. Nothing herein contained shall prevent the Adviser
from purchasing or recommending the purchase of a particular security
for one or more funds or clients while other funds or clients may be
selling the same security.
9. No Partnership or Joint Venture. Neither the Trust, the Fund, nor
the Adviser are partners of or joint venturers with each other and
nothing herein shall be construed so as to make them such partners or
joint venturers or impose any liability as such on any of them.
10. Name of the Trust and Fund. The Trust and the Fund may use the name
"John Hancock" or any name or names derived from or similar to the
names "John Hancock Advisers, Inc." or "John Hancock Mutual Life
Insurance Company" only for so long as this Agreement (or similar
agreement with John Hancock Mutual Life Insurance Company or any of its
affiliates or subsidiaries) remains in effect. At such time as this
Agreement or such other agreement shall no longer be in effect, the
Fund will (to the extent that it lawfully can) cease to use such a name
or any other name indicating that the Fund is advised by or otherwise
connected with the Adviser. The Fund acknowledges that it has adopted
the name "John Hancock V.A. Regional Bank Fund" through permission of
John Hancock Mutual Life Insurance Company, a Massachusetts insurance
company, and agrees that John Hancock Mutual Life Insurance Company
reserves to itself and any successor to its business the right to grant
the non-exclusive right to use the name "John Hancock" or any similar
name or names to any other corporation or entity, including but not
limited to any investment company of which John Hancock Mutual Life
Insurance Company or any subsidiary or affiliate thereof shall be the
investment adviser.
<PAGE>
11. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also employed by the Adviser, who may be or become an employee of and
paid by the Fund shall be deemed, when acting within the scope of his
employment by the Fund, to be acting in such employment solely for the
Fund and not as the Adviser's employee or agent.
12. Duration and Termination of this Agreement. This Agreement shall
remain in force until the second anniversary of the date upon which
this Agreement was executed by the parties hereto, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a majority of the Trustees who are
not interested persons of the Adviser or (other than as Board Members)
of the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and (b) either (i) the Trustees or (ii) a
majority of the outstanding voting securities of the Fund. This
Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the
Adviser. Termination of this Agreement shall not be deemed to terminate
or otherwise invalidate any provisions of any contract between the
Adviser and any other series of the Trust. This Agreement shall
automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 12, the definitions contained in Section
2(a) of the 1940 Act (particularly the definitions of "assignment,"
"interested person" and "voting security"), shall be applied.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, and no
amendment, transfer, assignment, sale, hypothecation or pledge of this
Agreement shall be effective until approved by (a) the Trustees,
including a majority of the Trustees who are not interested persons of
the Adviser or (other than as Board Members) of the Fund, cast in
person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15. Severability. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be deemed invalid or
unenforceable in whole or in part.
<PAGE>
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The name
John Hancock V.A. Regional Bank Fund is a series designation of the
Trustees under the Trust's Declaration of Trust, dated November 15,
1995, as amended from time to time. The Declaration of Trust has been
filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Fund are not personally binding upon, nor shall
resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the
Fund's property shall be bound. The Fund shall not be liable for the
obligations of any other series of the Trust and no other series shall
be liable for the Fund's obligations hereunder.
Yours very truly,
JOHN HANCOCK DECLARATION TRUST
On behalf of John Hancock V.A. Regional Bank Fund
By: /s/ Anne C. Hodsdon
-------------------
Anne C. Hodsdon
President
The foregoing contract is hereby agreed
to as of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/John A. Morin
----------------
John A. Morin
Vice President and Secretary
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, MA 02199
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
Pursuant to Section 13 of the Distribution Agreement dated as of July
22, 1996 between John Hancock Declaration Trust (the "Trust") and John Hancock
Funds, Inc., please be advised that the Trust has established a new series of
its shares, namely, John Hancock V.A. Financial Industries Fund (the "Fund"),
and please be further advised that the Trust desires to retain John Hancock
Funds, Inc. to serve as distributor and principal underwriter under the
Distribution Agreement for the Fund.
Please indicate your acceptance of this responsibility by signing this
letter as indicated below.
JOHN HANCOCK FUNDS, INC. JOHN HANCOCK DECLARATION TRUST
By: /s/ Edward J. Boudreau, Jr. By: /s/ Anne C. Hodsdon
-------------------------- -------------------
Chairman, President & CEO President
Dated: May 1, 1997
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, MA 02199
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
Pursuant to Section 13 of the Distribution Agreement dated as of July
22, 1996 between John Hancock Declaration Trust (the "Trust") and John Hancock
Funds, Inc., please be advised that the Trust has established three new series
of its shares, namely, John Hancock V.A. High Yield Bond Fund, John Hancock V.A.
Growth and Income Fund, and John Hancock V.A. Special Opportunities Fund (the
"Funds"), and please be further advised that the Trust desires to retain John
Hancock Funds, Inc. to serve as distributor and principal underwriter under the
Distribution Agreement for the Funds.
Please indicate your acceptance of this responsibility by signing this
letter as indicated below.
JOHN HANCOCK FUNDS, INC. JOHN HANCOCK DECLARATION TRUST
By: /s/ Edward J. Boudreau, Jr. By: /s/ Anne C. Hodsdon
------------------------------ -----------------------
Chairman, President & CEO President
Dated: January 2, 1998
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, MA 02199
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
Pursuant to Section 13 of the Distribution Agreement dated as of July
22, 1996 between John Hancock Declaration Trust (the "Trust") and John Hancock
Funds, Inc., please be advised that the Trust has established a new series of
its shares, namely, John Hancock V.A. Regional Bank Fund (the "Fund"), and
please be further advised that the Trust desires to retain John Hancock Funds,
Inc. to serve as distributor and principal underwriter under the Distribution
Agreement for the Funds.
Please indicate your acceptance of this responsibility by signing this
letter as indicated below.
JOHN HANCOCK FUNDS, INC. JOHN HANCOCK DECLARATION TRUST
By: /s/Edward J. Boudreau, Jr. By: /s/ Anne C. Hodsdon
- --- -------------------------- -----------------------
Chairman, President & CEO President
Dated: May 1, 1998
January 2, 1998
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
RE: JOHN HANCOCK DECLARATION Trust
- John Hancock V.A. High Yield Bond Fund
- John Hancock V.A. Growth and Income Fund
- John Hancock V.A. Special Opportunities Fund
Dear Sir/Madam:
John Hancock Declaration Trust (the "Trust"), a Massachusetts business
trust on behalf of John Hancock V.A. High Yield Bond Fund, John Hancock V.A.
Growth and Income Fund, and John Hancock V.A. Special Opportunities Fund (the
"Funds") hereby notifies Investors Bank & Trust Company (the "Bank") that it
desires to place and maintain the Funds' securities and cash in the custody of
the Bank pursuant to the Master Custodian Agreement between John Hancock Mutual
Funds and the Bank dated December 15, 1992, effective January 2, 1998.
If the Bank agrees to provide such services, please sign below and
return a signed copy of this letter to the undersigned.
INVESTORS BANK & TRUST COMPANY JOHN HANCOCK DECLARATION TRUST
On behalf of
John Hancock V.A. High Yield Bond Fund
John Hancock V.A. Growth and Income Fund
John Hancock V.A. Special Opportunities Fund
By: /s/ Robert D. Mancuso By: /s/ Anne C. Hodsdon
------------------------- -------------------
Name: Robert D. Mancuso Name: Anne C. Hodsdon
Title: Senior Vice President Title: President
Attest: /s/ J. M. Keenan Attest: /s/ Susan S. Newton
------------------------- -------------------
May 1, 1998
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
RE: JOHN HANCOCK DECLARATION Trust
- John Hancock V.A. Regional Bank Fund
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust"), a Massachusetts business
trust on behalf of John Hancock V.A. Regional Bank Fund (the "Fund") hereby
notifies Investors Bank & Trust Company (the "Bank") that it desires to place
and maintain the Fund's securities and cash in the custody of the Bank pursuant
to the Master Custodian Agreement between John Hancock Mutual Funds and the Bank
dated December 15, 1992, effective May 1, 1998.
If the Bank agrees to provide such services, please sign below and
return a signed copy of this letter to the undersigned.
INVESTORS BANK & TRUST COMPANY JOHN HANCOCK DECLARATION TRUST
On behalf of
John Hancock V.A. Regional Bank Fund
By: /s/ Robert D. Mancuso By: /s/Anne C. Hodsdon
--- --------------------- --- ------------------
Name: Robert D. Mancuso Name: Anne C. Hodsdon
Title: Senior Vice President Title: President
Attest: Attest: /s/ Theresa Apruzzese
--------------------------- -------------------------
AMENDED AND RESTATED MASTER TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN JOHN
HANCOCK FUNDS AND JOHN HANCOCK SIGNATURE SERVICES, INC.
- --------------------------------------------------------------------------------
Amended and Restated Master Transfer Agency and Service Agreement made as of the
1st day of June, 1998 by and between each investment company advised by John
Hancock Advisers, Inc., having its principal office and place of business at 101
Huntington Avenue, Boston, Massachusetts, 02199, and John Hancock Signature
Services, Inc., a Delaware corporation having its principal office and place of
business at 101 Huntington Avenue, Boston, Massachusetts 02199 ("JHSS").
WITNESSETH:
WHEREAS, each investment company desires to appoint JHSS as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities;
and
WHEREAS, JHSS desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Definitions
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
(a)"Fund" shall mean the investment company which has adopted this
agreement and is listed on Appendix A hereto. If the Fund is a
Massachusetts business trust or Maryland corporation, it may in the
future establish and designate other separate and distinct series of
shares, each of which may be called a "series" or a "portfolio"; in
such case, the term "Fund" shall also refer to each such separate
series or portfolio.
(b)"Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
Article 2 Terms of Appointment; Duties of JHSS
2.01 Subject to the terms and conditions set forth in this Agreement, the Fund
hereby employs and appoints JHSS to act, and JHSS agrees to act, as transfer
agent and dividend dispersing agent with respect to the authorized and issued
shares of beneficial interest ("Shares") of the Fund subject to this Agreement
and to provide to the shareholders of the Fund ("Shareholders") such services in
connection therewith as may be set out in the prospectus of the Fund from time
to time.
2.02 JHSS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and JHSS, JHSS shall:
(i)Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
therefor to the Fund's Custodian authorized pursuant to the
1
<PAGE>
Fund's Declaration of Trust or Articles of Incorporation (the
"Custodian");
(ii)Pursuant to purchase orders, issue the appropriate number
of Shares and hold such Shares in the appropriate Shareholder
account;
(iii)Receive for acceptance, redemption requests and redemption
directions and deliver the appropriate documentation therefor to
the Custodian;
(iv)At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any redemption,
pay over or cause to be paid over in the appropriate manner
such monies as instructed by the redeeming Shareholders;
(v)Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi)Prepare and transmit payments for dividends and distributions
declared by the Fund, processing the reinvestment of
distributions on the Fund at the net asset value per share for
the Fund next computed after the payment (in accordance with the
Fund's then-current prospectus);
(vii)Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(viii)Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) of the rules and regulations of the
Securities Exchange Act of 1934 a record of the total number of
Shares of the Fund which are authorized, based upon data provided
to it by the Fund, and issued and outstanding. JHSS shall also
provide the Fund, on a regular basis, with the total number of
Shares which are authorized and issued and outstanding and shall
have no obligation, when recording the issuance of Shares, to
monitor the issuance of these Shares or to take cognizance of any
laws relating to the issue or sale of these Shares, which
functions shall be the sole responsibility of the Fund.
(b) In calculating the number of Shares to be issued on purchase or
reinvestment, or redeemed or repurchased, or the amount of the purchase
payment or redemption or repurchase payments owed, JHSS shall use the
net asset value per share (as described in the Fund's then-current
prospectus) computed by it or such other person as may be designated by
the Fund's Board. All issuances, redemptions or repurchases of the
Funds' shares shall be effected at net asset values per share next
computed after receipt of the orders therefore and said orders shall
become irrevocable at the time as of which said value is next computed.
(c) In addition to and not in lieu of the services set forth in the
above paragraph (a), JHSS shall: (i) perform all of the customary
services of a transfer agent and dividend disbursing agent including
but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating
proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing appropriate forms required with respect
to dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and statements
of account to Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder accounts, preparing
and mailing activity statements for Shareholders, and providing
2
<PAGE>
Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of the Fund's Shares sold
in each State.
(d) In addition, the Fund shall (i) identify to JHSS in writing those
transactions and assets to be treated as exempt from the blue sky
reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of JHSS for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and the reporting of these
transactions to the Fund as provided above.
(e) Additionally, JHSS shall:
(i) Utilize a system to identify all share transactions which
involve purchase and redemption orders that are processed at a
time other than the time of the computation of net asset value
per share next computed after receipt of such orders, and shall
compute the net effect upon the Fund of the transactions so
identified on a daily and cumulative basis.
(ii) If upon any day the cumulative net effect of such
transactions upon the Fund is negative and exceeds a dollar
amount equivalent to 1/2 of 1 cent per share, JHSS shall promptly
make a payment to the Fund in cash or through the use of a credit
in the manner described in paragraph (iv) below, in such amount
as may be necessary to reduce the negative cumulative net effect
to less than 1/2 of 1 cent per share.
(iii) If on the last business day of any month the cumulative net
effect upon the Fund of such transactions (adjusted by the amount
of all prior payments and credits by JHSS and the Fund) is
negative, the Fund shall be entitled to a reduction in the fee
next payable under the Agreement by an equivalent amount, except
as provided in paragraph (iv) below. If on the last business day
in any month the cumulative net effect upon the Fund of such
transactions (adjusted by the amount of all prior payments and
credits by JHSS and the Fund) is positive, JHSS shall be entitled
to recover certain past payments and reductions in fees, and to a
credit against all future payments and fee reductions that may be
required under the Agreement as herein described in paragraph
(iv) below.
(iv) At the end of each month, any positive cumulative net effect
upon a Fund of such transactions shall be deemed to be a credit
to JHSS which shall first be applied to permit JHSS to recover
any prior cash payments and fee reductions made by it to the Fund
under paragraphs (ii) and (iii) above during the calendar year,
by increasing the amount of the monthly fee under the Agreement
next payable in an amount equal to prior payments and fee
reductions made by JHSS during such calendar year, but not
exceeding the sum of that month's credit and credits arising in
prior months during such calendar year to the extent such prior
credits have not previously been utilized as contemplated by this
paragraph. Any portion of a credit to JHSS not so used by it
shall remain as a credit to be used as payment against the amount
of any future negative cumulative net effects that would
otherwise require a cash payment or fee reduction to be made to
the Fund pursuant to paragraphs (ii) or (iii) above (regardless
of whether or not the credit or any portion thereof arose in the
same calendar year as that in which the negative cumulative net
effects or any portion thereof arose).
3
<PAGE>
(v) JHSS shall supply to the Fund from time to time, as
mutually agreed upon, reports summarizing the transactions
identified pursuant to paragraph (i) above, and the daily and
cumulative net effects of such transactions, and shall advise
the Fund at the end of each month of the net cumulative effect
at such time. JHSS shall promptly advise the Fund if at any
time the cumulative net effects exceeds a dollar amount
equivalent to 1/2 of 1 cent per share.
(vi) In the event that this Agreement is terminated for
whatever cause, or this provision 2.02 (d) is terminated
pursuant to paragraph (vii) below, the Fund shall promptly pay
to JHSS an amount in cash equal to the amount by which the
cumulative net effect upon the Fund is positive or, if the
cumulative net effect upon the Fund is negative, JHSS shall
promptly pay to the Fund an amount in cash equal to the amount
of such cumulative net effect.
(vii) This provision 2.02 (e) of the Agreement may be
terminated by JHSS at any time without cause, effective as of
the close of business on the date written notice (which may be
by telex) is received by the Fund.
Procedures applicable to certain of these services may be established from time
to time by agreement between the Fund and JHSS.
Article 3 Fees and Expenses
3.01 For performance by JHSS pursuant to this Agreement, the Fund agrees to pay
JHSS a fee as set out in Appendix A attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 3.02 below may be changed from
time to time subject to mutual written agreement between the Fund and JHSS.
3.02 In addition to the fee paid under Section 3.01 above, the Fund agrees to
reimburse JHSS for out-of-pocket expenses or advances incurred by JHSS for the
items set out in the fee schedule attached hereto. In addition, any other
expenses incurred by JHSS at the request or with the consent of the Fund, will
be reimbursed by the Fund.
3.03 The Fund agrees to pay all fees and reimbursable expenses promptly
following the mailing of the respective billing notice. Postage for mailing of
proxies to all shareholder accounts shall be advanced to JHSS by the Funds at
least seven (7) days prior to the mailing date of such materials.
Article 4 Representations and Warranties of JHSS
JHSS represents and warrants to the Fund that:
4.01 It is a corporation duly organized and existing and in good standing under
the laws of the State of Delaware, and is duly qualified and in good standing as
a foreign corporation under the Laws of The Commonwealth of Massachusetts.
4.02 It has corporate power and authority to enter into and perform its
obligations under this Agreement.
4
<PAGE>
4.03 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.04 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 5 Representations and Warranties of the Fund
The Fund represents and warrants to JHSS that:
5.01 It is a business trust duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts or, in the case of John
Hancock Cash Reserve, Inc., a Maryland corporation duly organized and existing
and in good standing under the laws of the State of Maryland.
5.02 It has power and authority to enter into and perform this Agreement.
5.03 All proceedings required by the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
5.04 It is an open-end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
5.05 A registration statement under the Securities Act of 1933, as amended, with
respect to the shares of the Fund subject to this Agreement has become
effective, and appropriate state securities law filings have been made and will
continue to be made.
Article 6 Indemnification
6.01 JHSS shall not be responsible for, and the Fund shall indemnify and hold
JHSS harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or attributable
to:
(a) All actions of JHSS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken
in good faith and without negligence or willful misfeasance.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's bad faith, gross negligence
or willful misfeasance or which arise out of the reckless disregard of
any representation or warranty of the Fund hereunder.
(c) The reliance on or use by JHSS or its agents or subcontractors of
information, records and documents which (i) are received by JHSS or
its agents or subcontractors and furnished to it by or on behalf of the
Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by JHSS or its agents or
subcontractors of, any instructions or requests of the Fund.
5
<PAGE>
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or
regulations of any state that Fund Shares be registered in that state
or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of
Shares in that state.
(f) It is understood and agreed that the assets of the Fund may be used
to satisfy the indemnity under this Article 6 only to the extent that
the loss, damage, cost, charge, counsel fee, payment, expense and
liability arises out of or is attributable to services hereunder with
respect to the Shares of such Fund.
6.02 JHSS shall indemnify and hold harmless the Fund from and against any and
all losses, damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributed to any action or failure or omission to
act by JHSS as a result of JHSS's lack of good faith, negligence or willful
misfeasance.
6.03 At any time JHSS may apply to any officer of the Fund for instructions, and
may consult with legal counsel with respect to any matter arising in connection
with the services to be performed by JHSS under this Agreement, and JHSS and its
agents or subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such instructions or
upon the opinion of such counsel. JHSS, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided JHSS or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by the
Fund, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Fund. JHSS, its agents
and subcontractors shall also be protected and indemnified in recognizing share
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officer of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
6.04 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
6.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
6.06 In order that the indemnification provisions contained in this Article 6
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
6
<PAGE>
Article 7 Covenants of the Fund and JHSS
7.01 The Fund shall promptly furnish to JHSS the following:
(a) A certified copy of the resolution(s) of the Trustees of the Trust
or the Directors of the Corporation authorizing the appointment of JHSS
and the execution and delivery of this Agreement.
(b) A copy of the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws and all amendments thereto.
7.02 JHSS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of share certificates and
facsimile signature imprinting devices, if any; and for the preparation or use,
and for keeping account of, such certificates and devices.
7.03 JHSS shall keep records relating to the services to be performed hereunder,
in the form and manner as it may deem advisable. To the extent required by
Section 31 of the Investment Company Act of 1940 and the rules and regulations
of the Securities and Exchange Commission thereunder, JHSS agrees that all such
records prepared or maintained by JHSS relating to the services to be performed
by JHSS hereunder are the property of the Fund and will be preserved, maintained
and made available in accordance with such Act and rules, and will be
surrendered to the Fund promptly on and in accordance with the Fund's request.
7.04 JHSS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person without
the consent of the other party to this Agreement, except as may be required by
law.
7.05 JHSS agrees that, from time to time or at any time requested by the Fund,
JHSS will make reports to the Fund, as requested, of JHSS's performance of the
foregoing services.
7.06 JHSS will cooperate generally with the Fund to provide information
necessary for the preparation of registration statements and periodic reports to
be filed with the Securities and Exchange Commission, including registration
statements on Form N-1A, semi-annual reports on Form N-SAR, periodic statements,
shareholder communications and proxy materials furnished to holders of shares of
the Fund, filings with state "blue sky" authorities and with United States and
foreign agencies responsible for tax matters, and other reports and filings of
like nature.
7.07 In case of any requests or demands for the inspection of the Shareholder
records of the Fund, JHSS will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such inspection. JHSS
reserves the right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable for the failure
to exhibit the Shareholder records to such person.
7
<PAGE>
Article 8 No Partnership or Joint Venture
8.01 The Fund and JHSS are not currently partners of or joint venturers with
each other and nothing in this Agreement shall be construed so as to make them
partners or joint venturers or impose any liability as such on them.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon one hundred twenty
(120) days' written notice to the other party.
9.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses
associated with the movement of records and material will be borne by the Fund.
Additionally, JHSS reserves the right to charge for any other reasonable
expenses associated with such termination.
Article 10 Assignment
10.01 Except as provided in Section 10.03 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
10.03 JHSS may, without further consent on the part of the Fund, subcontract for
the performance hereof with (i) Boston Finanacial Data Services, Inc., a
Massachusetts corporation ("BE") which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section
17A(c)(1)") or any other entity registered as a transfer agent under Section
17A(c)(1) JHSS deems appropriate in order to comply with the terms and
conditions of this Agreement; provided, however, that JHSS shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
Article 11 Amendment
11.01 This Agreement may be amended or modified by a written agreement executed
by both parties and authorized or approved by a resolution of the Trustees of
the Trust or Directors of the Corporation.
Article 12 Massachusetts Law to Apply
12.01 This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the internal substantive laws of The Commonwealth
of Massachusetts.
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
8
<PAGE>
Article 14 Limitation on Liability
14.01 If the Fund is a Massachusetts business trust, JHSS expressly acknowledges
the provision in the Fund's Declaration of Trust limiting the personal liability
of the trustees and shareholders of the Fund; and JHSS agrees that it shall have
recourse only to the assets of the Fund for the payment of claims or obligations
as between JHSS and the Fund arising out of this Agreement, and JHSS shall not
seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. In any case, each Fund, and each series or portfolio
of each Fund, shall be liable only for its own obligations to JHSS under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf under their seals by and through their duly
authorized officers, as of the day and year first above written.
JOHN HANCOCK FUNDS Listed on Appendix A
By: /s/Anne C. Hodsdon
-------------------
Anne C. Hodsdon
President
JOHN HANCOCK SIGNATURE SERVICES, INC.
By: /s/Charles J. McKenney, Jr.
---------------------------
Charles J. McKenney, Jr.
Vice President
9
<PAGE>
EXHIBIT A
TRANSFER AGENT FEE SCHEDULE, EFFECTIVE JUNE 1, 1998
Effective June 1, 1998, the transfer agent fees payable monthly under
the transfer agent agreement between each fund and John Hancock Signature
Services, Inc. shall be the following rates plus certain out-of-pocket expenses
as described to the Board:
<TABLE>
<CAPTION>
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
-------------- -------------- ---------------
<S> <C> <C> <C>
$19.00 $21.50 $20.50
Equity Fund
- -----------
John Hancock Capital Series
- -JH Independence Equity Fund*
- -JH Special Value Fund*
John Hancock Special Equities Fund
John Hancock World Fund
- -JH Pacific Basin Fund
- -JH Global Rx Fund
- -JH European Equity Fund
John Hancock Investment Trust
- -JH Growth and Income Fund*
- -JH Sovereign Balanced Fund
- -JH Sovereign Investors Fund*
John Hancock Investment Trust II
- -JH Financial Industries Fund
- -JH Regional Bank Fund
John Hancock Investment Trust III
- -John Hancock Global Fund
- -John Hancock Growth Fund*
- -John Hancock International Fund*
- -John Hancock Special Opportunities Fund*
John Hancock Series Trust
- -JH Emerging Growth Fund*
- -JH Global Technology Fund
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Annual Rate Per Account
-----------------------
Class A Shares Class B Shares Class C Shares*
-------------- -------------- ---------------
<S> <C> <C> <C>
Money Market Funds $20.00 $22.50 $21.50
- ------------------
John Hancock Current Interest
- -JH Money Market Fund*
- -JH US Government Cash Reserve
(Class A Shares only)
John Hancock Cash Reserve, Inc.
(Class A Shares only)
Annual Rate Per Account
-----------------------
Class A Shares Class B Shares
-------------- --------------
<S> <C> <C>
Tax Free Funds $20.00 $22.50
- --------------
John Hancock Tax-Exempt Series Fund
- -JH Massachusetts Tax-Free Income Funds
- -JH New York Tax-Free Income Fund
John Hancock California Tax-Free Income Fund
John Hancock Tax-Free Bond Trust
- -JH High Yield Tax-Free Fund
- -JH Tax Free Bond Fund
Annual Rate Per Account
-----------------------
Class A Shares Class B Shares Class C Shares*
-------------- -------------- ---------------
<S> <C> <C> <C>
Income Funds $20.00 $22.50 $21.50
-----------
John Hancock Sovereign Bond Fund
John Hancock Strategic Series
- -JH Strategic Income Fund*
- -JH Sovereign US Government Income Fund
John Hancock Investment Trust III
- -JH Short-Term Strategic Income Fund
- -JH World Bond Fund John Hancock Bond Trust
- -JH Government Income Fund
- -JH HighYield Bond Fund*
- -JH Intermediate Maturity Government Fund
</TABLE>
<PAGE>
The following funds are at a % of daily net assets of the Fund.
Out-of-pocket expenses are paid by John Hancock Signature Services, Inc.
% of Daily Net Assets of the Class
Class Y Shares 0.10%
John Hancock Special Equities Fund
John Hancock Sovereign Investors Fund
% of Daily Net Assets of the Fund
John Hancock Institutional Series Trust 0.05%
- -JH Active Bond Fund
- -JH Dividend Performers Fund
- -JH Small Capitalization Value Fund
- -JH Global Bond Fund
- -JH Independence Balanced Fund
- -JH Independence Diversified Core Equity Fund II
- -JH Independence Growth Fund
- -JH Independence Medium Capitalization Fund
- -JH Independence Value Fund
- -JH International Equity Fund
- -JH Multi-Sector Growth Fund
- -JH Small Capitalization Growth Fund
These fees are agreed to by the undersigned as of June 1, 1998.
/s/Anne C. Hodsdon
-------------------
Anne C. Hodsdon
President of Each Fund
/s/Charles McKenney, Jr.
-----------------------
Charles McKenney, Jr.
Vice President of John Hancock
Signature Services, Inc.
