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. 10 [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 10 [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
(X) On May 1, 1999 pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
( ) on (date) 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>
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.
[Clip Art] Growth
V.A. Financial Industries Fund
V.A. 500 Index Fund
V.A. International Fund
V.A. Large Cap Growth Fund formerly V.A. Growth Fund
V.A. Mid Cap Growth Fund formerly V.A. Special Opportunities Fund
V.A. Regional Bank Fund
V.A. Small Cap Growth Fund formerly V.A. Emerging Growth Fund
[Clip Art] Growth & Income
V.A. Core Equity Fund formerly V.A. Independence Equity Fund
V.A. Large Cap Value Fund formerly V.A. Growth & Income Fund
V.A. Sovereign Investors Fund
[Clip Art] 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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<TABLE>
<S> <C> <C>
General information about Overview 4
the Declaration funds.
Your investment choices 5
A fund-by-fund summary [Clip Art] Growth
of goals, strategies, risks, V.A. Financial Industries Fund 6
performance and financial V.A. 500 Index Fund 8
highlights. V.A. International Fund 10
V.A. Large Cap Growth Fund 12
V.A. Mid Cap Growth Fund 14
V.A. Regional Bank Fund 16
V.A. Small Cap Growth Fund 18
[Clip Art] Growth & Income
V.A. Core Equity Fund 20
V.A. Large Cap Value Fund 22
V.A. Sovereign Investors Fund 24
[Clip Art] 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
</TABLE>
<PAGE>
Overview
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FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page six. Each description provides
the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Past perfomance The fund's total return, measured year-by-year and
over time.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Financial highlights A table showing the fund's financial performance
for up to five years.
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.
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.
[Clip Art] Growth Funds
o V.A. Financial Industries Fund
o V.A. 500 Index Fund
o V.A. International Fund
o V.A. Large Cap Growth Fund
o V.A. Mid Cap Growth Fund
o V.A. Regional Bank Fund
o V.A. Small Cap Growth Fund
These funds seek long-term growth by investing primarily in common stocks. They
may be appropriate if you are investing for long-term goals such as retirement
and are willing to accept higher short-term risk along with higher potential
long-term 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.
[Clip Art] Growth & Income Funds
o V.A. Core Equity Fund
o V.A. Large Cap Value Fund
o V.A. Sovereign Investors Fund
These funds invest for varying combinations of income and capital appreciation.
Because of their income potential, they may be appropriate if you are looking
for a more 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.
[Clip Art] Income Funds
o V.A. Bond Fund
o V.A. High Yield Bond Fund
o V.A. Money Market Fund
o V.A. Strategic Income Fund
These funds seek to provide current income without sacrificing total return, and
some also invest for stability of principal. They may be appropriate if you are
seeking a regular stream of income. They may not be appropriate if you are
investing for maximum return or need absolute stability of your principal.
5
<PAGE>
V.A. Financial Industries Fund
GOAL AND STRATEGY
[Clip Art] 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1997
Joined adviser in 1985
Began career in 1979
Thomas M. Finucane
- ---------------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began career in 1990
Thomas C. Goggins
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clip Art] The graph shows the fund's total return, 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. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). Past performance does not indicate future
results.
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Total return -- calendar year
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1998
8.55%
Best quarter: up 16.06%, fourth quarter 1998
Worst quarter: down 16.76%, third quarter 1998
Total return for the first three months of 1999: -2.01%
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Average annual total returns -- for periods ending 12/31/98
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Fund Index
1 year 8.55% 28.60%
Life of fund - began 4/30/97 25.76% 31.38%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
6
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<TABLE>
<CAPTION>
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Period ended: 12/97(1) 12/98
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<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.44
Net investment income (loss)(2) 0.11 0.18
Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.39 0.97
Total from investment operations 3.50 1.15
Less distributions:
Dividends from net investment income (0.05) (0.14)
Distributions from net realized gain on investments sold (0.01) (0.00)(3)
Total distributions (0.06) (0.14)
Net asset value, end of period $13.44 $14.45
Total investment return at net asset value(4) (%) 35.05(5) 8.55
Total adjusted investment return at net asset value(4,6) (%) 34.71(5) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465 54,569
Ratio of expenses to average net assets (%) 1.05(7) 0.92
Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) --
Ratio of net investment income (loss) to average net assets (%) 1.32(7) 1.25
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 0.98(7) --
Portfolio turnover rate (%) 11 38
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) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
7
<PAGE>
V.A. 500 Index Fund
GOAL AND STRATEGY
[Clip Art] 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 the index.
This fund is passively managed, meaning that the manager does not use any broad
economic 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 adviser
Joined team in 1997
Joined adviser in 1994
Began career in 1980
PAST PERFORMANCE
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
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Year-by-year total returns -- calendar years
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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: 5.12%
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Average annual total returns -- for periods ending 12/31/98
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Fund Index
1 year 28.44% 28.60%
Life of fund - began 8/29/96 30.24% 33.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
8
<PAGE>
Main Risks
[Clip Art] 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
[Clip Art] 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 Ernst & Young LLP.
<TABLE>
<CAPTION>
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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 $12.62
Net investment income (loss)(2) 0.17 0.30 0.20
Net realized and unrealized gain (loss) on investments 0.98 2.72 3.37
Total from investment operations 1.15 3.02 3.57
Less distributions:
Dividends from net investment income (0.16) (0.30) (0.20)
Distributions from net realized gain on investments sold (0.55) (0.54) (0.76)
Total distributions (0.71) (0.84) (0.96)
Net asset value, end of period $10.44 $12.62 $15.23
Total investment return at net asset value(3) (%) 11.49(4) 29.51 28.44
Total adjusted investment return at net asset value(3,5) (%) 11.25(4) 29.27 28.12
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,049 20,008 26,457
Ratio of expenses to average net assets (%) 0.60(6) 0.36 0.35
Ratio of adjusted expenses to average net assets(7) (%) 1.31(6) 0.60 0.67
Ratio of net investment income (loss) to average net assets (%) 4.57(6) 2.45 1.44
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.86(6) 2.21 1.12
Portfolio turnover rate (%) -- 9 47
Fee reduction per share(2) ($) 0.03 0.03 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 that 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. International Fund
GOAL AND STRATEGY
[Clip Art] 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 economic 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-U.S. Free 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
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London-based affiliate of adviser
Founded in 1986
PAST PERFORMANCE
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
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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: -0.74%
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Average annual total returns -- for periods ending 12/31/98
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Fund Index
1 year 16.75% 14.46%
Life of fund - began 8/29/96 12.20% 8.76%
Index: MSCI All Country World-Ex U.S. Free Index, an unmanaged index of freely
traded stocks of foreign companies.
10
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<TABLE>
<CAPTION>
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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 $10.50
Net investment income (loss)(2) 0.07 0.05 0.07
Net realized and unrealized gain (loss) on investments and foreign
currency transactions 1.20 (0.13) 1.69
Total from investment operations 1.27 (0.08) 1.76
Less distributions:
Dividends from net investment income (0.04) (0.01) (0.07)
Dividends in excess of net investment income -- -- (0.01)
Distributions from net realized gain on investments sold and foreign
currency transactions -- (0.64) --
Total distributions (0.04) (0.65) (0.08)
Net asset value, end of period $11.23 $10.50 $12.18
Total investment return at net asset value(3) (%) 12.75(4) (0.54) 16.75
Total adjusted investment return at net asset value(3,5) (%) 12.07(4) (1.43) 14.77
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,267 3,792 7,201
Ratio of expenses to average net assets (%) 1.15(6) 1.15 1.15
Ratio of adjusted expenses to average net assets(7) (%) 3.13(6) 2.04 3.13
Ratio of net investment income (loss) to average net assets (%) 2.03(6) 0.43 0.59
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.05(6) (0.46) (1.39)
Portfolio turnover rate (%) 14 273 89
Fee reduction per share(2) ($) 0.07 0.10 0.22
</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 that 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. Large Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] 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 identify 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 7.85%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 24.60% 28.60%
Life of fund - began 8/29/96 13.22% 33.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
12
<PAGE>
MAIN RISKS
[Clip Art] 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 does not 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.73
Net investment income (loss)(2) (0.01) (0.04) (0.00)(3)
Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64
Total from investment operations (0.61) 1.34 2.64
Net asset value, end of period $9.39 $10.73 $13.37
Total investment return at net asset value(4) (%) (6.10)(5) 14.27 24.60
Total adjusted investment return at net asset value(4,6) (%) (7.39)(5) 12.90 24.27
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733 10,372
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33
Ratio of net investment income (loss) to average net assets (%) (0.23)(7) (0.39) (0.00)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.99)(7) (1.76) (0.33)
Portfolio turnover rate (%) 68 136 176
Fee reduction per share(2) ($) 0.13 0.13 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) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
13
<PAGE>
V.A. Mid Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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: 1.18%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year - began 1/7/98 10.35% 28.60% 17.86%
Index 1: Standard & Poor's 500 Stock Index, an unmanaged index of 500 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.
14
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ---------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.01
Net realized and unrealized gain (loss) on investments 1.03
Total from investment operations 1.04
Less distributions:
Dividends from net investment income (0.01)
Tax return of capital (0.00)(3)
Total distributions (0.01)
Net asset value, end of period $11.03
Total investment return at net asset value(4) (%) 10.35(6)
Total adjusted investment return at net asset value(4,5) (%) 7.17(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,779
Ratio of expenses to average net assets (%) 1.00(7)
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7)
Ratio of net investment income (loss) to average net assets (%) 0.06(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.17)(7)
Portfolio turnover rate (%) 103
Fee reduction per share(2) ($) 0.33
</TABLE>
(1) Began operations on January 7, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the period shown.
(6) Not annualized.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
15
<PAGE>
V.A. Regional Bank Fund
GOAL AND STRATEGY
[Clip Art] 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1998
Joined adviser in 1985
Began career in 1979
Thomas M. Finucane
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1990
Began career in 1990
Thomas C. Goggins
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clip Art] 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.
16
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ----------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.09
Net realized and unrealized gain (loss) on investments (0.74)
Total from investment operations (0.65)
Less distributions:
Dividends from net investment income (0.07)
Distributions from net realized gain on investments sold (0.00)(3)
Total distributions (0.07)
Net asset value, end of period $9.28
Total investment return at net asset value(4) (%) (6.43)(6)
Total adjusted investment return at net asset value(4,5) (%) (6.49)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 20,256
Ratio of expenses to average net assets (%) 1.05(7)
Ratio of adjusted expenses to average net assets(8) (%) 1.14(7)
Ratio of net investment income (loss) to average net assets (%) 1.39(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 1.30(7)
Portfolio turnover rate (%) 28
Fee reduction per share(2) ($) 0.01
</TABLE>
(1) Began operations on May 1, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the period shown.
(6) Not annualized.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
17
<PAGE>
V.A. Small Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] 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 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 rapidly growing companies. 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
Bernice S. Behar, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1986
Laura J. 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
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with broad-based market
indices for reference). This information may help provide an indication of the
fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 2.58%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 15.94% -2.55% 1.23%
Life of fund - began 8/29/96 8.20% 12.03% 8.34%
Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S.
small-capitalization 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.
18
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.35
Net investment income (loss)(2) 0.02 (0.02) (0.06)
Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.68) 1.05 1.71
Total from investment operations (0.66) 1.03 1.65
Less distributions:
Dividends from net investment income (0.02) (0.00)(3) --
Net asset value, end of period $9.32 $10.35 $12.00
Total investment return at net asset value(4) (%) (6.62)(5) 11.06 15.94
Total adjusted investment return at net asset value(4,6) (%) (8.05)(5) 9.34 15.31
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841 8,232
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63
Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.57)(7) (1.88) (1.22)
Portfolio turnover rate (%) 31 79 93
Fee reduction per share(2) ($) 0.14 0.17 0.07
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
19
<PAGE>
V.A. Core Equity Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks above-average total return (capital appreciation plus
income). To pursue this goal, the fund invests in a diversified portfolio of
primarily large-capitalization stocks. The portfolio's risk profile is similar
to that of the S&P 500 Index.
The managers select from a menu of stocks of approximately 550 companies that
evolves over time. Approximately 70% to 80% of these companies also are 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 must sell any stocks that fall into the bottom 20% of
the menu.
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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 3.08%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 28.42% 28.60%
Life of fund - began 8/29/96 30.85% 33.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
20
<PAGE>
Main Risks
[Clip Art] 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 potentially
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 securities and derivatives could become
harder to value or to sell at a fair price.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $14.11
Net investment income (loss)(2) 0.06 0.16 0.10
Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90
Total from investment operations 1.18 3.39 4.00
Less distributions:
Dividends from net investment income (0.06) (0.14) (0.10)
Distributions from net realized gain on investments sold (0.01) (0.25) (0.27)
Total distributions (0.07) (0.39) (0.37)
Net asset value, end of period $11.11 $14.11 $17.74
Total investment return at net asset value(3) (%) 11.78(4) 30.68 28.42
Total adjusted investment return at net asset value(3,5) (%) 10.66(4) 30.04 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691
Ratio of expenses to average net assets (%) 0.95(6) 0.95 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 0.65
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.68)(6) 0.60 --
Portfolio turnover rate (%) 24 53 55
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 that 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. Large Cap Value Fund
GOAL AND STRATEGY
[Clip Art] 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 fund manages risk by typically holding between 50 and 150 large companies
that are diversified across industry sectors. The management team also uses
fundamental financial analysis to identify individual companies with substantial
cash flows, reliable revenue streams, superior competitive positions and strong
management.
The fund may attempt to take advantage of short-term market volatility by
investing in corporate restructurings or pending acquisitions.
In selecting bonds of any maturity, the managers 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
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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: -0.27%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year - began 1/6/98 21.39% 28.60%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
22
<PAGE>
MAIN RISKS
[Clip Art] 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 and longer
maturity will increase volatility. 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
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ---------------------------------------------------------------------------------------------------------
<S> <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 2.02
Total from investment operations 2.13
Less distributions:
Dividends from net investment income (0.10)
Net asset value, end of period $12.03
Total investment return at net asset value(3) (%) 21.39(4)
Total adjusted investment return at net asset value(3,5) (%) 21.21(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368
Ratio of expenses to average net assets (%) 0.85(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.03(6)
Ratio of net investment income (loss) to average net assets (%) 1.17(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.99(6)
Portfolio turnover rate (%) 242
Fee reduction per share(2) ($) 0.02
</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 that 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
[Clip Art] The fund seeks long-term growth of capital and 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 managers generally visit 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 of any maturity, 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 or 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- ---------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1971
Barry H. Evans, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began career in 1986
Peter M. Schofield, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1984
PAST PERFORMANCE
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: -1.98%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 16.88% 28.60%
Life of fund - began 8/29/96 23.08% 33.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
24
<PAGE>
MAIN RISKS
[Clip Art] 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-
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 and longer
maturity will increase volatility. 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 In a down market, higher-risk securites and derivatives could become
harder to value or to sell at a fair price.
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political upheavals.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $13.59
Net investment income (loss)(2) 0.07 0.22 0.27
Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00
Total from investment operations 0.83 3.04 2.27
Less distributions:
Dividends from net investment income (0.07) (0.18) (0.25)
Distributions from net realized gain on investments sold (0.02) (0.01) --
Total distributions (0.09) (0.19) (0.25)
Net asset value, end of period $10.74 $13.59 $15.61
Total investment return at net asset value(3) (%) 8.30(4) 28.43 16.88
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 28.12 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.74
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 1.88
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.03)(6) 1.50 --
Portfolio turnover rate (%) 17 11 19
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 that 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
[Clip Art] 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 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. There
is no limit on the fund's average maturity.
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 those of its peers. 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: -0.41%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 9.41% 8.29%
Life of fund - began 8/29/96 9.96% 9.23%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
26
<PAGE>
MAIN RISKS
[Clip Art] 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.
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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.36
Net investment income (loss)(2) 0.23 0.68 0.63
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32
Total from investment operations 0.44 0.92 0.95
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17)
Total distributions (0.25) (0.75) (0.80)
Net asset value, end of period $10.19 $10.36 $10.51
Total investment return at net asset value(3) (%) 4.42(4) 9.30 9.41
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52 8.82
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79 5.34
Portfolio turnover rate (%) 45 193 367
Fee reduction per share(2) ($) 0.12 0.18 0.06
</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 that 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
[Clip Art] 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. There is no
limit on the fund's average maturity.
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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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: 4.19%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year - began 1/6/98 -9.80% 1.87%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yield
bonds.
28
<PAGE>
MAIN RISKS
[Clip Art] 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.
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 do not 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- --------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.90
Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.82)
Total from investment operations (0.92)
Less distributions:
Dividends from net investment income (0.84)
Tax return of capital (0.02)
Total distributions (0.86)
Net asset value, end of period $8.22
Total investment return at net asset value(3) (%) (9.80)(4)
Total adjusted investment return at net asset value(3,5) (%) (10.10)(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,120
Ratio of expenses to average net assets (%) 0.85(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.15(6)
Ratio of net investment income (loss) to average net assets (%) 9.85(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 9.55(6)
Portfolio turnover rate (%) 102
Fee reduction per share(2) ($) 0.03
</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 that does not take into consideration
fee reductions by the adviser during the period shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
29
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clip Art] 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 companies
o U.S. and foreign banks
o U.S. and foreign governments
o U.S. agencies, states and municipalities
o International 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 management team searches aggressively for the
best values on securities that meet the fund's credit and maturity requirements.
The team 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
[Clip Art] 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. All figures assume dividend
reinvestment but do not include variable contract charges (see attached variable
product prospectus). Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
4.88% 4.87%
Best quarter: up 1.25%, first quarter 1998
Worst quarter: up 1.12%, fourth quarter 1998
Total return for the first three months of 1999: 1.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund
1 year 4.87%
Life of fund - began 8/29/96 4.76%
30
<PAGE>
MAIN RISKS
[Clip Art] 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 per share, it is possible to lose
money by investing in the fund.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $1.00
Net investment income (loss)(2) 0.02 0.05 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05) (0.05)
Net asset value, end of period $1.00 $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88 4.87
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377 16,519
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74
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 4.70
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 that 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
[Clip Art] 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
Although the fund invests in securities rated as low as CC/Ca and their unrated
equivalents, it generally intends to keep its average credit quality in the
investment-grade range. There is no limit on the fund's average maturity.
In managing the portfolio, the managers allocate assets among the three major
sectors based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends.
Within each sector, the managers look for securities that are appropriate for
the overall portfolio in terms of yield, credit quality, structure and industry
distribution. In selecting securities, relative yields and risk/reward ratios
are the primary considerations.
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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 2.48%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 4.92% 9.47%
Life of fund - began 8/29/96 9.94% 10.42%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
32
<PAGE>
MAIN RISKS
[Clip Art] 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.
A fall in worldwide demand for U.S. government securities could also 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.47
Net investment income (loss)(2) 0.27 0.91 0.85
Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.36 0.26 (0.35)
Total from investment operations 0.63 1.17 0.50
Less distributions:
Dividends from net investment income (0.27) (0.91) (0.85)
Distributions from net realized gain on investments sold (0.06) (0.09) (0.02)
Total distributions (0.33) (1.00) (0.87)
Net asset value, end of period $10.30 $10.47 $10.10
Total investment return at net asset value(3) (%) 6.45(4) 11.77 4.92
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25 4.84
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25 8.11
Portfolio turnover rate (%) 73 110 92
Fee reduction per share(2) ($) 0.05 0.05 0.01
</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 that 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 of trustees. 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. Financial Industries Fund 0.80%
V.A. 500 Index Fund 0.10%
V.A. International Fund 0.90%
V.A. Large Cap Growth Fund 0.75%
V.A. Mid Cap Growth Fund 0.75%
V.A. Regional Bank Fund 0.80%
V.A. Small Cap Growth Fund 0.75%
- --------------------------------------------------------------------------------
Growth & Income Funds
- --------------------------------------------------------------------------------
V.A. Core Equity Fund 0.70%
V.A. Large Cap Value Fund 0.60%
V.A. Sovereign Investors Fund 0.60%
- --------------------------------------------------------------------------------
Income Funds
- --------------------------------------------------------------------------------
V.A. Bond Fund 0.50%
V.A. High Yield Bond Fund 0.60%
V.A. Money Market Fund 0.50%
V.A. Strategic Income Fund 0.60%
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 may reduce its fee or make other arrangements to
limit each fund's expenses to a specified percentage of average daily net
assets. The adviser has agreed to limit temporarily each fund's expenses to
0.25% 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
----------------------
-----------------------------------
Subadviser
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.
------------------------------------
------------------------------------
Custodians
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, MA02205-9298
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
John Hancock(R) (C) 1999 John Hancock Funds, Inc.
VA00P 5/99
<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.
[Clip Art] Growth
V.A. Financial Industries Fund
V.A. Large Cap Growth Fund formerly V.A. Growth Fund
V.A. Mid Cap Growth Fund formerly V.A. Special Opportunities Fund
V.A. Small Cap Growth Fund formerly V.A. Emerging Growth Fund
[Clip Art] Growth & Income
V.A. Core Equity Fund formerly V.A. Independence Equity Fund
V.A. Large Cap Value Fund formerly V.A. Growth and Income Fund
V.A. Sovereign Investors Fund
[Clip Art] 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
- --------------------------------------------------------------------------------
General information about Overview 4
the Declaration funds.
Your investment choices 5
A fund-by-fund summary [Clip Art] Growth
of goals, strategies, V.A. Financial Industries Fund 6
risks, performance and V.A. Large Cap Growth Fund 8
financial highlights. V.A. Mid Cap Growth Fund 10
V.A. Small Cap Growth Fund 12
[Clip Art] Growth & Income
V.A. Core Equity Fund 14
V.A. Large Cap Value Fund 16
V.A. Sovereign Investors Fund 18
[Clip Art] 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 Buying and selling fund shares 28
affecting your fund Valuing fund shares 28
investment. Fund expenses 28
Dividends and taxes 28
Further information on Fund details
the Declaration funds. Business structure 29
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page six. Each description provides
the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Past perfomance The fund's total return, measured year-by-year and
over time.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Financial highlights A table showing the fund's financial
performance for up to five years.
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.
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.
[Clip Art] Growth Funds
o V.A. Financial Industries Fund
o V.A. Large Cap Growth Fund
o V.A. Mid Cap Growth Fund
o V.A. Small Cap Growth Fund
These funds seek long-term growth by investing primarily in common stocks. They
may be appropriate if you are investing for long-term goals such as retirement
and are willing to accept higher short-term risk along with higher potential
long-term 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.
[Clip Art] Growth & Income Funds
o V.A. Core Equity Fund
o V.A. Large Cap Value Fund
o V.A. Sovereign Investors Fund
These funds invest for varying combinations of income and capital appreciation.
Because of their income potential, they may be appropriate if you are looking
for a more 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.
[Clip Art] Income Funds
o V.A. Bond Fund
o V.A. High Yield Bond Fund
o V.A. Money Market Fund
o V.A. Strategic Income Fund
These funds seek to provide current income without sacrificing total return, and
some also invest for stability of principal. They may be appropriate if you are
seeking a regular stream of income. They may not be appropriate if you are
investing for maximum return or need absolute stability of your principal.
5
<PAGE>
V.A. Financial Industries Fund
GOAL AND STRATEGY
[Clip Art] 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- -----------------------------------
Executive vice president of adviser
Joined team in 1997
Joined adviser in 1985
Began career in 1979
Thomas M. Finucane
- -----------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began career in 1990
Thomas C. Goggins
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clip Art] The graph shows the fund's total return, 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. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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 16.76%, third quarter 1998
Total return for the first three months of 1999: -2.01%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 8.55% 28.60%
Life of fund - began 4/30/97 25.76% 31.38%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
6
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/97(1) 12/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.44
Net investment income (loss)(2) 0.11 0.18
Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.39 0.97
Total from investment operations 3.50 1.15
Less distributions:
Dividends from net investment income (0.05) (0.14)
Distributions from net realized gain on investments sold (0.01) (0.00)(3)
Total distributions (0.06) (0.14)
Net asset value, end of period $13.44 $14.45
Total investment return at net asset value(4) (%) 35.05(5) 8.55
Total adjusted investment return at net asset value(4,6) (%) 34.71(5) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465 54,569
Ratio of expenses to average net assets (%) 1.05(7) 0.92
Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) --
Ratio of net investment income (loss) to average net assets (%) 1.32(7) 1.25
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 0.98(7) --
Portfolio turnover rate (%) 11 38
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) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
7
<PAGE>
V.A. Large Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] 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 identify 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 7.85%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 24.60% 28.60%
Life of fund - began 8/29/96 13.22% 37.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
8
<PAGE>
MAIN RISKS
[Clip Art] 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 does not 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.73
Net investment income (loss)(2) (0.01) (0.04) (0.00)(3)
Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64
Total from investment operations (0.61) 1.34 2.64
Net asset value, end of period $9.39 $10.73 $13.37
Total investment return at net asset value(4) (%) (6.10)(5) 14.27 24.60
Total adjusted investment return at net asset value(4,6) (%) (7.39)(5) 12.90 24.27
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733 10,372
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33
Ratio of net investment income (loss) to average net assets (%) (0.23)(7) (0.39) (0.00)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.99)(7) (1.76) (0.33)
Portfolio turnover rate (%) 68 136 176
Fee reduction per share(2) ($) 0.13 0.13 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) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
9
<PAGE>
V.A. Mid Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with broad-based market indices for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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: 1.18%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year - began 1/7/98 10.35% 28.60% 17.86%
Index 1: Standard & Poor's 500 Stock Index, an unmanaged index of 500 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.
10
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.01
Net realized and unrealized gain (loss) on investments 1.03
Total from investment operations 1.04
Less distributions:
Dividends from net investment income (0.01)
Tax return of capital (0.00)(3)
Total distributions (0.01)
Net asset value, end of period $11.03
Total investment return at net asset value(4) (%) 10.35(6)
Total adjusted investment return at net asset value(4,5) (%) 7.17(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,779
Ratio of expenses to average net assets (%) 1.00(7)
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7)
Ratio of net investment income (loss) to average net assets (%) 0.06(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.17)(7)
Portfolio turnover rate (%) 103
Fee reduction per share(2) ($) 0.33
</TABLE>
(1) Began operations on January 7, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the period shown.
(6) Not annualized.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
11
<PAGE>
V.A. Small Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] 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 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 rapidly growing companies. 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
Bernice S. Behar, CFA
- -----------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1986
Laura J. 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
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with broad-based market
indices for reference). This information may help provide an indication of the
fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 2.58%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 15.94% -2.55% 1.23%
Life of fund - began 8/29/96 8.20% 12.03% 8.34%
Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S.
small-capitalization 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.
12
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.35
Net investment income (loss)(2) 0.02 (0.02) (0.06)
Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.68) 1.05 1.71
Total from investment operations (0.66) 1.03 1.65
Less distributions:
Dividends from net investment income (0.02) (0.00)(3) --
Net asset value, end of period $9.32 $10.35 $12.00
Total investment return at net asset value(4) (%) (6.62)(5) 11.06 15.94
Total adjusted investment return at net asset value(4,6) (%) (8.05)(5) 9.34 15.31
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841 8,232
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63
Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.57)(7) (1.88) (1.22)
Portfolio turnover rate (%) 31 79 93
Fee reduction per share(2) ($) 0.14 0.17 0.07
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
13
<PAGE>
V.A. Core Equity Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks above-average total return (capital appreciation plus
income). To pursue this goal, the fund invests in a diversified portfolio of
primarily large-capitalization stocks. The portfolio's risk profile is similar
to that of the S&P 500 Index.
The managers select from a menu of stocks of approximately 550 companies that
evolves over time. Approximately 70% to 80% of these companies also are 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 must sell any stocks that fall into the bottom 20% of
the menu.
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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 3.08%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 28.42% 28.60%
Life of fund - began 8/29/96 30.85% 33.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
14
<PAGE>
MAIN RISKS
[Clip Art] 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 potentially
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 securities and derivatives could become
harder to value or to sell at a fair price.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $14.11
Net investment income (loss)(2) 0.06 0.16 0.10
Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90
Total from investment operations 1.18 3.39 4.00
Less distributions:
Dividends from net investment income (0.06) (0.14) (0.10)
Distributions from net realized gain on investments sold (0.01) (0.25) (0.27)
Total distributions (0.07) (0.39) (0.37)
Net asset value, end of period $11.11 $14.11 $17.74
Total investment return at net asset value(3) (%) 11.78(4) 30.68 28.42
Total adjusted investment return at net asset value(3,5) (%) 10.66(4) 30.04 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691
Ratio of expenses to average net assets (%) 0.95(6) 0.95 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 0.65
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.68)(6) 0.60 --
Portfolio turnover rate (%) 24 53 55
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 that 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. Large Cap Value Fund
GOAL AND STRATEGY
[Clip Art] 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 fund manages risk by typically holding between 50 and 150 large companies
that are diversified across industry sectors. The management team also uses
fundamental financial analysis to identify individual companies with substantial
cash flows, reliable revenue streams, superior competitive positions and strong
management.
The fund may attempt to take advantage of short-term market volatility by
investing in corporate restructurings or pending acquisitions.
In selecting bonds of any maturity, the managers 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
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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: -0.27%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year - began 1/6/98 21.39% 28.60%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
16
<PAGE>
MAIN RISKS
[Clip Art] 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 and longer
maturity will increase volatility. 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
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <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 2.02
Total from investment operations 2.13
Less distributions:
Dividends from net investment income (0.10)
Net asset value, end of period $12.03
Total investment return at net asset value(3) (%) 21.39(4)
Total adjusted investment return at net asset value(3,5) (%) 21.21(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368
Ratio of expenses to average net assets (%) 0.85(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.03(6)
Ratio of net investment income (loss) to average net assets (%) 1.17(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.99(6)
Portfolio turnover rate (%) 242
Fee reduction per share(2) ($) 0.02
</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 that does not take into
consideration fee reductions by the adviser during the period shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
17
<PAGE>
V.A. Sovereign Investors Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital and 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 managers generally visit 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 of any maturity, 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 or 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- -----------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1971
Barry H. Evans, CFA
- -----------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began career in 1986
Peter M. Schofield, CFA
- -----------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1984
PAST PERFORMANCE
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: -1.98%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 16.88% 28.60%
Life of fund - began 8/29/96 23.08% 33.49%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
18
<PAGE>
MAIN RISKS
[Clip Art] 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-
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 and longer
maturity will increase volatility. 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 In a down market, higher-risk securities and derivatives could become
harder to value or to sell at a fair price.
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political upheavals.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $13.59
Net investment income (loss)(2) 0.07 0.22 0.27
Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00
Total from investment operations 0.83 3.04 2.27
Less distributions:
Dividends from net investment income (0.07) (0.18) (0.25)
Distributions from net realized gain on investments sold (0.02) (0.01) --
Total distributions (0.09) (0.19) (0.25)
Net asset value, end of period $10.74 $13.59 $15.61
Total investment return at net asset value(3) (%) 8.30(4) 28.43 16.88
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 28.12 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.74
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 1.88
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.03)(6) 1.50 --
Portfolio turnover rate (%) 17 11 19
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 that 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
[Clip Art] 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 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. There
is no limit on the fund's average maturity.
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 those of its peers. 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: -0.41%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 9.41% 8.29%
Life of fund - began 8/29/96 9.96% 9.23%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
20
<PAGE>
MAIN RISKS
[Clip Art] 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.
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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96( 12/97 12/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19 $10.36
Net investment income (loss)(2) 0.23 0.68 0.63
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32
Total from investment operations 0.44 0.92 0.95
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17)
Total distributions (0.25) (0.75) (0.80)
Net asset value, end of period $10.19 $10.36 $10.51
Total investment return at net asset value(3) (%) 4.42(4) 9.30 9.41
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52 8.82
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79 5.34
Portfolio turnover rate (%) 45 193 367
Fee reduction per share(2) ($) 0.12 0.18 0.06
</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 that 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
[Clip Art] 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. There is no
limit on the fund's average maturity.
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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). 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: 4.19%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year - began 1/6/98 -9.80% 1.87%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yield
bonds.
22
<PAGE>
MAIN RISKS
[Clip Art] 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.
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 do not 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 during the year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.90
Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.82)
Total from investment operations (0.92)
Less distributions:
Dividends from net investment income (0.84)
Tax return of capital (0.02)
Total distributions (0.86)
Net asset value, end of period $8.22
Total investment return at net asset value(3) (%) (9.80)(4)
Total adjusted investment return at net asset value(3,5) (%) (10.10)(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,120
Ratio of expenses to average net assets (%) 0.85(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.15(6)
Ratio of net investment income (loss) to average net assets (%) 9.85(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 9.55(6)
Portfolio turnover rate (%) 102
Fee reduction per share(2) ($) 0.03
</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 that does not take into
consideration fee reductions by the adviser during the period shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
23
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clip Art] 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 companies
o U.S. and foreign banks
o U.S. and foreign governments
o U.S. agencies, states and municipalities
o International 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 management team searches aggressively for the
best values on securities that meet the fund's credit and maturity requirements.
The team 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
[Clip Art] 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. All figures assume dividend
reinvestment but do not include variable contract charges (see attached variable
product prospectus). Past performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998
4.88% 4.87%
Best quarter: up 1.25%, first quarter 1998
Worst quarter: up 1.12%, fourth quarter 1998
Total return for the first three months of 1999: 1.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund
1 year 4.87%
Life of fund - began 8/29/96 4.76%
24
<PAGE>
MAIN RISKS
[Clip Art] 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 per share, it is possible to lose
money by investing in the fund.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $1.00
Net investment income (loss)(2) 0.02 0.05 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05) (0.05)
Net asset value, end of period $1.00 $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88 4.87
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377 16,519
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74
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 4.70
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 that 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
[Clip Art] 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
Although the fund invests in securities rated as low as CC/Ca and their unrated
equivalents, it generally intends to keep its average credit quality in the
investment-grade range. There is no limit on the fund's average maturity.
In managing the portfolio, the managers allocate assets among the three major
sectors based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends.
Within each sector, the managers look for securities that are appropriate for
the overall portfolio in terms of yield, credit quality, structure and industry
distribution. In selecting securities, relative yields and risk/reward ratios
are the primary considerations.
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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
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
[Clip Art] 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. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). 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: 2.48%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Fund Index
1 year 4.92% 9.47%
Life of fund - began 8/29/96 9.94% 10.42%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
26
<PAGE>
MAIN RISKS
[Clip Art] 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.
A fall in worldwide demand for U.S. government securities could also 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.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] 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 Ernst & Young LLP.
<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 $10.47
Net investment income (loss)(2) 0.27 0.91 0.85
Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.36 0.26 (0.35)
Total from investment operations 0.63 1.17 0.50
Less distributions:
Dividends from net investment income (0.27) (0.91) (0.85)
Distributions from net realized gain on investments sold (0.06) (0.09) (0.02)
Total distributions (0.33) (1.00) (0.87)
Net asset value, end of period $10.30 $10.47 $10.10
Total investment return at net asset value(3) (%) 6.45(4) 11.77 4.92
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25 4.84
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25 8.11
Portfolio turnover rate (%) 73 110 92
Fee reduction per share(2) ($) 0.05 0.05 0.01
</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 that 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 of trustees. 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. Financial Industries Fund 0.80%
V.A. Large Cap Growth Fund 0.75%
V.A. Mid Cap Growth Fund 0.75%
V.A. Small Cap Growth Fund 0.75%
- --------------------------------------------------------------------------------
Growth & Income Funds
- --------------------------------------------------------------------------------
V.A. Core Equity Fund 0.70%
V.A. Large Cap Value Fund 0.60%
V.A. Sovereign Investors Fund 0.60%
- --------------------------------------------------------------------------------
Income Funds
- --------------------------------------------------------------------------------
V.A. Bond Fund 0.50%
V.A. High Yield Bond Fund 0.60%
V.A. Money Market Fund 0.50%
V.A. Strategic Income Fund 0.60%
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 may reduce its fee or make other arrangements to
limit each fund's expenses to a specified percentage of average daily net
assets. The adviser has agreed to limit temporarily each fund's expenses to
0.25% 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 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.
-----------------------
Variable
contract holders
-----------------------
-------------------------
Insurance company
separate accounts
-------------------------
-----------------------
Declaration
funds
-----------------------
------------------------------------
Subadviser
Independence Investment
Associates, Inc.
53 State Street
Boston, MA 02109
Provides portfolio management
to V.A. Core Equity Fund.
------------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
--------------------------------------------
Custodians
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
John Hancock(R) (C) 1999 John Hancock Funds, Inc.
PVA00P 5/99
<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. Small Cap Growth Fund
John Hancock V.A. Mid Cap Growth Fund
John Hancock V.A. Large Cap Growth Fund
John Hancock V.A. Large Cap Value Fund
John Hancock V.A. Core 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
Fund"), John Hancock V.A. Small Cap Growth Fund ("Small Cap Growth Fund")
(formerly John Hancock V.A. Emerging Growth Fund), John Hancock Mid Cap Growth
Fund ("Mid Cap Growth Fund") (formerly John Hancock V.A. Special Opportunities
Fund) John Hancock V.A. Large Cap Growth Fund ("Large Cap Growth Fund")
(formerly John Hancock V.A. Growth Fund), John Hancock V.A. Large Cap Value Fund
("Large Cap Value Fund") formerly John Hancock V.A. Growth and Income Fund, John
Hancock V.A. Core Equity Fund ("Core Equity Fund") (formerly John Hancock V.A.
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 Strategy and
Main Risks": of each Fund in the Prospectus and "Investment Restrictions" in
this Statement of Additional Information.
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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, SMALL CAP
GROWTH FUND, MID CAP GROWTH FUND, LARGE CAP GROWTH FUND, LARGE CAP VALUE FUND,
CORE EQUITY FUND, SOVEREIGN INVESTORS FUND, AND 500 INDEX FUND (collectively,
the "Equity Funds") invest primarily in equity securities. Each Equity Fund,
other than the Large Cap Value Fund, invests at least 65% of its assets, and, in
the case of the Small Cap Growth Fund and 500 Index Fund, 80% of its assets, in
equity securities. However, under normal market conditions, the Equity Funds
(other than the Large Cap Value Fund) are substantially fully invested in common
stocks. The Large Cap Value 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 Core 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, Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap Growth Fund and
Large Cap Value 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 SMALL CAP GROWTH FUND INVESTS PRIMARILY IN SMALL-SIZED COMPANIES
THAT TEND TO BE AT A STAGE OF DEVELOPMENT ASSOCIATED WITH HIGHER THAN
AVERAGE GROWTH.
The SMALL CAP 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 MID CAP GROWTH FUND INVESTS PRIMARILY IN COMMON STOCKS OF U.S. AND
FOREIGN ISSUERS SELECTED FROM VARIOUS INCOME SECTORS.
The MID CAP GROWTH 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 LARGE CAP 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 LARGE CAP 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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THE LARGE CAP VALUE FUND INVESTS IN A DIVERSIFIED PORTFOLIO OF STOCK,
BONDS AND MONEY MARKET INSTRUMENTS.
Under normal circumstances, the LARGE CAP VALUE 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 CORE 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 CORE 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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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 Large
Cap Value 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, Small Cap
Growth Fund, Mid Cap Growth Fund, Large Cap Growth Fund and Large Cap Value 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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The fixed income securities of International Fund, Small Cap Growth Fund, Mid
Cap Growth Fund and Core 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. Large Cap
Value 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 Large Cap 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 Large Cap 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 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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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 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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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
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least two rating organizations while second tier securities have received
ratings within the two highest categories from at least two rating agencies, but
do not qualify as first tier securities. The Fund may also purchase obligations
that are not rated, but are determined by the Adviser, based on procedures
adopted by the Trust's Board of Trustees, to be of comparable quality to rated
first or second tier securities. The Fund may not purchase any second tier
security if, as a result of its purchase (a) more than 5% of its total assets
would be invested in second tier securities or (b) more than 1% of its total
assets or $1 million (whichever is greater) would be invested in the second tier
securities of a single issuer.
The Fund seeks to maintain a constant $1.00 share price although there can be no
assurance it will do so. All of the Fund's investments will mature in 397 days
or less. The Fund will maintain an average dollar-weighted portfolio maturity of
90 days or less.
EACH FUND MAY EMPLOY CERTAIN INVESTMENT STRATEGIES AND TECHNIQUES TO
HELP ACHIEVE ITS INVESTMENT OBJECTIVE.
Each Fund (other than the Core 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 Core 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 55.87% 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, 1999, the five largest companies
in the Index were: Microsoft (4.302%), General Electric (3.448%), Wal-Mart
(1.950%), Intel (1.889%), and Merck & Co, Inc. (1.817%). The largest industry
categories were: computer software (7.778%), drugs (5.492%), computer systems
(5.10%), health care (4.498%) and financial-miscellaneous (4.413%).
"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
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economic conditions can adversely affect their financial performance and
condition. The market value of the debt securities in the Fund's portfolio will
also tend to vary in an inverse relationship with changes in interest rates. For
example, as interest rates rise, the market value of debt securities tends to
decline. The Fund is not a complete investment program. Because the Fund's
investments are concentrated in the banking industry, an investment in the Fund
may be subject to greater market fluctuations than a fund that does not
concentrate in a particular industry. Thus, it is recommended that an investment
in the Fund be considered only one portion of your overall investment portfolio.
Banks, finance companies and other financial services organizations are subject
to extensive governmental regulations which may limit both the amounts and types
of loans and other financial commitments which may be made and the interest
rates and fees which may be charged. The profitability of these concerns is
largely dependent upon the availability and cost of capital funds, and has shown
significant recent fluctuation as a result of volatile interest rate levels.
Volatile interest rates will also affect the market value of debt securities
held by the Fund. In addition, general economic conditions are important to the
operations of these concerns, with exposure to credit losses resulting from
possible financial difficulties of borrowers potentially having an adverse
effect.
FINANCIAL INDUSTRIES. Since the Financial Industries Fund's investments will be
concentrated in the financial services sector, it will be subject to risks in
addition to those that apply to the general equity and debt markets. Events may
occur which significantly affect the sector as a whole or a particular segment
in which the Fund invests. Accordingly, the Fund may be subject 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
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of the security and interest rate sensitivity of the various debt issues
available from a particular issuer as well as analysis of the anticipated
volatility and liquidity of the fixed income instruments. The longer a Fund's
average portfolio maturity, the more the value of the portfolio and the net
asset value of the Fund's shares will fluctuate in response to changes in
interest rates. An increase in rates will generally decrease the value of the
Fund's securities, while a decline in interest rates will generally increase
their value.
PREFERRED STOCKS. Preferred stock generally has a preference as to dividends and
upon liquidation over an issuer's common stock but ranks junior to debt
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may be subject to optional or mandatory
redemption provisions.
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, Small Cap Growth Fund, Mid Cap Growth
Fund, Large Cap Growth Fund, Large Cap Value 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 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
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<PAGE>
of public authorities to obtain funds for many types of local, privately
operated facilities. Such debt instruments are considered municipal obligations
if the interest paid on them is exempt from federal income tax. The payment of
principal and interest by issuers of certain obligations purchased by the Fund
may be guaranteed by a letter of credit, note repurchase agreement, insurance or
other credit facility agreement offered by a bank or other financial
institution. Such guarantees and the creditworthiness of guarantors will be
considered by the Adviser in determining whether a municipal obligation meets
the Fund's investment quality requirements. No assurance can be given that a
municipality or guarantor will be able to satisfy the payment of principal or
interest on a municipal obligation.
Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued and meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power of ability of any one or more issuers to pay when due
the principal of and interest on their municipal obligations may be affected.
The yields of municipal bonds depend upon, among other things, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of S&P, Moody's and Fitch Investors Service ("Fitch") represent their
respective opinions on the quality of the municipal bonds they undertake to
rate. It should be emphasized, however, that ratings are general and not
absolute standards of quality. Consequently, municipal bonds with the same
maturity, coupon and rating may have different yields and municipal bonds of the
same maturity and coupon with different ratings may have the same yield. Many
issuers of securities chose not to have their obligations rated. Although
unrated securities eligible for purchase by the Fund must be determined to be
comparable in quality to securities having certain specified ratings, the market
for unrated securities may not be as broad for rated securities since many
investors rely on rating organizations for credit appraisal.
PAY-IN-KIND, DELAYED AND ZERO COUPON BONDS. The 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
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for timely payment of principal and interest on the certificates. Fannie Mae
certificates are guaranteed by Fannie Mae, a federally chartered and privately
owned corporation, for full and timely payment of principal and interest on the
certificates. Freddie Mac certificates are guaranteed by Freddie Mac, a
corporate instrumentality of the U.S. Government, for timely payment of interest
and the ultimate collection of all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
issuers. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
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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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
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exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's), Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service ("Fitch") represent the opinions of these agencies as to the
quality of the securities which they rate. It should be emphasized, however,
that such ratings are relative and subjective and are not absolute standards of
quality. These ratings will be used by the Funds as initial criteria for the
selection of portfolio securities. Among the factors which will be considered
are the long-term ability of the issuer to pay principal and interest and
general economic trends. Appendix A contains further information concerning the
ratings of Moody's, S&P and Fitch and their significance.
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, Large Cap Value Fund, Sovereign
Investors Fund, Large Cap 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 Core 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, the fund
will segregate cash or liquid securities, of any type or maturity, in a separate
account 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 Core 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, Small Cap 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 Core Equity Fund, 500 Index Fund, Sovereign
Investors Fund and Money Market Fund) may invest, and International Fund and
Small Cap 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
27
<PAGE>
to sell the underlying securities or currencies or dispose of assets held in a
segregated account until the options expire or are exercised. Similarly, if a
Fund is unable to effect a closing sale transaction with respect to options it
has purchased, it would have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of underlying
securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
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 securities prices are falling, a Fund can seek
28
<PAGE>
to offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When 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.
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 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
29
<PAGE>
generates a premium which may partially offset an increase in the price of
securities that a Fund intends to purchase. However, a Fund becomes obligated
(upon exercise of the option) to purchase a futures contract if the option is
exercised, which may have a value lower than the exercise price. The loss
incurred by each Fund in writing options on futures is potentially unlimited and
may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
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.
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<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, Large Cap Growth Fund, Financial Industries
Fund, Small Cap Growth Fund and Mid Cap Growth 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.
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<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
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<PAGE>
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.
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.
Money Market Fund may not:
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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.
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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.
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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").
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<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); Director, Brookline Bankcorp.
June 1931
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, John Hancock Funds,
July 1937 Insurance Agency, John Hancock
Subsidiaries, Inc., The Berkeley
Group, Federal Reserve Bank of
Boston, Signature Services (until
January 1997;) Trustee, John
Hancock Asset Management (until
March 1997).
Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief
160 Washington Street Executive Officer, Brookline
Brookline, MA 02147 Bankcorp. (lending); Director,
February 1935 Lumber Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.;
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 Corp.
(until 1996) (environmental services
and equipment), Niagara Mohawk Power
Co. (electric services); Concept
Five Technologies (until 1997);
Mitretek Systems (governmental
consulting services); Conversion
Technologies, Inc.; Living
Technologies, Inc.
Leland O. Erdahl Trustee Director of Uranium Resources
8046 Mackenzie Court Corporation; Hecla Mining Company,
Las Vegas, NV 89129 Canyon Resources Corporation and
December 1928 Original Sixteen to One Mines, Inc.
(1984-1987 and 1991-1998)
(management consultant); Director,
Freeport-McMoran Copper & Gold, Inc.
(until 1997); Vice President, Chief
Financial Officer and Director of
Amax Gold, Inc. (until 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.
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 Chief Investment Officer and
Boston, MA 02199 Director, the Adviser, The Berkeley
April 1953 Group; Executive Vice 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 Mutual
John Hancock Place Life Insurance Company; Director,
P.O. Box 111 the Adviser, John Hancock Funds,
Boston, MA 02117 Signator Investors, Inc., Insurance
August 1937 Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp., NM
Capital, The Berkeley Group, JH
Networking Insurance Agency, Inc.;
Signature Services (until January
1997).
Osbert M. Hood Senior Vice President and Chief Senior Vice President, Chief
101 Huntington Avenue Financial Officer Financial Officer and Treasurer, 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 36.38%,
Regional Bank 2.31%, Small Cap Growth Fund 14.60%, Mid Cap Growth 31.02%, Large
Cap Growth Fund 12.89%, Large Cap Value 3.50%, Bond Fund 11.64%, Strategic
Income Fund 16.52%, High Yield Bond Fund 22.09% and Money Market Fund 0.67%.
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, Brown 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.
Aggregate Compensation Total Compensation From All
From the Funds Fiscal Year Funds in John Hancock Fund
Independent Trustees Ended December 31, 1998 Complex to Trustees(*)
- -------------------- ----------------------- ---------------------------
Dennis S. Aronowitz $ 454 $ 72,000
Richard P. Chapman, Jr.+ 485 75,100
William J. Cosgrove+ 454 72,000
Douglas M. Costle 485 75,100
Leland O. Erdahl 454 72,000
Richard A. Farrell 485 75,100
Gail D. Fosler 454 72,000
William F. Glavin+ 454 72,000
John A. Moore+ 454 72,000
Patti McGill Peterson 485 75,100
John W. Pratt 454 72,000
Edward J. Spellman 416 70,350
------ --------
$5,534 $874,750
(*) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1998. 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-three 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 $81,203, for Mr. Cosgrove was $182,174 and for Mr. Glavin was
$248,920, and for Dr. Moore was $166,978 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
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
44
<PAGE>
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $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's
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 Core 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.
JHAI, located at 32-36 Duke, St. James SW1Y6DF, London, U.K. 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.
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.
45
<PAGE>
- ------------------------------------------------ ---------------------------
International Fund 0.90%
- ------------------------------------------------ ---------------------------
Regional Bank Fund 0.80%
- ------------------------------------------------ ---------------------------
Financial Industries Fund 0.80%
- ------------------------------------------------ ---------------------------
Small Cap Growth Fund 0.75%
- ------------------------------------------------ ---------------------------
Mid Cap Growth Fund 0.75%
- ------------------------------------------------ ---------------------------
Large Cap Growth Fund 0.75%
- ------------------------------------------------ ---------------------------
Large Cap Value Fund 0.60%
- ------------------------------------------------ ---------------------------
Core Equity Fund 0.70%
- ------------------------------------------------ ---------------------------
Sovereign Investors Fund 0.60%
- ------------------------------------------------ ---------------------------
500 Index Fund 0.10%*
- ------------------------------------------------ ---------------------------
Bond Fund 0.50%
- ------------------------------------------------ ---------------------------
Strategic Income Fund 0.60%
- ------------------------------------------------ ---------------------------
High Yield Bond Fund 0.60%
- ------------------------------------------------ ---------------------------
Money Market Fund 0.50%
- ------------------------------------------------ ---------------------------
* Reflects the Adviser's Agreement to limit the management fee. Without this
limitation the management fee would be 0.35%. The Adviser has agreed to
continue this limitation until May 1,2000.
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.
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>
1997
Fund Management fee before Management fee received
expense reduction by the Adviser
----------------- --------------
International Fund $26,618 $ 188
Financial Industries Fund 41,060 23,382
Small Cap Growth Fund 14,584 0
Large Cap Growth Fund 16,677 0
Core 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
Management fee before Management fee received
Fund expense reduction by the Adviser
- ---- ----------------- --------------
International Fund $49,454 0
Regional Bank Fund 72,908 64,783
Financial Industries Fund 324,581 324,581
Small Cap Growth Fund 43,238 6,661
Mid Cap Growth Fund 7,546 0
Large Cap Growth Fund 48,603 27,347
Large Cap Value Fund 45,181 31,498
Core Equity Fund 112,746 112,746
Sovereign Investors Fund 139,125 139,125
500 Index Fund 20,232* 0
Bond Fund 35,548 0
Strategic Income Fund 62,923 54,828
High Yield Bond Fund 32,414 16,272
Money Market Fund 61,349 61,349
* Net of limitation by Adviser.
For the fiscal year ended December 31, 1997 and 1998, the Adviser paid the
Subadviser of International Fund $18,127 and $32,611, respectively. For the
fiscal year ended December 31, 1997 and 1998, respectively, the Subadvisers of
Core Equity Fund and Sovereign Investors Fund waived their fees.
47
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------- ------------------------ ------------------------- -------------------------
1996* 1997 1998
- ---------------------------------------- ------------------------ ------------------------- -------------------------
- ---------------------------------------- ------------------------ ------------------------- -------------------------
International Fund 133 535 870
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Regional Bank Fund -- -- 1,353+
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Financial Industries Fund -- 909** 6,370
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Small Cap Growth Fund 64 349 915
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Mid Cap Growth Fund -- -- 158+++
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Large Cap Growth Fund 65 400 1,012
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Large Cap Value Fund -- -- 1,136++
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Core Equity Fund 70 600 2,523
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Sovereign Investors Fund 68 829 3,643
- ---------------------------------------- ------------------------ ------------------------- -------------------------
500 Index Fund 245 1,862 3,237
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Bond Fund 66 322 1,109
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Strategic Income Fund 132 583 1,645
- ---------------------------------------- ------------------------ ------------------------- -------------------------
High Yield Bond Fund -- -- 839++
- ---------------------------------------- ------------------------ ------------------------- -------------------------
Money Market Fund 7 439 1,914
- ---------------------------------------- ------------------------ ------------------------- -------------------------
</TABLE>
*From commencement of operations on August 29, 1996.
**From commencement of operations on April 30, 1997.
+From commencement of operations on May 1, 1998.
++From commencement of operations on January 6, 1998.
+++From commencement of operations on January 7, 1998.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser,
the sub-advisers and the Funds have adopted extensive restrictions on personal
securities trading by personnel of the Adviser, the sub-advisers and their
affiliates. In the case of the Adviser, some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. The sub-advisers have adopted similar
restrictions which may differ where appropriate as long as they have similar
intent. These restrictions are a continuation of the basic principle that the
interests of the Funds and their shareholders come first.
DISTRIBUTION CONTRACTS
Distribution Agreement. John Hancock Funds, a wholly owned subsidiary of the
Adviser, serves as the principal underwriter for the Trust in connection with
the continuous offering of the shares of the Funds. John Hancock Funds has the
exclusive right, pursuant to the Distribution Agreement, to purchase shares from
the Funds at net asset value for resale to the separate accounts of insurance
companies at the public offering price.
Each advisory agreement, sub-advisory agreement and distribution agreement
(except those for Mid Cap Growth Fund, Large Cap 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.
48
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of the
Funds, the following procedures are utilized wherever applicable.
Debt securities are valued on the basis of valuations furnished by a principal
market maker or a pricing service, both of which generally utilize electronic
data processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt instruments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of any security may be determined in good faith in accordance with
procedures approved by the Trustees.
Money Market Fund utilizes the amortized cost valuation method of valuing
portfolio instruments in the absence of extraordinary or unusual circumstances.
Under the amortized cost method, assets are valued by constantly amortizing over
the remaining life of an instrument the difference between the principal amount
due at maturity and the cost of the instrument to the Fund. The Trustees will
from time to time review the extent of any deviation of the net asset value, as
determined on the basis of the amortized cost method, from net asset value as it
would be determined on the basis of available market quotations. If any
deviation occurs which may result in unfairness either to new investors or
existing shareholders, the Trustees will take such actions as they deem
appropriate to eliminate or reduce such unfairness to the extent reasonably
practicable. These actions may include selling portfolio instruments prior to
maturity to realize gains or losses or to shorten the Fund's average portfolio
maturity, withholding dividends, splitting, combining or otherwise
recapitalizing outstanding shares or utilizing available market quotations to
determine net asset value per share.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the Funds' custodian
based on London currency exchange quotations as of 5:00 p.m., London time (12:00
noon, New York time) on the date of any determination of a Fund's NAV. If
quotations are not readily available, or the value has been materially affected
by events occurring after the closing of a foreign market, assets are valued by
a method that the Trustees believe accurately reflects fair value.
The NAV for each Fund is determined each business day at the close of regular
trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by
dividing the Fund's net assets by the number of its shares outstanding. On any
day an international market is closed and the New York Stock Exchange is open,
any foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of that Fund's
shares may be significantly affected on days when a shareholder has no access to
that Fund.
49
<PAGE>
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, a brokerage charge would be incurred. Any
such security would be valued for the purpose of making such payment at the same
value as used in determining net asset value. Each Fund has elected to be
governed by Rule 18f-1 under the 1940 Act. Under that rule, the Fund must redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one account.
DESCRIPTION OF THE TRUST'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Funds. The Declaration of Trust, dated November 15, 1995 (the "Declaration
of Trust"), permits the Trustees to issue an unlimited number of full and
fractional shares of beneficial interest of the Funds, without par value. Under
the Declaration of Trust, the Trustees have the authority to create and classify
shares of beneficial interest in separate series, without further action by
shareholders. As of the date of this Statement of Additional Information, the
Trustees have only authorized shares of the Funds. Additional series may be
added in the future. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Funds, or any other series of the
Trust, into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have not authorized the issuance of additional classes
of shares of the Funds.
Each share of a Fund represents an equal proportionate interest in the assets
belonging to that Fund. When issued, shares are fully paid and nonassessable
except as provided in the Prospectus under the caption "Organization and
Management of the Funds." In the event of liquidation of a Fund, shareholders
are entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of a Fund are freely transferable and
have no preemptive, subscription or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times net asset value per share) will be
entitled to one vote on any matter on which such shares are entitled to vote.
The rights, if any, of Variable Contract holders to vote the shares of a Fund
are governed by the relevant Variable Contract. For information on these voting
rights, see the Prospectus describing the Variable Contract.
Unless otherwise required by the 1940 Act or the Declaration of Trust, each Fund
has no intention of holding annual meetings of shareholders. Fund shareholders
may remove a Trustee by the affirmative vote of at least two-thirds of the
Trust's outstanding shares and the Trustees shall promptly call a meeting for
such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Trust. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
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
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as a joint tenancy with right of survivorship, unless the joint owners notify
John Hancock Servicing Center 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
Small Cap Growth Fund Annually Annually
Mid Cap Growth Fund Annually Annually
Large Growth Fund Annually Annually
Large Cap Value Fund Quarterly Quarterly
Core 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.
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.
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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.
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
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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, 2005 and
2006, respectively; Small Cap Growth Fund $18,937, $167,508 and $467,575; Large
Cap Growth Fund $0, $189,103 and $0; International Fund $0, $0 and $187,201; Mid
Cap Growth Fund $0, $0 and $110,444; Sovereign Investors Fund $0, $0 and
$157,877 and High Yield Bond Fund $0, $0 and $145,743.
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 Large
Cap Value 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
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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.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1998, the annualized yield was:
Bond Fund 5.17%
Strategic Income Fund 7.81%
High Yield Bond Fund 12.23%
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:
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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:
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:
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1 year period ended Commencement of Operations
December 31, 1998 to December 31, 1998*
----------------- ---------------------
V.A. International Fund 16.75% 12.20%
V.A. Financial Industries Fund 8.55% 25.76%
V.A. Regional Bank -- -6.43**%
V.A. Small Cap Growth Fund 15.94% 8.20%
V.A. Mid Cap Growth Fund -- 10.35%**
V.A. Large Cap Growth Fund 24.60% 13.22%
V.A. Large Cap Value Fund -- 21.39%**
V.A. Core Equity Fund 28.42% 30.85%
V.A. Sovereign Investors Fund 16.88% 23.08%
V.A. 500 Index Fund 28.44% 30.24%
V.A. Bond Fund 9.41% 9.96%
V.A. High Yield Bond Fund -- -9.80%**
V.A. Strategic Income Fund 4.92% 9.94%
* V.A. Financial Industries Fund commenced operations on April 30, 1997. Large
Cap Value Fund and High Yield Bond Fund commenced operations on January 6, 1998.
Mid Cap Growth Fund commenced operations on January 7, 1998. Regional Bank Fund
commenced operations on May 1, 1998. Each of the other funds commenced
operations on August 29, 1996.
** Not annualized
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.
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From time to time, in reports and promotional literature, a Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on approximately 1,700 fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. A Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta reflects the market-related risk of the Fund by showing how
responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of a Fund for any
period in the future. The performance of a Fund is a function of many factors
including its earnings, expenses and number of outstanding shares. Fluctuating
market conditions; purchases, sales and maturities of portfolio securities;
sales and redemptions of shares of beneficial interest; and changes in operating
expenses are all examples of items that can increase or decrease a Fund's
performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser, any Sub-adviser and
the officers of the Trust pursuant to recommendations made by its investment
committee, which consists of officers and directors of the Adviser and
affiliates and officers and Trustees who are interested persons of the Funds.
Orders for purchases and sales of securities are placed in a manner which, in
the opinion of the Adviser or Sub-adviser, will offer the best price and market
for the execution of each such transaction. Purchases from underwriters of
portfolio securities may include a commission or commissions paid by the issuer
and transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
In the U.S. Government securities market, securities are generally traded on a
"net" basis with dealers acting as principal for their own account without a
stated commission, although the price of the security usually includes a profit
to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid. 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.
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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, Small
Cap Growth Fund $819, Large Cap Growth Fund $1,057, Core 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,
Small Cap Growth Fund $4,501, Large Cap Growth Fund $7,000, Core 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 $31,688, Regional Bank Fund $15,933, Mid Cap Growth Fund
$4,603, Small Cap Growth Fund $10,790, Large Cap Growth Fund $28,768, Core
Equity Fund $15,467, Sovereign Investors Fund $34,227, 500 Index Fund $0, Bond
Fund $0, Strategic Income Fund $455, High Yield Bond $ 2,778, Financial
Industries Fund $85,961 and Large Cap Value Fund $67,087.
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, 1998, Large Cap Growth Fund,
Small Cap Growth Fund, Financial Industries Fund, Large Cap Value, International
Fund, Sovereign Investors, Mid Cap Growth and 500 Index directed commissions in
the amounts of $7,792, $1,588, $6,048, $6,047, $1,397, $441, $5,820, $1,560 and
$7, 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 (until January 1, 1999,
John Hancock Distributors, Inc.)("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
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less favorable than the Affiliated Broker's contemporaneous charges for
comparable transactions for its other most favored, but unaffiliated, customers,
except for accounts for which the Affiliated Broker acts as a clearing broker
for another brokerage firm, and any customers of the Affiliated Broker not
comparable to a Fund as determined by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Funds, the Adviser or
the Affiliated Brokers. Because the Adviser, which is affiliated with the
Affiliated Broker, has, as an investment adviser to the Funds, the obligation to
provide investment management services, which includes elements of research and
related investment skills, such research and related skills will not be used by
the Affiliated Broker as a basis for negotiating commissions at a rate higher
than that determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Funds. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position attainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Funds with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
SHAREHOLDER SERVICING AGENT
John Hancock Servicing Center, P.O. Box 9298, Boston, MA 02205, a division of
the Life Company, is the shareholder servicing agent for the Funds. Currently,
the Funds pay no fee.
CUSTODY OF PORTFOLIO
Portfolio securities of the International Fund, Money Market Fund and 500 Index
Fund are held pursuant to a custodian agreement between the Trust and State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02205.
Portfolio securities of the other Funds are held pursuant to a custodian
agreement between the Trust and Investors Bank & Trust Company, 200 Clarendon
Street, Boston, MA 02117. Under the custodian agreements, the custodians perform
custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, is 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 Ernst & Young LLP 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.
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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
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C: The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an active or implied 'CCC-' debt rating. The 'C' debt rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
FITCH INVESTORS SERVICE ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and high quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change
over the term of the issue. Bonds rated A are considered to be investment grade
and of good quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
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
The financial statements listed below are included and incorporated by reference
into Part B of the Registration Statement from the 1998 Annual Report to
Shareholder's for the year ended December 31, 1997 (filed electronically on
March 5, 1999, accession number 0001010521-99-000160 , file no. 811-07437 and
33-64465).
John Hancock Declaration Trust
Statementof Assets and Liabilities as of December 31, 1998.
Statement of Operations for the year ended of December 31, 1998.
Statementof Changes in Net Assets for each of the two years in the
period ended December 31, 1998.
Financial Highlights for each of the two years in the period ended
December 31, 1998.
Schedule of Investments as of December 31, 1998.
Notes to Financial Statements.
Report of Independent Auditors.
F-2
<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 Trustee, President, Chief Investment
101 Huntington Avenue Officer and Chief Operating
Boston, Massachusetts Officer
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 certifies that it meets all of the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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
29th day of April, 1999.
JOHN HANCOCK DECLARATION TRUST
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 April 29, 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 April 29, 1999
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
January 1, 1999 and March 17, 1999.
</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.(a).7 Abolition of John Hancock V.A. World Bond Fund dated March 9, 1999.+
99.(a).8 Instrument Changing Names of Series of the Trust dated March 9, 1999.+
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. Amended and Restated Master Custodian Agreement
between John Hancock Mutual Funds and Investors Bank and Trust Company
dated March 9, 1999.+
99.(g).1 Amended and Restated Master Custodian Agreement between John Hancock
Mutual Funds and State Street Bank and Trust Company dated
March 9, 1999.+
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.+
99.(j) Other Opinions. Auditors Consent.+
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.+
John Hancock V.A. International Fund
John Hancock V.A. Regional Bank Fund
John Hancock V.A. Financial Industries Fund
John Hancock V.A. Small Cap Growth Fund
John Hancock V.A. Mid Cap Growth Fund
John Hancock V.A. Large Cap Growth Fund
John Hancock V.A. Large Cap Value Fund
John Hancock V.A. Core 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
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.
****** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 9 file nos. 811-07437 and 33-64465 on
February 23, 1999 accession number 0001010521-99-000137.
+ Filed herewith.
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. World Bond Fund
Abolition of John Hancock V.A. World Bond Fund
The undersigned, being a majority of the Trustees of John Hancock
Declaration Trust, a Massachusetts business trust (the "Trust"), acting pursuant
to Section 8.3 of the Declaration of Trust dated November 15, 1995, as amended
from time to time (the "Declaration of Trust"), do hereby abolish the John
Hancock V.A. World Bond Fund and in connection therewith do hereby extinguish
any and all rights and preferences of such John Hancock V.A. World Bond Fund, as
set forth in the Declaration of Trust and the Trust's Registration Statement on
Form N-1A. The abolition of the Fund is effective as of March 26, 1999.
The Declaration of Trust is hereby amended to the extent necessary to
reflect the abolition of the John Hancock V.A. World Bond Fund.
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 on
the 9th day of March 1999.
/s/ Gail D. Fosler
Dennis S. Aronowitz Gail D. Fosler
- ------------------- --------------
/s/Edward J. Boudreau, Jr. /s/ W.F. Glavin
- -------------------------- ---------------
Edward J. Boudreau, Jr. William F. Glavin
/s/ Richard P. Chapman, Jr. /s/Anne C. Hodsdon
- --------------------------- ------------------
Richard P. Chapman, Jr. Anne C. Hodsdon
/s/William J. Cosgrove /s/John A. Moore
- ---------------------- ----------------
William J. Cosgrove John A. Moore
/s/Patti McGill Peterson
Douglas M. Costle Patti McGill Peterson
- ----------------- ---------------------
/s/Leland O. Erdahl /s/John W. Pratt
- ------------------- ----------------
Leland O. Erdahl John W. Pratt
/s/Richard A. Farrell
- --------------------- ----------------------
Richard A. Farrell Richard S. Scipione
<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 DADE )
Then personally appeared the above-named Edward J. Boudreau, Jr.,
Richard P. Chapman, Jr., William J. Cosgrove, Leland O. Erdahl, Richard A.
Farrell, Gail D. Fosler, William F. Glavin, Anne C. Hodsdon, John A. Moore,
Patti McGill Peterson, and John W. Pratt, who acknowledged the foregoing
instrument to be his or her free act and deed, before me, this 9th day of March
1999. In the county of Dade, State of Florida
/s/ Gloria Ashby
----------------
Notary Public
My Commission Expires: May 10, 1999
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 names of,
John Hancock V.A. Independence Equity Fund to John Hancock V.A. Core Equity
Fund; John Hancock V.A. Emerging Growth Fund to John Hancock V.A. Small Cap
Growth Fund; John Hancock V.A. Growth and Income Fund to John Hancock V.A. Large
Cap Value Fund; John Hancock V.A. Growth Fund to John Hancock V.A. Large Cap
Growth Fund; John Hancock V.A. Special Opportunities Fund to John Hancock V.A.
Mid Cap Growth Fund, effective May 1, 1999.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
9th day of March, 1999.
/s/ Gail D. Fosler
- ---------------------- ------------------
Dennis S. Aronowitz Gail D. Fosler
/s/Edward J. Boudreau, Jr. /s/ W.F. Glavin
- -------------------------- ---------------
Edward J. Boudreau, Jr. William F. Glavin
/s/ Richard P. Chapman, Jr. /s/Anne C. Hodsdon
- --------------------------- ------------------
Richard P. Chapman, Jr. Anne C. Hodsdon
/s/William J. Cosgrove /s/John A. Moore
- ---------------------- ----------------
William J. Cosgrove John A. Moore
/s/Patti McGill Peterson
- -------------------- ------------------------
Douglas M. Costle Patti McGill Peterson
/s/Leland O. Erdahl /s/John W. Pratt
- ------------------- ----------------
Leland O. Erdahl John W. Pratt
/s/Richard A. Farrell
- --------------------- ------------------------
Richard A. Farrell Richard S. Scipione
<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 DADE )
Then personally appeared the above-named Edward J. Boudreau, Jr.,
Richard P. Chapman, Jr., William J. Cosgrove, Leland O. Erdahl, Richard A.
Farrell, Gail D. Fosler, William F. Glavin, Anne C. Hodsdon, John A. Moore,
Patti McGill Peterson, and John W. Pratt, who acknowledged the foregoing
instrument to be his or her free act and deed, before me, this 9th day of March
1999. In the county of Dade, State of Florida
/s/ Gloria Ashby
----------------
Notary Public
My Commission Expires: May 10, 1999
s:\dectrust\amendmts\capserie\ind equity name change
MASTER CUSTODIAN AGREEMENT
between
JOHN HANCOCK MUTUAL FUNDS
and
INVESTORS BANK & TRUST COMPANY
Amended and Restated
March 9, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
1. Definitions.............................................................1-3
2. Employment of Custodian and Property to be held by it.....................3
3. The Custodian as a Foreign Custody Manager................................3
A. Definitions......................................................3-4
B. Delegation to the Custodian as Foreign Custody Manager.............4
C. Countries Covered..................................................4
D. Scope of Delegated Responsibilities..............................5-7
E. Standard of Care as Foreign Custody Manager of the Fund............7
F. Reporting Requirements.............................................7
G. Representations with respect to Rule 17f-5.........................7
H. Effective Date and Termination of the Custodian as Foreign.......7-8
Custody Manager
I. Withdrawal of Custodian as Foreign Custody Manager with............8
Respect to Designated Countries and with Respect to
Eligible Foreign Custodians
J. Guidelines for the Exercise of Delegated Authority and ..........8-9
Provision of Information Regarding Country Risk
K. Most Favored Client.............................................9-10
L. Direction as to Eligible Foreign Custodians.......................10
4. Duties of the Custodian with Respect toProperty of the Fund..............10
A. Safekeeping and Holding of Property...............................10
B. Delivery of Securities.........................................10-13
C. Registration of Securities........................................13
D. Bank Accounts..................................................13-14
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<PAGE>
E. Payments for Shares of the Fund...................................14
F. Investment and Availability of Federal Funds......................14
G. Collections....................................................14-15
H. Payment of Fund Moneys.........................................15-16
I. Liability for Payment in Advance of Receipt of.................16-17
Securities Purchased
J. Payments for Repurchases of Redemptions of Shares of the Fund.....17
K. Appointment of Agents by the Custodian.........................17-18
L. Deposit of Fund Portfolio Securities in Securities Systems.....18-19
M. Deposit of Fund Commercial Paper in an Approved................19-22
Book-Entry System for Commercial Paper
N. Segregated Account................................................22
O. Ownership Certificates for Tax Purposes...........................22
P. Proxies...........................................................22
Q. Communications Relating to Fund Portfolio Securities...........22-23
R. Exercise of Rights; Tender Offers................................23
S. Depository Receipts............................................23-24
T. Interest Bearing Call or Time Deposits............................24
U. Options, Futures Contracts and Foreign Currency Transactions...24-25
V. Actions Permitted Without Express Authority.......................25
5. Duties of Bank with Respect to Books of Account and......................26
Calculations of Net Asset Value
6. Records and Miscellaneous Duties......................................26-27
7. Opinion of Fund`s Independent Public Accountants.........................27
ii
<PAGE>
8. Compensation and Expenses of Bank........................................27
9. Responsibility of Bank................................................27-28
10. Persons Having Access to Assets of the Fund...........................28-29
11. Effective Period, Termination and Amendment;..........................29-30
Successor Custodian
12. Interpretive and Additional Provisions...................................30
13. Certification as to Authorized Officers..................................30
14. Notices..................................................................30
15. Massachusetts Law to Apply; Limitations on Liability..................30-31
16. Adoption of the Agreement by the Fund....................................31
iii
<PAGE>
MASTER CUSTODIAN AGREEMENT
This Agreement is made as of December 15, 1992 as amended and restated
March 9, 1999 between each investment company advised by John Hancock Advisers,
Inc. which has adopted this Agreement in the manner provided herein and
Investors Bank & Trust Company (hereinafter called "Bank", "Custodian" and
"Agent"), a trust company established under the laws of Massachusetts with a
principal place of business in Boston, Massachusetts.
Whereas, each such investment company is registered under the Investment
Company Act of 1940 and has appointed the Bank to act as Custodian of its
property and to perform certain duties as its Agent, as more fully hereinafter
set forth; and
Whereas, the Bank is willing and able to act as each such investment
company's Custodian and Agent, subject to and in accordance with the provisions
hereof;
Now, therefore, in consideration of the premises and of the mutual
covenants and agreements herein contained, each such investment company and the
Bank agree as follows:
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 "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.
(c) "The Depository Trust Company", a clearing agency registered with
the Securities and Exchange Commission under Section 17A of the Securities
Exchange Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
(d) "Authorized Officer", shall mean any of the following officers of
the Fund: The Chairman of the Board of Trustees, the President, a Vice
President, the Secretary, the Treasurer or Assistant Secretary or Assistant
Treasurer, or any other officer of the Fund duly authorized to sign by
appropriate resolution of the Board of Trustees of the Trust.
(e) "Participants Trust Company", a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities Exchange
Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
1
<PAGE>
(f) "Approved Clearing Agency" shall mean any other domestic clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934 which acts as a securities depository but
only if the Custodian has received a certified copy of a vote of the Board
approving such clearing agency as a securities depository for the Fund.
(g) "Federal Book-Entry System" shall mean the book-entry system
referred to in Rule 17f-4(b) under the Investment Company Act of 1940 for United
States and federal agency securities (i.e., as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry
regulations of federal agencies substantially in the form of Subpart O).
(h) "Approved Book-Entry System for Commercial Paper" shall mean a
system maintained by the Custodian or by a subcustodian employed pursuant to
Section 2 hereof for the holding of commercial paper in book-entry form but only
if the Custodian has received a certified copy of a vote of the Board approving
the participation by the Fund in such system.
(i) The Custodian shall be deemed to have received "proper instructions"
in respect of any of the matters referred to in this Agreement upon receipt of
written or facsimile instructions signed by such one or more person or persons
as the Board shall have from time to time authorized to give the particular
class of instructions in question. Electronic instructions for the purchase and
sale of securities which are transmitted by John Hancock Advisers, Inc. (the
"Adviser") to the Custodian shall be deemed to be proper instructions; the Fund
shall cause all such instructions to be confirmed in writing. Different persons
may be authorized to give instructions for different purposes. A certified copy
of a vote of the Board may be received and accepted by the Custodian as
conclusive evidence of the authority of any such person to act and may be
considered as in full force and effect until receipt of written notice to the
contrary. Such instructions may be general or specific in terms and, where
appropriate, may be standing instructions. Unless the vote delegating authority
to any person or persons to give a particular class of instructions specifically
requires that the approval of any person, persons or committee shall first have
been obtained before the Custodian may act on instructions of that class, the
Custodian shall be under no obligation to question the right of the person or
persons giving such instructions in so doing. Oral instructions will be
considered proper instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. The Fund authorizes
2
<PAGE>
the Custodian to tape record any and all telephonic or other oral instructions
given to the Custodian. "Proper instructions" may also include communications
effected directly between electromechanical or electronic devices provided that
the President and Treasurer of the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. In performing
its duties generally, and more particularly in connection with the purchase,
sale and exchange of securities made by or for the Fund, the Custodian may take
cognizance of the provisions of the governing documents and registration
statement of the Fund as the same may from time to time be in effect (and votes,
resolutions or proceedings of the shareholders or the Board), but, nevertheless,
except as otherwise expressly provided herein, the Custodian may assume unless
and until notified in writing to the contrary that so-called proper instructions
received by it are not in conflict with or in any way contrary to any provisions
of such governing documents and registration statement, or votes, resolutions or
proceedings of the shareholders or the Board.
2. Employment of Custodian and Property to be Held by It
The Fund hereby appoints and employs the Bank as its Custodian and Agent
in accordance with and subject to the provisions hereof, and the Bank hereby
accepts such appointment and employment. The Fund agrees to deliver to the
Custodian all securities, participation interests, cash and other assets owned
by it, and all payments of income, payments of principal and capital
distributions and adjustments received by it with respect to all securities and
participation interests owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares ("Shares") of the
Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held by the Fund and not delivered by
the Fund to the Custodian. The Fund will also deliver to the Bank from time to
time copies of its currently effective charter (or declaration of trust or
partnership agreement, as the case may be), by-laws, prospectus, statement of
additional information and distribution agreement with its principal
underwriter, together with such resolutions, votes and other proceedings of the
Fund as may be necessary for or convenient to the Bank in the performance of its
duties hereunder.
The Custodian may from time to time employ one or more subcustodians to
perform such acts and services upon such terms and conditions as shall be
approved from time to time by the Board. Any such subcustodian so employed by
the Custodian shall be deemed to be the agent of the Custodian, and the
Custodian shall remain primarily responsible for the securities, participation
interests, moneys and other property of the Fund held by such subcustodian. For
the purposes of this Agreement, any property of the Fund held by any such
subcustodian (domestic or foreign) shall be deemed to be held by the Custodian
under the terms of this Agreement.
3. The Custodian as a Foreign Custody Manager
A. Definitions Capitalized terms in this Article 3 shall have the
following meanings:
(a) "Country risk" means all factors reasonably related to
the systemic risk of holding Foreign Assets in a
particular country including, but not limited to, a
country's political environment; economic and financial
infrastructure (including financial institutions such as
any Mandatory Securities Depositories operating in the
country); prevailing custody and settlement practices; and
laws and regulations applicable to the safekeeping and
recovery of Foreign Assets held in custody in that
country.
3
<PAGE>
(b) "Eligible Foreign Custodian" has the meaning set forth in section
(a)(1) of Rule 17f-5 and also includes a U.S. Bank.
(c) "Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in these investments.
(d) "Foreign Custody Manager" has the meaning set forth in section (a)(2)
of Rule 17f-5; it is a Fund's Board of Directors or any person serving as
the Board's delegate under sections (b) or (d) of Rule 17f-5.
(e) "Mandatory Securities Depository" means a Securities Depository the use
of which is mandatory (i) by law or regulation; (ii) because securities
cannot be withdrawn from the depository; (iii) because maintaining
securities outside the Securities Depository would impair the liquidity of
the securities because settlement within the depository is mandatory and
the period of time required to deposit securities is longer than the
settlement period or where particular classes of transactions, such as
large trades or turn-around trades, are not available if the securities are
held in physical form; or (iv) because maintaining securities outside of
the Securities Depository is not consistent with prevailing custodial or
market practices generally accepted by institutional investors.
(f) "Securities Depository" has the same meaning set forth in section
(a)(6) of Rule 17f-5: it is a system for the central handling of securities
where all securities are of a particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred
or pledged by bookkeeping entry without physical delivery of the
securities.
(g) "U.S. Bank" means a bank which qualifies to serve as a custodian of
assets of investment companies under ss.17(f) of the Investment Company Act
of 1940, as amended.
B. Delegation to the Custodian as Foreign Custody Manager Each Fund,
by resolution adopted by its Board, hereby appoints the Custodian
as the Foreign Custody Manager of the Fund and delegates to the
Custodian, the responsibilities set forth in this Article 3 with
respect to Foreign Assets held outside the United States, and the
Custodian hereby accepts this delegation.
C. Countries Covered The Foreign Custody Manager shall be responsible
for performing the delegated responsibilities defined below only
with respect to the countries listed on Schedule A, which may be
amended from time to time by the Foreign Custody Manager.
Mandatory Securities Depositories are listed on Schedule B, which
may be amended from time to time by the Foreign Custody Manager.
Schedules A and B may also be amended in accordance with
subsection F of Article 3.
4
<PAGE>
D. Scope of Delegated Responsibilities
1) Selection of Eligible Foreign Custodians Subject to the
provisions of this Article 3 and Rule 17f-5 (and any other
applicable law), the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of an Eligible
Foreign Custodian selected by the Foreign Custody Manager in
each country listed on Schedule A, as amended from time to
time. In addition, the Foreign Custody Manager shall provide
the Fund with all requisite forms and documentation to open
an account in any country listed on Schedule A as requested
by any Authorized Officer and shall assist the Fund with the
filing and processing of these forms and documents.
Execution of this amended and restated Agreement by the Fund
shall be deemed to be a Proper Instruction to open an
account, or to place or maintain Foreign Assets in each
country listed on Schedule A.
In performing its delegated responsibilities as Foreign
Custody Manager to place or maintain Foreign Assets with an
Eligible Foreign Custodian, the Foreign Custody Manager
shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will
be held by that Eligible Foreign Custodian, after
considering all factors relevant to the safekeeping of those
assets. These factors include, without limitation:
(i) the Eligible Foreign Custodian's practices, procedures
and internal controls, including but not limited to, the
physical protections available for certificated securities
(if applicable), its methods of keeping custodial records
and its security and data protection practices;
(ii) whether the Eligible Foreign Custodian has the
requisite financial strength to provide reasonable care for
Foreign Assets;
(iii) the Eligible Foreign Custodian's general reputation
and standing and, in the case of any Securities Depository,
the Securities Depository's operating history and the number
of participants; and
(iv) whether the Fund will have jurisdiction over and be
able to enforce judgments against the Eligible Foreign
Custodian, such as by virtue of the existence of any offices
of the Eligible Foreign Custodian in the United States or
the Eligible Foreign Custodian's consent to service of
process in the United States.
2) Contracts With Eligible Foreign Custodians For each Eligible
Foreign Custodian selected by the Foreign Custody Manager,
the Foreign Custody Manager shall (or, in the case of a
Securities Depository which is not a Mandatory Securities
Depository, may under the rules or established practices or
procedures of the Securities Depository) enter into a
written
5
<PAGE>
contract governing the Fund's foreign custody
arrangements with the Eligible Foreign Custodian. The
Foreign Custody Manager shall determine that each contract
will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards
specified in paragraph 1 of subsection D of Article 3 of
this Agreement. Each contract shall include provisions that
provide:
(i) for indemnification or insurance arrangements (or any
combination of the foregoing) so that the Fund will be
adequately protected against the risk of loss of the
Foreign Assets held in accordance with the contract;
(ii) that the Foreign Assets will not be subject to any
right, security interest, lien or claim of any kind in
favor of the Eligible Foreign Custodian or its creditors
except a claim of payment for their safe custody or
administration or, in the case of cash deposits, liens or
rights in favor of creditors of the Eligible Foreign
Custodian arising under bankruptcy, insolvency or similar
laws;
(iii) that beneficial ownership of the Foreign Assets will
be freely transferable without the payment of money or
value other than for safe custody or administration;
(iv) that adequate records will be maintained identifying
the Foreign Assets as belonging to the Fund or as being
held by a third party for the benefit of the Fund;
(v) that the Fund's independent public accountants will be
given access to those records or confirmation of the
contents of those records; and
(vi) that the Fund will receive periodic reports with
respect to the safekeeping of the Foreign Assets,
including, but not limited to, notification of any
transfer of the Foreign Assets to or from the Fund's
account or a third party account containing the Foreign
Assets held for the benefit of the Fund, or, in lieu of
any or all of the provisions set forth in (i) through (vi)
above, such other provisions that the Foreign Custody
Manager determines will provide, in their entirety, the
same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (i) through
(vi) above in their entirety.
3) Monitoring In each case in which the Foreign Custody
Manager maintains Foreign Assets with an Eligible Foreign
Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to
monitor at reasonable intervals the initial and continued
appropriateness of (i) maintaining the Foreign Assets with
the Eligible Foreign Custodian and (ii) the contract
governing the custody arrangements established by the
Foreign Custody Manager with the Eligible Foreign
Custodian. The Foreign Custody Manager shall consider all
factors and criteria set forth in subparagraphs 1 and 2 of
subsection D of Article 3 of this Agreement.
6
<PAGE>
E. Standard of Care as Foreign Custody Manager of the Fund In
performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and
diligence as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
Investment Company Act of 1940, as amended, would exercise. The
Foreign Custody Manager agrees to notify immediately the Adviser
and the Board if, at any time, the Foreign Custody Manager
believes it cannot perform, in accordance with the foregoing
standard of care, its duties hereunder generally or with respect
to any country specified in Schedule A.
F. Reporting Requirements The Foreign Custody Manager shall list on
Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the Fund's assets. The Foreign Custody
Manager shall report the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of the Foreign Assets
with another Eligible Foreign Custodian by providing to the
Adviser an amended Schedule A promptly. The Foreign Custody
Manager shall make written reports notifying the Adviser and the
Board of any other material change in the foreign custody
arrangements of the Fund described in this Article 3. Amended
Schedules A or B and material change reports shall be provided to
the Board quarterly, provided that, if the Foreign Custody Manager
or the Adviser determines that any matter should be reported
sooner, the Foreign Custody Manager shall promptly, following the
occurrence of the event, direct the report to the Fund's Secretary
for forwarding to the Board. At least annually, the Foreign
Custody Manager shall provide the Adviser and the Board a
written statement enabling the Board to determine that it is
reasonable to rely on the Foreign Custody Manager to perform its
delegated duties under this Article 3 and that the foreign custody
arrangements delegated to the Foreign Custody Manager continue to
meet the requirements of Rule 17f-5 under the Investment Company
Act of 1940, as amended. The Foreign Custody Manager will also
provide monthly reports on each Eligible Foreign Custodian listing
all holdings and current market values.
G. Representations with respect to Rule 17f-5 The Foreign Custody
Manager represents to the Fund that it is a U.S. Bank as defined
in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined
that it is reasonable for the Board to rely on the Custodian to
perform the responsibilities delegated pursuant to this Article as
the Foreign Custody Manager of the Fund.
H. Effective Date and Termination of the Custodian as Foreign Custody
Manager The Board's delegation to the Custodian as Foreign Custody
Manager of the Fund shall be effective as of the date of execution
of this amended and restated Agreement and shall remain in effect
until terminated at any time, without penalty, by written notice
from the terminating party to the non-terminating party.
Termination will become effective sixty days after receipt by the
non-terminating party of the notice.
7
<PAGE>
I. Withdrawal of Custodian as Foreign Custody Manager with respect to
Designated Countries and with respect to Eligible Foreign
Custodians Following the receipt of Proper Instructions directing
the Foreign Custody Manager to close the account of the Fund with
the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country and to remove that country from
Schedule A, the delegation by the Board to the Custodian as
Foreign Custody Manager for that country shall be deemed to have
been withdrawn with respect to that country and the Custodian
shall cease to be the Foreign Custody Manager of the Fund with
respect to that country after settlement of all pending trades.
The Foreign Custody Manager may withdraw its acceptance of
delegated responsibilities with respect to a country listed on
Schedule A upon written notice to the Fund in accordance with
subsection F. Sixty days (or other period agreed to by the parties
in writing) after receipt of any notice by the Fund, the Custodian
shall have no further responsibility as Foreign Custody Manager to
the Fund with respect to that country.
In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has
selected are no longer appropriate because the applicable Eligible
Foreign Custodian is no longer able to provide reasonable care for
Foreign Assets held in the country, or an arrangement no longer
meets the requirements of Rule 17f-5, the Foreign Custody Manager
shall notify the Adviser, the Board and the Fund in accordance
with subsection F hereunder. If the Adviser determines that
withdrawal is in the best interest of the Fund, the Foreign
Custody Manager shall withdraw all Foreign Assets from the
Eligible Foreign Custodian, as soon as reasonably practicable, and
shall provide alternative safe keeping acceptable to the Foreign
Custody Manager. If the Adviser determines that it is in the best
interest of the Fund to withdraw all Foreign Assets and this
withdrawal would require liquidation of any Foreign Assets or
would materially and adversely impair the liquidity, value or
other investment characteristic of any Foreign Assets, the Foreign
Custody Manager shall immediately provide information regarding
the particular circumstances to the Adviser and to the Board and
shall act in accordance with instructions received from an
Authorized Officer, with respect to the liquidation or other
withdrawal.
J. Guidelines for the Exercise of Delegated Authority and Provision
of Information Regarding Country Risk Nothing in this Article 3
shall require the Foreign Custody Manager to consider Country Risk
as part of its delegated responsibilities under subsection D of
Article 3. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be responsible for, or
liable for any loss in connection with the placement of Foreign
Assets with or withdrawal of Foreign Assets from a Mandatory
Securities Depository nor be delegated any responsibilities under
this Article 3 with respect to Mandatory Securities Depositories
other than those set forth below.
8
<PAGE>
With respect to the countries listed in Schedule A, or added
thereto, the Foreign Custody Manager agrees to provide annually to
the Board and the Adviser, information relating to the Country
Risks of holding Foreign Assets in such countries, including but
not limited to, the Mandatory Securities Depositories, if any,
operating in the country. In addition, the Foreign Custody Manager
shall use reasonable care in the gathering of this information and
with regard to, among other things, the completeness and accuracy
of this information. The information furnished annually by the
Foreign Custody Manager to the Board should include but not be
limited to the following, if available:
(i) Legal Opinion regarding whether applicable foreign law
would restrict the access of the Fund's independent public
accountants to the books and records of the foreign
custodian, whether applicable foreign law would restrict
the Fund's ability to recover its assets in the event of
bankruptcy of the foreign custodian, whether applicable
foreign law would restrict the Fund's ability to recover
assets lost while under the foreign custodian's control,
the likelihood of expropriation, nationalization, freezes
or confiscation of the Fund's assets and whether there are
reasonably foreseeable difficulties in converting the
Fund's cash into U.S. dollars, or such other form of Legal
Opinion as is customary in association with Rule 17f-5
from time to time,
(ii) audit report of the Foreign Custody Manager,
(iii) copy of balance sheet from annual report of the
custodian,
(iv) summary of Central Depository Information,
(v) country profile materials containing market practice
for: delivery versus payment, settlement method, currency
restrictions, buy-in practice, Foreign ownership limits
and unique market arrangements,
(vi) The Foreign Custody Manager shall also provide such
other information as may be reasonably available relating
to Mandatory Securities Depositories, and, in accordance
with applicable requirements promulgated by the SEC from
time to time, to the criteria as set forth on Appendix B
hereto, as such Appendix may be revised by the parties
hereto from time to time; and,
(vii) such other materials as the Board may reasonably
request from time to time, including copies of contracts
with the subcustodians.
K. Most Favored Client If at any time the Foreign Custody Manager
shall be a party to an agreement, to serve as a Foreign Custody
Manager to an investment company, that provides for either (a) a
standard of care with respect to the selection of Eligible
Foreign Custodians in any jurisdiction higher than that set forth
in paragraph 1 of subsection D of Article 3 of this Agreement or
(b) a standard of care with respect to the exercise of the Foreign
Custody Manager's duties other than that set forth in subsection F
of Article 3 of this Agreement, the Foreign Custody Manager
9
<PAGE>
agrees to notify the Fund of this fact and to negotiate in good
faith the applicable standard of care hereunder to the standard
specified in the other agreement. In the event that the Foreign
Custody Manager shall in the future offer review or information
services with respect to Mandatory Securities Depositories in
addition to any services provided hereunder, the Foreign Custody
Manager agrees that it shall notify the Fund of this fact and
shall offer these services to the Fund.
L. Direction as to Eligible Foreign Custodians Notwithstanding
Article 3 of this Agreement, the Fund or the Adviser may direct
the Custodian to place and maintain Foreign Assets with a
particular Eligible Foreign Custodian acceptable to the Foreign
Custody Manager. In such event, the Custodian shall be entitled to
rely on any instruction as a Proper Instruction and may limit its
duties under this Article 3 of the Agreement with respect to such
arrangements by describing any limitations in writing with respect
to each instance.
4. Duties of the Custodian with Respect to Property of the Fund
A. Safekeeping and Holding of Property The Custodian shall keep
safely all property of the Fund and on behalf of the Fund shall
from time to time receive delivery of Fund property for
safekeeping. The Custodian shall hold, earmark and segregate on
its books and records for the account of the Fund all property of
the Fund, including all securities, participation interests and
other assets of the Fund (1) physically held by the Custodian,
(2) held by any subcustodian referred to in Section 2 hereof or by
any agent referred to in Paragraph K hereof, (3) held by or
maintained in The Depository Trust Company or in Participants
Trust Company or in an Approved Clearing Agency or in the Federal
Book-Entry System or in an Approved Foreign Securities Depository,
each of which from time to time is referred to herein as a
"Securities System", and (4) held by the Custodian or by any
subcustodian referred to in Section 2 hereof and maintained in any
Approved Book-Entry System for Commercial Paper.
B. Delivery of Securities The Custodian shall release and deliver
securities or participation interests owned by the Fund held (or
deemed to be held) by the Custodian or maintained in a Securities
System account or in an Approved Book-Entry System for Commercial
Paper account only upon receipt of proper instructions, which may
be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities or participation interests
for the account of the Fund, but only against receipt of
payment therefor; if delivery is made in Boston or New
York City, payment therefor shall be made in accordance
with generally accepted clearing house procedures or by
use of Federal Reserve Wire System procedures; if delivery
is made elsewhere payment therefor shall be in accordance
with the then current "street delivery" custom or in
accordance with such procedures
10
<PAGE>
agreed to in writing from time to time by the parties
hereto; if the sale is effected through a Securities
System, delivery and payment therefor shall be made in
accordance with the provisions of Paragraph L hereof; if
the sale of commercial paper is to be effected through an
Approved Book-Entry System for Commercial Paper,
delivery and payment therefor shall be made in accordance
with the provisions of Paragraph M hereof; if the
securities are to be sold outside the United States,
delivery may be made in accordance with procedures
agreed to in writing from time to time by the parties
hereto; for the purposes of this subparagraph, the
term "sale" shall include the disposition of a portfolio
security (i) upon the exercise of an option written by the
Fund and (ii) upon the failure by the Fund to make a
successful bid with respect to a portfolio security, the
continued holding of which is contingent upon the making
of such a bid;
2) Upon the receipt of payment in connection with any
repurchase agreement or reverse repurchase agreement
relating to such securities and entered into by the Fund;
3) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
4) To the issuer thereof or its agent when such securities or
participation interests are called, redeemed, retired or
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
5) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Paragraph K hereof or into the name
or nominee name of any subcustodian employed pursuant to
Section 2 hereof; or for exchange for a different number
of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities or
participation interests are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
6) To the broker selling the same for examination in
accordance with the "street delivery" custom; provided
that the Custodian shall adopt such procedures as the Fund
from time to time shall approve to ensure their prompt
return to the Custodian by the broker in the event the
broker elects not to accept them;
11
<PAGE>
7) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion of
such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof;
8) In the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such
warrants, rights or similar securities, or the surrender
of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
9) For delivery in connection with any loans of securities
made by the Fund (such loans to be made pursuant to the
terms of the Fund's current registration statement), but
only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities.
10) For delivery as security in connection with any borrowings
by the Fund requiring a pledge or hypothecation of assets
by the Fund (if then permitted under circumstances
described in the current registration statement of the
Fund), provided, that the securities shall be released
only upon payment to the Custodian of the monies borrowed,
except that in cases where additional collateral is
required to secure a borrowing already made, further
securities may be released for that purpose; upon receipt
of proper instructions, the Custodian may pay any such
loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
11) When required for delivery in connection with any
redemption or repurchase of Shares of the Fund in
accordance with the provisions of Paragraph J hereof;
12) For delivery in accordance with the provisions of any
agreement between the Custodian (or a subcustodian
employed pursuant to Section 2 hereof) and a broker-dealer
registered under the Securities Exchange Act of 1934 and,
if necessary, the Fund, relating to compliance with the
rules of The Options Clearing Corporation or of any
registered national securities exchange, or of any similar
organization or organizations, regarding deposit or escrow
or other arrangements in connection with options
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian (or a subcustodian
employed pursuant to Section 2 hereof), and a futures
commission merchant, relating to compliance with the rules
of the Commodity Futures Trading
12
<PAGE>
Commission and/or of any contract market or commodities
exchange or similar organization, regarding futures
margin account deposits or payments in connection with
futures transactions by the Fund;
14) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose
to be proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
C. Registration of Securities Securities held by the Custodian (other
than bearer securities) for the account of the Fund shall be
registered in the name of the Fund or in the name of any nominee
of the Fund or of any nominee of the Custodian, or in the name or
nominee name of any agent appointed pursuant to Paragraph K
hereof, or in the name or nominee name of any subcustodian
employed pursuant to Section 2 hereof, or in the name or nominee
name of The Depository Trust Company or Participants Trust Company
or Approved Clearing Agency or Federal Book-Entry System or
Approved Book-Entry System for Commercial Paper; provided, that
securities are held in an account of the Custodian or of such
agent or of such subcustodian containing only assets of the Fund
or only assets held by the Custodian or such agent or such
subcustodian as a custodian or subcustodian or in a fiduciary
capacity for customers. All certificates for securities accepted
by the Custodian or any such agent or subcustodian on behalf of
the Fund shall be in "street" or other good delivery form or shall
be returned to the selling broker or dealer who shall be advised
of the reason thereof.
D. Bank Accounts The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to
draft or order by the Custodian acting in pursuant to the terms
of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or
for the account of the Fund other than cash maintained by the Fund
in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as the Custodian may in its
discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each
such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved in writing by two
officers of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be subject to
withdrawal only by the Custodian in that capacity.
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<PAGE>
The Custodian may, on behalf of any Fund, open and cause to be
maintained outside the United States a bank account with (a) an
Eligible Foreign Custodian (as defined in Article 3) or (b) any
person with whom property of the Fund may be placed and maintained
outside of the United States under (i) ss.17(f) or 26(a) of the
1940 Act, without regard to Rule 17f-5 or (ii) an order of the
U.S. Securities and Exchange Commission (a "Permissible Foreign
Custodian"). Such account(s) shall be subject only to draft or
order by the Custodian or Eligible Foreign Custodian or
Permissible Foreign Custodian acting pursuant to the terms of this
Agreement to hold cash received by or from or for the account of
the Fund.
E. Payment for Shares of the Fund The Custodian shall make
appropriate arrangements with the Transfer Agent and the principal
underwriter of the Fund to enable the Custodian to make certain it
promptly receives the cash or other consideration due to the Fund
for such new or treasury Shares as may be issued or sold from time
to time by the Fund, in accordance with the governing documents
and offering prospectus and statement of additional information of
the Fund. The Custodian will provide prompt notification to the
Fund of any receipt by it of payments for Shares of the Fund.
F. Investment and Availability of Federal Funds Upon agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties, invest in
such securities and instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the
Fund.
G. Collections The Custodian shall promptly collect all income and
other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall promptly
collect all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or agent thereof and shall
credit such income, as collected, to the Fund's custodian account.
The Custodian shall do all things necessary and proper in connection with such
prompt collections and, without limiting the generality of the foregoing, the
Custodian shall
1) Present for payment all coupons and other income items
requiring presentations;
2) Present for payment all securities which may mature or be
called, redeemed, retired or otherwise become payable;
3) Endorse and deposit for collection, in the name of the
Fund, checks, drafts or other negotiable instruments;
14
<PAGE>
4) Credit income from securities maintained in a Securities
System or in an Approved Book-Entry System for Commercial
Paper at the time funds become available to the Custodian;
in the case of securities maintained in The Depository
Trust Company funds shall be deemed available to the Fund
not later than the opening of business on the first
business day after receipt of such funds by the Custodian.
The Custodian shall notify the Fund as soon as reasonably practicable whenever
income due on any security is not promptly collected. In any case in which the
Custodian does not receive any due and unpaid income after it has made demand
for the same, it shall immediately so notify the Fund in writing, enclosing
copies of any demand letter, any written response thereto, and memoranda of all
oral responses thereto and to telephonic demands, and await instructions from
the Fund; the Custodian shall in no case have any liability for any nonpayment
of such income provided the Custodian meets the standard of care set forth in
Section 8 hereof. The Custodian shall not be obligated to take legal action for
collection unless and until reasonably indemnified to its satisfaction.
The Custodian shall also receive and collect all stock dividends, rights and
other items of like nature, and deal with the same pursuant to proper
instructions relative thereto.
H. Payment of Fund Moneys Upon receipt of proper instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
1) Upon the purchase of securities, participation interests,
options, futures contracts, forward contracts and options
on futures contracts purchased for the account of the Fund
but only (a) against the receipt of
(i) such securities registered as provided in
Paragraph C hereof or in proper form for transfer
or
(ii) detailed instructions signed by an officer of the
Fund regarding the participation interests to be
purchased or
(iii) written confirmation of the purchase by the Fund
of the options, futures contracts, forward
contracts or options on futures contracts
by the Custodian (or by a subcustodian employed pursuant
to Section 2 hereof or by a clearing corporation of a
national securities exchange of which the Custodian is a
member or by any bank, banking institution or trust
company doing business in the United States or abroad
which is qualified under the Investment Company Act of
1940 to act as a custodian and which has been designated
by the Custodian as its agent for this purpose or by the
agent specifically designated in such instructions as
representing the purchasers of a new issue of privately
placed securities); (b) in the case of a purchase effected
through a Securities System, upon receipt of the
15
<PAGE>
securities by the Securities System in accordance with the
conditions set forth in Paragraph L hereof; (c) in the
case of a purchase of commercial paper effected through an
Approved Book-Entry System for Commercial Paper, upon
receipt of the paper by the Custodian or subcustodian in
accordance with the conditions set forth in Paragraph M
hereof; (d) in the case of repurchase agreements entered
into between the Fund and another bank or a broker-dealer,
against receipt by the Custodian of the securities
underlying the repurchase agreement either in certificate
form or through an entry crediting the Custodian's
segregated, non-proprietary account at the Federal Reserve
Bank of Boston with such securities along with written
evidence of the agreement by the bank or broker-dealer to
repurchase such securities from the Fund; or (e) with
respect to securities purchased outside of the United
States, in accordance with written procedures agreed to
from time to time in writing by the parties hereto;
2) When required in connection with the conversion, exchange
or surrender of securities owned by the Fund as set forth
in Paragraph B hereof;
3) When required for the redemption or repurchase of Shares
of the Fund in accordance with the provisions of Paragraph
J hereof;
4) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: advisory fees,
distribution plan payments, interest, taxes, management
compensation and expenses, accounting, transfer agent and
legal fees, and other operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends or other distributions to
holders of Shares declared or authorized by the Board; and
6) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board, specifying the
amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person or
persons to whom such payment is to be made.
I. Liability for Payment in Advance of Receipt of Securities
Purchased In any and every case where payment for purchase of
securities for the account of the Fund is made by the Custodian in
advance of receipt of the securities purchased in the absence of
specific written instructions signed by two officers of the Fund
to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the
securities had been received by the Custodian; except that in the
case of a repurchase agreement entered into by the Fund with a
bank which is a member of the Federal Reserve System, the
Custodian may transfer funds
16
<PAGE>
to the account of such bank prior to the receipt of (i) the
securities in certificate form subject to such repurchase
agreement or (ii) written evidence that the securities subject to
such repurchase agreement have been transferred by book-entry into
a segregated non-proprietary account of the Custodian maintained
with the Federal Reserve Bank of Boston or (iii) the safekeeping
receipt, provided that such securities have in fact been so
transferred by book-entry and the written repurchase agreement is
received by the Custodian in due course. With respect to
securities and funds held by a subcustodian, either directly or
indirectly (including by a Securities Depository or clearing
corporation), notwithstanding any provisions of this Agreement to
the contrary, payment for securities purchased and delivery of
securities sold may be made prior to receipt of securities or
payment respectively, and securities or payment may be received in
a form in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally
accepted trade practice in the applicable local market, (d) the
terms and characteristics of the particular investment, or (e) the
terms of instructions.
J. Payments for Repurchases or Redemptions of Shares of the Fund From
such funds as may be available for the purpose, but subject to any
applicable votes of the Board and the current redemption and
repurchase procedures of the Fund, the Custodian shall, upon
receipt of written instructions from the Fund or from the Fund's
transfer agent or from the principal underwriter, make funds
and/or portfolio securities available for payment to holders of
Shares who have caused their Shares to be redeemed or repurchased
by the Fund or for the Fund's account by its transfer agent or
principal underwriter.
The Custodian may maintain a special checking account upon which
special checks may be drawn by shareholders of the Fund holding
Shares for which certificates have not been issued. Such checking
account and such special checks shall be subject to such rules and
regulations as the Custodian and the Fund may from time to time
adopt. The Custodian or the Fund may suspend or terminate use of
such checking account or such special checks (either generally or
for one or more shareholders) at any time. The Custodian and the
Fund shall notify the other immediately of any such suspension or
termination.
K. Appointment of Agents by the Custodian The Custodian may at any
time or times in its discretion appoint (and may at any time
remove) any other bank or trust company (provided such bank or
trust company is itself qualified under the Investment Company Act
of 1940 to act as a custodian or is itself an eligible foreign
custodian within the meaning of Rule 17f-5 under said Act) as the
agent of the Custodian to carry out such of the duties and
functions of the Custodian described in this Section 3 as the
Custodian may from time to time direct; provided, however, that
the appointment of any such agent shall not relieve the Custodian
of any of its responsibilities or liabilities hereunder, and as
between the Fund and the Custodian the Custodian shall be fully
responsible for the acts and omissions of any such agent. For the
purposes of this Agreement, any property of the Fund held by any
such agent shall be deemed to be held by the Custodian hereunder.
17
<PAGE>
L. Deposit of Fund Portfolio Securities in Securities Systems The
Custodian may deposit and/or maintain securities owned by the Fund
(1) in The Depository Trust Company;
(2) in Participants Trust Company;
(3) in any other Approved Clearing Agency;
(4) in the Federal Book-Entry System; or
(5) in a Securities Depository (as defined in
Article 3).
in each case only in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, and at all times subject to the following
provisions:
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep securities of
the Fund in a Securities System provided that such securities are
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in the Securities System which
shall not include any assets of the Custodian or such subcustodian
or any other person other than assets held by the Custodian or
such subcustodian as a fiduciary, custodian, or otherwise for its
customers.
(b) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund, and the
Custodian shall be fully and completely responsible for
maintaining a recordkeeping system capable of accurately and
currently stating the Fund's holdings maintained in each such
Securities System.
(c) The Custodian shall pay for securities purchased in book-entry
form for the account of the Fund only upon (i) receipt of notice
or advice from the Securities System that such securities have
been transferred to the Account, and (ii) the making of any entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund only upon (i)
receipt of notice or advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for
18
<PAGE>
the account of the Fund. Copies of all notices or advises from
the Securities System of transfers of securities for the account
of the Fund shall identify the Fund, be maintained for the Fund by
the Custodian and be promptly provided to the Fund at its request.
The Custodian shall promptly send to the Fund confirmation of each
transfer to or from the account of the Fund in the form of a
written advice or notice of each such transaction, and shall
furnish to the Fund copies of daily transaction sheets reflecting
each day's transactions in the Securities System for the account
of the Fund on the next business day.
(d) The Custodian shall promptly send to the Fund any report or other
communication received or obtained by the Custodian relating to
the Securities System's accounting system, system of internal
accounting controls or procedures for safeguarding securities
deposited in the Securities System; the Custodian shall promptly
send to the Fund any report or other communication relating to the
Custodian's internal accounting controls and procedures for
safeguarding securities deposited in any Securities System; and
the Custodian shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant to
Section 2 hereof shall promptly send to the Fund and to the
Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and
procedures for safeguarding securities deposited in any Securities
System. The Custodian's books and records relating to the Fund's
participation in each Securities System will at all times during
regular business hours be open to the inspection of the Fund's
authorized officers, employees or agents.
(e) The Custodian shall not act under this Paragraph L in the absence
of receipt of a certificate of an officer of the Fund that the
Board has approved the use of a particular Securities System; the
Custodian shall also obtain appropriate assurance from the
officers of the Fund that the Board has annually reviewed and
approved the continued use by the Fund of each Securities System,
so long as such review and approval is required by Rule 17f-4
under the Investment Company Act of 1940, and the Fund shall
promptly notify the Custodian if the use of a Securities System is
to be discontinued; at the request of the Fund, the Custodian will
terminate the use of any such Securities System as promptly as
practicable.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or subcustodians or of any of its or their employees
or from any failure of the Custodian or any such agent or
subcustodian to enforce effectively such rights as it may have
against the Securities System or any other person; at the election
of the Fund, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that
the Fund has not been made whole for any such loss or damage.
M. Deposit of Fund Commercial Paper in an Approved Book-Entry System for
Commercial Paper Upon receipt of proper instructions with respect to
each issue of direct issue commercial paper purchased by the Fund, the
Custodian may deposit and/or maintain direct issue commercial paper
owned by the Fund in any Approved Book-Entry System for Commercial
Paper, in each case only in accordance with applicable Securities and
Exchange Commission rules, regulations, and no-action correspondence,
and at all times subject to the following provisions:
19
<PAGE>
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep
commercial paper of the Fund in an Approved Book-Entry
System for Commercial Paper, provided that such paper is
issued in book entry form by the Custodian or subcustodian
on behalf of an issuer with which the Custodian or
subcustodian has entered into a book-entry agreement and
provided further that such paper is maintained in a
non-proprietary account ("Account") of the Custodian or
such subcustodian in an Approved Book-Entry System for
Commercial Paper which shall not include any assets of the
Custodian or such subcustodian or any other person other
than assets held by the Custodian or such subcustodian as
a fiduciary, custodian, or otherwise for its customers.
(b) The records of the Custodian with respect to commercial
paper of the Fund which is maintained in an Approved
Book-Entry System for Commercial Paper shall identify by
book-entry each specific issue of commercial paper
purchased by the Fund which is included in the System and
shall at all times during regular business hours be open
for inspection by authorized officers, employees or agents
of the Fund. The Custodian shall be fully and completely
responsible for maintaining a recordkeeping system capable
of accurately and currently stating the Fund's holdings of
commercial paper maintained in each such System.
(c) The Custodian shall pay for commercial paper purchased in
book-entry form for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice from the
issuer that such paper has been issued, sold and
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
purchase, payment and transfer for the account of the
Fund. The Custodian shall transfer such commercial paper
which is sold or cancel such commercial paper which is
redeemed for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice that
payment for such paper has been transferred to the
Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer or redemption and
payment for the account of the Fund. Copies of all
notices, advises and confirmations of transfers of
commercial paper for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be promptly provided to the Fund at its
request. The Custodian shall promptly send to the Fund
confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice of each
such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transactions in the System for the account of the Fund o
the next business day.
20
<PAGE>
(d) The Custodian shall promptly send to the Fund any report
or other communication received or obtained by the
Custodian relating to each System's accounting system,
system of internal accounting controls or procedures for
safeguarding commercial paper deposited in the System;
the Custodian shall promptly send to the Fund any report
or other communication relating to the Custodian's
internal accounting controls and procedures for
safeguarding commercial paper deposited in any Approved
Book-Entry System for Commercial Paper; and the Custodian
shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant
to Section 2 hereof shall promptly send to the Fund and to
the Custodian any report or other communication relating
to such agent's or subcustodian's internal accounting
controls and procedures for safeguarding securities
deposited in any Approved Book-Entry System for Commercial
Paper.
(e) The Custodian shall not act under this Paragraph M in the
absence of receipt of a certificate of an officer of the
Fund that the Board has approved the use of a particular
Approved Book-Entry System for Commercial Paper; the
Custodian shall also obtain appropriate assurance from the
officers of the Fund that the Board has annually reviewed
and approved the continued use by the Fund of each
Approved Book-Entry System for Commercial Paper, so long
as such review and approval is required by Rule 17f-4
under the Investment Company Act of 1940, and the Fund
shall promptly notify the Custodian if the use of an
Approved Book-Entry System for Commercial Paper is to be
discontinued; at the request of the Fund, the Custodian
will terminate the use of any such System as promptly as
practicable.
(f) The Custodian (or subcustodian, if the Approved Book-Entry
System for Commercial Paper is maintained by the
subcustodian) shall issue physical commercial paper or
promissory notes whenever requested to do so by the Fund
or in the event of an electronic system failure which
impedes issuance, transfer or custody of direct issue
commercial paper by book-entry.
(g) Anything to the contrary in this Agreement
notwithstanding, the Custodian shall be liable to the Fund
for any loss or damage to the Fund resulting from use of
any Approved Book-Entry System for Commercial Paper by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or subcustodians or of any
of its or their employees or from any failure of the
Custodian or any such agent or subcustodian to enforce
effectively such rights as it may have against the System,
the issuer of the commercial paper or any other person; at
the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to
any claim against the System, the issuer of the commercial
paper or any other person which the Custodian may have as
a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such
loss or damage.
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<PAGE>
N. Segregated Account The Custodian shall upon receipt of proper
instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Paragraph L hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and any registered
broker-dealer (or any futures commission merchant), relating to
compliance with the rules of the Options Clearing Corporation and
of any registered national securities exchange (or of the
Commodity Futures Trading Commission or of any contract market or
commodities exchange), or of any similar organization or
organizations, regarding escrow or deposit or other arrangements
in connection with transactions by the Fund, (ii) for purposes of
segregating cash or U.S. Government securities in connection with
options purchased, sold or written by the Fund or futures
contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
purposes, but only, in the case of clause (iv), upon receipt of,
in addition to proper instructions, a certificate signed by two
officers of the Fund, setting forth the purpose such segregated
account and declaring such purpose to be a proper purpose.
O. Ownership Certificates for Tax Purposes The Custodian shall
execute ownership and other certificates and affidavits for all
foreign, federal and state tax purposes in connection with
receipt of income or other payments with respect to securities
of the Fund held by it and in connection with transfers of
securities.
P. Proxies The Custodian shall, with respect to the securities
held by it hereunder, cause to be promptly delivered to the Fund
all forms of proxies and all notices of meetings and any
other notices or announcements or other written information
affecting or relating to the securities, and upon receipt of
proper instructions shall execute and deliver or cause its
nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor
its nominee shall vote upon any of the securities or
execute any proxy to vote thereon or give any consent or take
any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper
instructions.
Q. Communications Relating to Fund Portfolio Securities The Custodian
shall deliver promptly to the Fund all written information
(including, without limitation, pendency of call and maturities
of securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers and other
22
<PAGE>
persons relating to the securities and participation
interests being held for the Fund. With respect to tender or
exchange offers, the Custodian shall deliver promptly to the Fund
all written information received by the Custodian from
issuers and other persons relating to the securities and
participation interests whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange
offer.
R. Exercise of Rights; Tender Offers In the case of tender offers,
similar offers to purchase or exercise rights (including,
without limitation, pendency of calls and maturities of
securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options and the maturity of futures contracts) affecting
or relating to securities and participation interests held by
the Custodian under this Agreement, the Custodian shall have
responsibility for promptly notifying the Fund of all such
offers in accordance with the standard of reasonable care set
forth in Section 8 hereof. For all such offers for which the
Custodian is responsible as provided in this Paragraph R, the
Fund shall have responsibility for providing the Custodian with
all necessary instructions in timely fashion. Upon receipt of
proper instructions, the Custodian shall timely deliver to the
issuer or trustee thereof, or to the agent of either,
warrants, puts, calls, rights or similar securities for
the purpose of being exercised or sold upon proper receipt
therefor and upon receipt of assurances satisfactory to the
Custodian that the new securities and cash, if any, acquired by
such action are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof. Upon receipt
of proper instructions, the Custodian shall timely deposit
securities upon invitations for tenders of securities upon proper
receipt therefor and upon receipt of assurances satisfactory to
the Custodian that the consideration to be paid or delivered or
the tendered securities are to be returned to the Custodian or
subcustodian employed pursuant to Section 2 hereof.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary by proper instructions, to comply with
the terms of all mandatory or compulsory exchanges, calls,
tenders, redemptions, or similar rights of security ownership, and
shall thereafter promptly notify the Fund in writing of such
action.
S. Depository Receipts The Custodian shall, upon receipt of proper
instructions, surrender or cause to be surrendered foreign
securities to the depository used by an issuer of American
Depository Receipts, European Depository Receipts or International
Depository Receipts (hereinafter collectively referred to as
"ADRs") for such securities, against a written receipt therefor
adequately describing such securities and written evidence
satisfactory to the Custodian that the depository has acknowledged
receipt of instructions to issue with respect to such securities
ADRs in the name of a nominee of the Custodian or in the name or
nominee name of any subcustodian employed pursuant to Section 2
hereof, for delivery to the Custodian or such subcustodian at such
place as the Custodian or such subcustodian may from time to time
designate. The Custodian shall, upon receipt of proper
instructions, surrender ADRs to the issuer thereof against a
written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian
that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities
underlying such ADRs to the Custodian or to a subcustodian
employed pursuant to Section 2 hereof.
23
<PAGE>
T. Interest Bearing Call or Time Deposits The Custodian shall, upon
receipt of proper instructions, place interest bearing fixed ter
and call deposits with the banking department of such banking
institution (other than the Custodian) and in such amounts as
the Fund may designate. Deposits may be denominated in U.S.
Dollars or other currencies. The Custodian shall include in
its records with respect to the assets of the Fund appropriate
notation as to the amount and currency of each such deposit, the
accepting banking institution and other appropriate details
and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Custodian by the
banking institution. Such deposits shall be deemed portfolio
securities of the applicable Fund for the purposes of this
Agreement, and the Custodian shall be responsible for the
collection of income from such accounts and the transmission of
cash to and from such accounts.
U. Options, Futures Contracts and Foreign Currency Transactions
1. Options. The Custodians shall, upon receipt of proper
instructions and in accordance with the provisions of any
agreement between the Custodian, any registered broker-dealer
and, if necessary, the Fund, relating to compliance with the
rules of the Options Clearing Corporation or of any registered
national securities exchange or similar organization or
organizations, receive and retain confirmations or other
documents, if any, evidencing the purchase or writing of an
option on a security, securities index, currency or other
financial instrument or index by the Fund; deposit and
maintain in a segregated account for each Fund separately,
either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the
Fund; and release and/or transfer such securities or other
assets only in accordance with a notice or other communication
evidencing the expiration, termination or exercise of such
covered option furnished by the Options Clearing Corporation,
the securities or options exchange on which such covered
option is traded or such other organization as may be
responsible for handling such options transactions. The
Custodian and the broker-dealer shall be responsible for the
sufficiency of assets held in each Fund's segregated account
in compliance with applicable margin maintenance requirements.
2. Futures Contracts The Custodian shall, upon receipt of
proper instructions, receive and retain confirmations and
other documents, if any, evidencing the purchase or sale of a
futures contract or an option on a futures contract by the
Fund; deposit and maintain in a segregated account, for the
benefit of any futures commission merchant, assets designated
by the Fund as initial, maintenance or variation "margin"
deposits (including mark-to-market payments) intended to
secure the Fund's performance of its obligations under any
futures contracts purchased
24
<PAGE>
or sold or any options on futures contracts written by Fund,
in accordance with the provisions of any agreement or
agreements among the Fund, the Custodian and such futures
commission merchant, designed to comply with the rules of the
Commodity Futures Trading Commission and/or of any contract
market or commodities exchange or similar organization
regarding such margin deposits or payments; and release and/or
transfer assets in such margin accounts only in accordance
with any such agreements or rules. The Custodian and the
futures commission merchant shall be responsible for the
sufficiency of assets held in the segregated account in
compliance with the applicable margin maintenance and
mark-to-market payment requirements.
3. Foreign Exchange Transactions The Custodian shall, pursuant
to proper instructions, enter into or cause a subcustodian to
enter into foreign exchange contracts, currency swaps or
options to purchase and sell foreign currencies for spot and
future delivery on behalf and for the account of the Fund.
Such transactions may be undertaken by the Custodian or
subcustodian with such banking or financial institutions or
other currency brokers, as set forth in proper instructions.
Foreign exchange contracts, swaps and options shall be deemed
to be portfolio securities of the Fund; and accordingly, the
responsibility of the Custodian therefor shall be the same as
and no greater than the Custodian's responsibility in respect
of other portfolio securities of the Fund. The Custodian shall
be responsible for the transmittal to and receipt of cash from
the currency broker or banking or financial institution with
which the contract or option is made, the maintenance of
proper records with respect to the transaction and the
maintenance of any segregated account required in connection
with the transaction. The Custodian shall have no duty with
respect to the selection of the currency brokers or banking or
financial institutions with which the Fund deals or for their
failure to comply with the terms of any contract or option.
Without limiting the foregoing, it is agreed that upon receipt
of proper instructions, the Custodian may, and insofar as
funds are made available to the Custodian for the purpose, (if
determined necessary by the Custodian to consummate a
particular transaction on behalf and for the account of the
Fund) make free outgoing payments of cash in the form of U.S.
dollars or foreign currency before receiving confirmation of a
foreign exchange contract or swap or confirmation that the
countervalue currency completing the foreign exchange contract
or swap has been delivered or received. The Custodian shall
not be responsible for any costs and interest charges which
may be incurred by the Fund or the Custodian as a result of
the failure or delay of third parties to deliver foreign
exchange; provided that the Custodian shall nevertheless be
held to the standard of care set forth in, and shall be liable
to the Fund in accordance with, the provisions of Section 9.
V. Actions Permitted Without Express Authority The Custodian may in its
discretion, without express authority from the Fund:
25
<PAGE>
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided, that all such
payments shall be accounted for by the Custodian to the
Treasurer of the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all nondiscretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Fund except as otherwise directed by
the Fund.
5. Duties of Bank with Respect to Books of Account and Calculations of Net
Asset Value
The Bank shall as Agent (or as Custodian, as the case may be) keep such books of
account and render as at the close of business on each day a detailed statement
of the amounts received or paid out and of securities received or delivered for
the account of the Fund during said day and such other statements, including a
daily trial balance and inventory of the Fund's portfolio securities; and shall
furnish such other financial information and data as from time to time requested
by the Treasurer or any authorized officer of the Fund; and shall compute and
determine, as of the close of regular trading on the New York Stock Exchange, or
at such other time or times as the Board may determine, the net asset value of a
Share in the Fund, such computation and determination to be made in accordance
with the governing documents of the Fund and the votes and instructions of the
Board at the time in force and applicable, and promptly notify the Fund and its
investment adviser and such other persons as the Fund may request of the result
of such computation and determination. In computing the net asset value the
Custodian may rely upon security quotations received by telephone or otherwise
from sources or pricing services designated by the Fund by proper instructions,
and may further rely upon information furnished to it by any authorized officer
of the Fund relative (a) to liabilities of the Fund not appearing on its books
of account, (b) to the existence, status and proper treatment of any reserve or
reserves, (c) to any procedures established by the Board regarding the valuation
of portfolio securities, and (d) to the value to be assigned to any bond, note,
debenture, Treasury bill, repurchase agreement, subscription right, security,
participation interest or other asset or property for which market quotations
are not readily available.
6. Records and Miscellaneous Duties
The Bank shall create, maintain and preserve all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All books of account and
records maintained by the Bank in connection with the performance of its duties
under this Agreement shall be the property of the Fund, shall at all times
during the regular business hours of the Bank be open for inspection by
authorized officers, employees or agents of the Fund, and in the event of
termination of this Agreement
26
<PAGE>
shall be delivered to the Fund or to such other person or persons as shall be
designated by the Fund. Disposition of any account or record after any required
period of preservation shall be only in accordance with specific instructions
received from the Fund. The Bank shall assist generally in the preparation of
reports to shareholders, audits of accounts, and other ministerial matters of
like nature; and, upon request, shall furnish the Fund's auditors with an
attested inventory of securities held with appropriate information as to
securities in transit or in the process of purchase or sale and with such other
information as said auditors may from time to time request. The Custodian shall
also maintain records of all receipts, deliveries and locations of such
securities, together with a current inventory thereof, and shall conduct
periodic verifications (including sampling counts at the Custodian) of
certificates representing bonds and other securities for which it is responsible
under this Agreement in such manner as the Custodian shall determine from time
to time to be advisable in order to verify the accuracy of such inventory. The
Bank shall not disclose or use any books or records it has prepared or
maintained by reason of this Agreement in any manner except as expressly
authorized herein or directed by the Fund, and the Bank shall keep confidential
any information obtained by reason of this Agreement.
7. Opinion of Fund's Independent Public Accountants
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to enable the Fund to obtain from year to year favorable opinions
from the Fund's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Fund's registration
statement and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
8. Compensation and Expenses of Bank
The Bank shall be entitled to reasonable compensation for its services as
Custodian and Agent, as agreed upon from time to time between the Fund and the
Bank. The Bank shall entitled to receive from the Fund on demand reimbursement
for its cash disbursements, expenses and charges, including counsel fees, in
connection with its duties as Custodian and Agent hereunder, but excluding
salaries and usual overhead expenses.
9. Responsibility of Bank
So long as and to the extent that it is in the exercise of reasonable care, the
Bank as Custodian and Agent shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties.
27
<PAGE>
The Bank as Custodian and Agent shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
The Bank as Custodian and Agent shall be held to the exercise of reasonable care
in carrying out the provisions of this Agreement but shall be liable only for
its own negligent or bad faith acts or failures to act. Notwithstanding the
foregoing, nothing contained in this paragraph is intended to nor shall it be
construed to modify the standards of care and responsibility set forth in
Section 2 hereof with respect to subcustodians and in subparagraph f of
Paragraph L of Section 3 hereof with respect to Securities Systems and in
subparagraph g of Paragraph M of Section 3 hereof with respect to an Approved
Book-Entry System for Commercial Paper.
The Custodian shall be liable for the acts or omissions of a foreign banking
institution to the same extent as set forth with respect to subcustodians
generally in Section 2 hereof, provided that, regardless of whether assets are
maintained in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from, or caused by,
the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign county including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
acts of war, civil war or terrorism, insurrection, revolution, military or
usurped powers, nuclear fission, fusion or radiation, earthquake, storm or other
disturbance of nature or acts of God.
If the Fund requires the Bank in any capacity to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Bank, result in the Bank or its nominee assigned to the Fund
being liable for the payment of money or incurring liability of some other form,
the Fund, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
Except as may arise from the Custodian's own negligence or bad faith, the
Custodian shall be without liability to any Fund for any loss, liability, claim
or expense resulting from or caused by anything which is (a) part of Country
Risk or (b) part of the "prevailing country risk" of the Fund, as that term is
used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as that term is now
or in the future interpreted by the U.S. Securities and Exchange Commission or
by the staff of the Division of Investment Management of the Commission.
10. Persons Having Access to Assets of the Fund
(i) No trustee, director, general partner, officer, employee
or agent of the Fund shall have physical access to the
assets of the Fund held by the Custodian or be authorized
or permitted to withdraw any investments of the Fund, nor
shall the Custodian deliver any assets of the Fund to any
such person. No officer or director, employee or agent of
the Custodian who holds any similar position with the Fund
or the investment adviser of the Fund shall have access to
the assets of the Fund.
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<PAGE>
(ii) Access to assets of the Fund held hereunder shall only be
available to duly authorized officers, employees,
representatives or agents of the Custodian or other
persons or entities for whose actions the Custodian shall
be responsible to the extent permitted hereunder, or to
the Fund's independent public accountants in connection
with their auditing duties performed on behalf of the
Fund.
(iii) Nothing in this Section 9 shall prohibit any officer,
employee or agent of the Fund or of the investment adviser
of the Fund from giving instructions to the Custodian or
executing a certificate so long as it does not result in
delivery of or access to assets of the Fund prohibited by
paragraph (i) of this Section 9.
11. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, that the Fund may at any
time by action of its Board, (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Federal Deposit Insurance
Corporation or by the Banking Commissioner of The Commonwealth of Massachusetts
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction. Upon termination of the
Agreement, the Fund shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
Unless the holders of a majority of the outstanding Shares of the Fund vote to
have the securities, funds and other properties held hereunder delivered and
paid over to some other bank or trust company, specified in the vote, having not
less than $2,000,000 of aggregate capital, surplus and undivided profits, as
shown by its last published report, and meeting such other qualifications for
custodians set forth in the Investment Company Act of 1940, the Board shall,
forthwith, upon giving or receiving notice of termination of this Agreement,
appoint as successor custodian, a bank or trust company having such
qualifications. The Bank, as Custodian, Agent or otherwise, shall, upon
termination of the Agreement, deliver to such successor custodian, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank hereunder and all books of account and
records kept by the Bank pursuant to this Agreement, and all documents held by
the Bank relative thereto. In the event that no such vote has been adopted by
the shareholders and that no written order designating a successor custodian
shall have been delivered to the Bank on or before the date when such
termination shall become effective, then the Bank shall not deliver the
securities, funds and other properties of the Fund to the Fund but shall have
the right to deliver to a bank or trust company doing business in Boston,
Massachusetts of its own selection, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all funds, securities and properties of the Fund held by or
deposited with the Bank, and all books of account and records kept by the Bank
pursuant to this Agreement, and all documents held by the Bank relative thereto.
Thereafter such bank or trust company shall be the successor of the Custodian
under this Agreement.
29
<PAGE>
12. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and the Fund
may from time to time agree on such provisions interpretive of or in addition to
the provisions of this Agreement as may in their joint opinion be consistent
with the general tenor of this Agreement. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
governing instruments of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
13. Certification as to Authorized Officers
The Secretary of the Fund shall at all times maintain on file with the Bank his
certification to the Bank, in such form as may be acceptable to the Bank, of the
names and signatures of the authorized officers of each fund, it being
understood that upon the occurence of any change in the information set forth in
the most recent certification on file (including without limitation any person
named in the most recent certification who has ceased to hold the office
designated therein), the Secretary of the Fund shall sign a new or amended
certification setting forth the change and the new, additional or ommitted names
or signatures. The Bank shall be entitled to rely and act upon any officers
named in the most recent certification.
14. Notices
Notices and other writings delivered or mailed postage prepaid to the Fund
addressed to Susan S. Newton, John Hancock Advisers, Inc., 101 Huntington
Avenue, Boston, Massachusetts 02199, or to such other address as the Fund may
have designated to the Bank, in writing, or to Investors Bank & Trust Company,
200 Clarendon Street, Boston, Massachusetts 02116, with a copy to its General
Counsel at the same address, or such other address as the Custodian may
designate to the Fund in writing, shall be deemed to have been properly
delivered or given hereunder to the respective addressees.
15. Massachusetts Law to Apply; Limitations on Liability
This Agreement shall be construed and the provisions thereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
If the Fund is a Massachusetts business trust, the Custodian expressly
acknowledges the provision in the Fund's declaration of trust limiting the
personal liability of the trustees and shareholders of the Fund; and the
Custodian agrees that it shall have recourse only to the assets of the Fund for
the payment of claims or obligations as between the Custodian and the Fund
arising out of this Agreement, and the Custodian
30
<PAGE>
shall not seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. Each Fund, and each series or portfolio of a Fund,
shall be liable only for its own obligations to the Custodian under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
16. Adoption of the Agreement by the Fund
The Fund represents that its Board has approved this Agreement and has duly
authorized the Fund to adopt this Agreement. This Agreement shall be deemed to
supersede and terminate, as of the date first written above, all prior
agreements between the Fund and the Bank relating to the custody of the Fund's
assets.
In Witness Whereof, the parties hereto have caused this agreement to be executed
in duplicate as of the date first written above by their respective officers
thereunto duly authorized.
John Hancock Funds
By: /s/ Osbert Hood
---------------
Osbert Hood
Senior Vice President and Chief Financial Officer
Attest:
Investors Bank & Trust Company
By: /s/ Robert D. Mancuso
---------------------
Name: Robert D. Mancuso
Title: Senior Vice President
Attest:
31
<PAGE>
Appendix B
Additional Information Relating to Mandatory Securities Depositories
The Foreign Custody Manager shall furnish annually to the Board such
information as may be reasonably available relating to the proposed
"safeharbor" criteria with respect to Mandatory Securities Depositories
as set forth below:
(a) whether an Eligible Foreign Custodian or a U.S. bank holding
assets at the depository undertakes to adhere to the rules, practices
and procedures of the depository;
(b) whether a regulatory authority with oversight responsibility for
the depository has issued a public notice that the depository is not in
compliance with any material capital, solvency, insurance, or other
similar financial strength requirements imposed by such authority, or,
in the case of such a notice having been issued, that such notice has
been withdrawn or the remedy of such noncompliance has been publicly
announced by the depository;
(c) whether a regulatory authority with oversight responsibility over
the depository has issued a public notice that the depository is not in
compliance with any material internal controls requirement imposed by
such authority, or, in the case of such notice having been issued, that
such notice has been withdrawn or the remedy of such noncompliance has
been publicly announced by the depository;
(d) whether the depository maintains the assets of the Fund's depositor
under no less favorable safekeeping conditions than those that apply
generally to depositors;
(e) whether the depository maintains records that segregate the
depository's own assets from the assets of depositors;
(f) whether the depository maintains records that identify the assets
of each of its depositors;
(g) whether the depository provides periodic reports to its depositors
with respect to the safekeeping of assets maintained by the depository,
including, but not limited to, notification of any transfer to or from
a depositor's account; and
(h) whether the depository is subject to periodic review, such as
audits by independent accountants or inspections by regulatory
authorities, and
s:\agrcont\agreement\custodia\ibt amended with delegation
B-1
MASTER CUSTODIAN AGREEMENT
between
JOHN HANCOCK MUTUAL FUNDS
and
STATE STREET BANK AND TRUST COMPANY
Amended and Restated
March 9, 1999
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TABLE OF CONTENTS
1. Definitions.............................................................1-3
2. Employment of Custodian and Property to be Held by It.....................3
3. The Custodian as a Foreign Custody Manager................................3
A. Definitions......................................................3-4
B. Delegation to the Custodian as Foreign Custody Manager.............4
C. Countries Covered..................................................4
D. Scope of Delegated Responsibilities..............................4-6
E. Standard of Care as Foreign Custody Manager of the Fund............7
F. Reporting Requirements.............................................7
G. Representations with respect to Rule 17f-5.........................7
H. Effective Date and Termination of the Custodian as Foreign.........7
Custody Manager
I. Withdrawal of Custsodian as Foreign Custody Manager................8
with Respect to Designated Countries and with Respect
to Eligible Foreign Custodians
J. Guidelines for the Exercise of Delegated Authority...............8-9
and Provision of Information Regarding Country Risk
K. Most Favored Client.............................................9-10
L. Direction as to Eligible Foreign Custodians.......................10
4. Duties of the Custodian with Respect to..................................10
Property of the Fund
A. Safekeeping and Holding of Property...............................10
B. Delivery of Securities.........................................10-13
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C. Registration of Securities........................................13
D. Bank Accounts..................................................13-14
E. Payments for Shares of the Fund...................................14
F. Investment and Availability of Federal Funds......................14
G. Collections....................................................14-15
H. Payment of Fund Moneys.........................................15-16
I. Liability for Payment in Advance of............................16-17
Receipt of Securities Purchased
J. Payments for Repurchases of Redemptions...........................17
of Shares of the Fund
K. Appointment of Agents by the Custodian............................17
L. Deposit of Fund Portfolio Securities in........................18-19
Securities Systems
M. Deposit of Fund Commercial Paper in an Approved................19-21
Book-Entry System for Commercial Paper
N. Segregated Account................................................22
O. Ownership Certificates for Tax Purposes...........................22
P. Proxies...........................................................22
Q. Communications Relating to Fund Portfolio......................22-23
Securities
R. Exercise of Rights; Tender Offers................................23
S. Depository Receipts............................................23-24
T. Interest Bearing Call or Time Deposits............................24
U. Options, Futures Contracts and Foreign.........................24-25
Currency Transactions
V. Actions Permitted Without Express Authority....................25-26
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5. Duties of Bank with Respect to Books of Account and......................26
Calculations of Net Asset Value
6. Records and Miscellaneous Duties......................................26-27
7. Opinion of Fund's Independent Public Accountants.........................27
8. Compensation and Expenses of Bank........................................27
9. Responsibility of Bank................................................27-28
10. Persons Having Access to Assets of the Fund...........................28-29
11. Effective Period, Termination and Amendment;..........................29-30
Successor Custodian
12. Interpretive and Additional Provisions...................................30
13. Certification as to Authorized Officers..................................30
14. Notices..................................................................30
15. Massachusetts Law to Apply; Limitations on Liability..................30-31
16. Adoption of the Agreement by the Fund....................................31
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MASTER CUSTODIAN AGREEMENT
This Agreement made as of June 15, 1994 as amended and restated March 9,
1999 between each investment company advised by John Hancock Advisers, Inc.
which has adopted this Agreement in the manner provided herein and State Street
Bank and Trust Company (hereinafter called "Bank", "Custodian" and "Agent"), a
trust company established under the laws of Massachusetts with a principal place
of business in Boston, Massachusetts.
Whereas, each such investment company is registered under the Investment
Company Act of 1940 and has appointed the Bank to act as Custodian of its
property and to perform certain duties as its Agent, as more fully hereinafter
set forth; and
Whereas, the Bank is willing and able to act as each such investment
company's Custodian and Agent, subject to and in accordance with the provisions
hereof;
Now, therefore, in consideration of the premises and of the mutual
covenants and agreements herein contained, each such investment company and the
Bank agree as follows:
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 "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.
(c) "The Depository Trust Company", a clearing agency registered with
the Securities and Exchange Commission under Section 17A of the Securities
Exchange Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
(d) "Authorized Officer", shall mean any of the following officers of
the Fund : The Chairman of the Board of Trustees, the President, a Vice
President, the Secretary, the Treasurer or Assistant Secretary or Assistant
Treasurer, or any other officer of the Fund duly authorized to sign by
appropriate resolution of the Board of Trustees. .
(e) "Participants Trust Company", a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities Exchange
Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
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(f) "Approved Clearing Agency" shall mean any other domestic clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934 which acts as a securities depository but
only if the Custodian has received a certified copy of a vote of the Board
approving such clearing agency as a securities depository for the Fund.
(g) "Federal Book-Entry System" shall mean the book-entry system
referred to in Rule 17f-4(b) under the Investment Company Act of 1940 for United
States and federal agency securities (i.e., as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry
regulations of federal agencies substantially in the form of Subpart O).
(h) "Approved Book-Entry System for Commercial Paper" shall mean a
system maintained by the Custodian or by a subcustodian employed pursuant to
Section 2 hereof for the holding of commercial paper in book-entry form but only
if the Custodian has received a certified copy of a vote of the Board approving
the participation by the Fund in such system.
(i) The Custodian shall be deemed to have received "proper instructions"
in respect of any of the matters referred to in this Agreement upon receipt of
written or facsimile instructions signed by such one or more person or persons
as the Board shall have from time to time authorized to give the particular
class of instructions in question. Electronic instructions for the purchase and
sale of securities which are transmitted by John Hancock Advisers, Inc. (the
"Adviser") to the Custodian shall be deemed to be proper instructions; the Fund
shall cause all such instructions to be confirmed in writing. Different persons
may be authorized to give instructions for different purposes. A certified copy
of a vote of the Board may be received and accepted by the Custodian as
conclusive evidence of the authority of any such person to act and may be
considered as in full force and effect until receipt of written notice to the
contrary. Such instructions may be general or specific in terms and, where
appropriate, may be standing instructions. Unless the vote delegating authority
to any person or persons to give a particular class of instructions specifically
requires that the approval of any person, persons or committee shall first have
been obtained before the Custodian may act on instructions of that class, the
Custodian shall be under no obligation to question the right of the person or
persons giving such instructions in so doing. Oral instructions will be
considered proper instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. The Fund authorizes the Custodian to
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tape record any and all telephonic or other oral instructions given to the
Custodian. "Proper instructions" may also include communications effected
directly between electromechanical or electronic devices provided that the
President and Treasurer of the Fund and the Custodian are satisfied that such
procedures afford adequate safeguards for the Fund's assets. In performing its
duties generally, and more particularly in connection with the purchase, sale
and exchange of securities made by or for the Fund, the Custodian may take
cognizance of the provisions of the governing documents and registration
statement of the Fund as the same may from time to time be in effect (and votes,
resolutions or proceedings of the shareholders or the Board), but, nevertheless,
except as otherwise expressly provided herein, the Custodian may assume unless
and until notified in writing to the contrary that so-called proper instructions
received by it are not in conflict with or in any way contrary to any provisions
of such governing documents and registration statement, or votes, resolutions or
proceedings of the shareholders or the Board.
2. Employment of Custodian and Property to be Held by It
The Fund hereby appoints and employs the Bank as its Custodian and Agent
in accordance with and subject to the provisions hereof, and the Bank hereby
accepts such appointment and employment. The Fund agrees to deliver to the
Custodian all securities, participation interests, cash and other assets owned
by it, and all payments of income, payments of principal and capital
distributions and adjustments received by it with respect to all securities and
participation interests owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares ("Shares") of the
Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held by the Fund and not delivered by
the Fund to the Custodian. The Fund will also deliver to the Bank from time to
time copies of its currently effective charter (or declaration of trust or
partnership agreement, as the case may be), By-Laws, prospectus, statement of
additional information and distribution agreement with its principal
underwriter, together with such resolutions, votes and other proceedings of the
Fund as may be necessary for or convenient to the Bank in the performance of its
duties hereunder.
The Custodian may from time to time employ one or more subcustodians to
perform such acts and services upon such terms and conditions as shall be
approved from time to time by the Board. Any such subcustodian so employed by
the Custodian shall be deemed to be the agent of the Custodian, and the
Custodian shall remain primarily responsible for the securities, participation
interests, moneys and other property of the Fund held by such subcustodian. For
the purposes of this Agreement, any property of the Fund held by any such
subcustodian (domestic or foreign) shall be deemed to be held by the Custodian
under the terms of this Agreement.
3. The Custodian as a Foreign Custody Manager
A. Definitions Capitalized terms in this Article 3 shall have the
following meanings:
(a) "Country risk" means all factors reasonably related to the systemic
risk of holding Foreign Assets in a particular country including, but not
limited to, a country's political environment; economic and financial
infrastructure (including financial institutions such as any Mandatory
Securities Depositories operating in the country); prevailing custody and
settlement practices; and laws and regulations applicable to the
safekeeping and recovery of Foreign Assets held in custody in that country.
(b) "Eligible Foreign Custodian" has the meaning set forth in section
(a)(1) of Rule 17f-5 and also includes a U.S. Bank.
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(c) "Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in these investments.
(d) "Foreign Custody Manager" has the meaning set forth in section (a)(2)
of Rule 17f-5; it is a Fund's Board of Directors or any person serving as
the Board's delegate under sections (b) or (d) of Rule 17f-5.
(e) "Mandatory Securities Depository" means a Securities Depository the use
of which is mandatory (i) by law or regulation; (ii) because securities
cannot be withdrawn from the depository; (iii) because maintaining
securities outside the Securities Depository would impair the liquidity of
the securities because settlement within the depository is mandatory and
the period of time required to deposit securities is longer than the
settlement period or where particular classes of transactions, such as
large trades or turn-around trades, are not available if the securities are
held in physical form; or (iv) because maintaining securities outside of
the Securities Depository is not consistent with prevailing custodial or
market practices generally accepted by institutional investors.
(f) "Securities Depository" has the same meaning set forth in section
(a)(6) of Rule 17f-5: it is a system for the central handling of securities
where all securities are of a particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred
or pledged by bookkeeping entry without physical delivery of the
securities.
(g) "U.S. Bank" means a bank which qualifies to serve as a custodian of
assets of investment companies under ss.17(f) of the Investment Company Act
of 1940, as amended.
B. Delegation to the Custodian as Foreign Custody Manager Each Fund,
by resolution adopted by its Board, hereby appoints the Custodian
as the Foreign Custody Manager of the Fund and delegates to the
Custodian, the responsibilities set forth in this Article 3 with
respect to Foreign Assets held outside the United States, and the
Custodian hereby accepts this delegation.
C. Countries Covered The Foreign Custody Manager shall be responsible
for performing the delegated responsibilities defined below only
with respect to the countries listed on Schedule A, which may be
amended from time to time by the Foreign Custody Manager.
Mandatory Securities Depositories are listed on Schedule B, which
may be amended from time to time by the Foreign Custody Manager.
Schedules A and B may also be amended in accordance with
subsection F of Article 3.
D. Scope of Delegated Responsibilities
1) Selection of Eligible Foreign Custodians Subject to the
provisions of this Article 3 and Rule 17f-5 (and any other
applicable law), the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of an Eligible
Foreign Custodian selected by the Foreign Custody Manager in
each country listed
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on Schedule A, as amended from time to time. In addition,
the Foreign Custody Manager shall provide the Fund with all
requisite forms and documentation to open an account in any
country listed on Schedule A as requested by any Authorized
Officer and shall assist the Fund with the filing and
processing of these forms and documents. Execution of this
amended and restated Agreement by the Fund shall be deemed
to be a Proper Instruction to open an account, or to place
or maintain Foreign Assets in each country listed on
Schedule A.
In performing its delegated responsibilities as Foreign
Custody Manager to place or maintain Foreign Assets with an
Eligible Foreign Custodian, the Foreign Custody Manager
shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will
be held by that Eligible Foreign Custodian, after
considering all factors relevant to the safekeeping of those
assets. These factors include, without limitation:
(i) the Eligible Foreign Custodian's practices, procedures
and internal controls, including but not limited to, the
physical protections available for certificated securities
(if applicable), its methods of keeping custodial records
and its security and data protection practices;
(ii) whether the Eligible Foreign Custodian has the
requisite financial strength to provide reasonable care for
Foreign Assets;
(iii) the Eligible Foreign Custodian's general reputation
and standing and, in the case of any Securities Depository,
the Securities Depository's operating history and the number
of participants; and
(iv) whether the Fund will have jurisdiction over and be
able to enforce judgments against the Eligible Foreign
Custodian, such as by virtue of the existence of any offices
of the Eligible Foreign Custodian in the United States or
the Eligible Foreign Custodian's consent to service of
process in the United States.
2) Contracts With Eligible Foreign Custodians For each Eligible
Foreign Custodian selected by the Foreign Custody Manager,
the Foreign Custody Manager shall (or, in the case of a
Securities Depository which is not a Mandatory Securities
Depository, may under the rules or established practices or
procedures of the Securities Depository) enter into a
written contract governing the Fund's foreign custody
arrangements with the Eligible Foreign Custodian. The
Foreign Custody Manager shall determine that each contract
will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards
specified in paragraph 1 of subsection D of Article 3 of
this Agreement. Each contract shall include provisions that
provide:
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(i) for indemnification or insurance arrangements (or any
combination of the foregoing) so that the Fund will be
adequately protected against the risk of loss of the
Foreign Assets held in accordance with the contract;
(ii) that the Foreign Assets will not be subject to any
right, security interest, lien or claim of any kind in
favor of the Eligible Foreign Custodian or its creditors
except a claim of payment for their safe custody or
administration or, in the case of cash deposits, liens or
rights in favor of creditors of the Eligible Foreign
Custodian arising under bankruptcy, insolvency or similar
laws;
(iii) that beneficial ownership of the Foreign Assets will
be freely transferable without the payment of money or
value other than for safe custody or administration;
(iv) that adequate records will be maintained identifying
the Foreign Assets as belonging to the Fund or as being
held by a third party for the benefit of the Fund;
(v) that the Fund's independent public accountants will be
given access to those records or confirmation of the
contents of those records; and
(vi) that the Fund will receive periodic reports with
respect to the safekeeping of the Foreign Assets,
including, but not limited to, notification of any
transfer of the Foreign Assets to or from the Fund's
account or a third party account containing the Foreign
Assets held for the benefit of the Fund, or, in lieu of
any or all of the provisions set forth in (i) through (vi)
above, such other provisions that the Foreign Custody
Manager determines will provide, in their entirety, the
same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (i) through
(vi) above in their entirety.
3) Monitoring In each case in which the Foreign Custody
Manager maintains Foreign Assets with an Eligible Foreign
Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to
monitor at reasonable intervals the initial and continued
appropriateness of (i) maintaining the Foreign Assets with
the Eligible Foreign Custodian and (ii) the contract
governing the custody arrangements established by the
Foreign Custody Manager with the Eligible Foreign
Custodian. The Foreign Custody Manager shall consider all
factors and criteria set forth in subparagraphs 1 and 2 of
subsection D of Article 3 of this Agreement.
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E. Standard of Care as Foreign Custody Manager of the Fund In
performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and
diligence as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
Investment Company Act of 1940, as amended, would exercise. The
Foreign Custody Manager agrees to notify immediately the Adviser
and the Board if, at any time, the Foreign Custody Manager
believes it cannot perform, in accordance with the foregoing
standard of care, its duties hereunder generally or with respect
to any country specified in Schedule A.
F. Reporting Requirements The Foreign Custody Manager shall list on
Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the Fund's assets. The Foreign
Custody Manager shall report the withdrawal of the Foreign Assets
from an Eligible Foreign Custodian and the placement of the
Foreign Assets with another Eligible Foreign Custodian by
providing to the Adviser an amended Schedule A promptly. The
Foreign Custody Manager shall make written reports notifying the
Adviser and the Board of any other material change in the foreign
custody arrangements of the Fund described in this Article 3.
Amended Schedules A or B and material change reports shall be
provided to the Board quarterly, provided that, if the Foreign
Custody Manager or the Adviser determines that any matter should
be reported sooner, the Foreign Custody Manager shall promptly,
following the occurrence of the event, direct the report to the
Fund's Secretary for forwarding to the Board. At least annually,
the Foreign Custody Manager shall provide the Adviser and the
Board a written statement enabling the Board to determine that it
is reasonable to rely on the Foreign Custody Manager to perform
its delegated duties under this Article 3 and that the foreign
custody arrangements delegated to the Foreign Custody Manager
continue to meet the requirements of Rule 17f-5 under the
Investment Company Act of 1940, as amended. The Foreign Custody
Manager will also provide monthly reports on each Eligible Foreign
Custodian listing all holdings and current market values.
G. Representations with respect to Rule 17f-5 The Foreign Custody
Manager represents to the Fund that it is a U.S. Bank as defined
in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined
that it is reasonable for the Board to rely on the Custodian to
perform the responsibilities delegated pursuant to this Article as
the Foreign Custody Manager of the Fund.
H. Effective Date and Termination of the Custodian as Foreign Custody
Manager The Board's delegation to the Custodian as Foreign Custody
Manager of the Fund shall be effective as of the date of execution
of this amended and restated Agreement and shall remain in effect
until terminated at any time, without penalty, by written notice
from the terminating party to the non-terminating party.
Termination will become effective sixty days after receipt by the
non-terminating party of the notice.
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I. Withdrawal of Custodian as Foreign Custody Manager with respect to
Designated Countries and with respect to Eligible Foreign
Custodians Following the receipt of Proper Instructions directing
the Foreign Custody Manager to close the account of the Fund with
the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country and to remove that country from
Schedule A, the delegation by the Board to the Custodian as
Foreign Custody Manager for that country shall be deemed to have
been withdrawn with respect to that country and the Custodian
shall cease to be the Foreign Custody Manager of the Fund with
respect to that country after settlement of all pending trades.
The Foreign Custody Manager may withdraw its acceptance of
delegated responsibilities with respect to a country listed on
Schedule A upon written notice to the Fund in accordance with
subsection F. Sixty days (or other period agreed to by the parties
in writing) after receipt of any notice by the Fund, the Custodian
shall have no further responsibility as Foreign Custody Manager to
the Fund with respect to that country.
In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has
selected are no longer appropriate because the applicable Eligible
Foreign Custodian is no longer able to provide reasonable care for
Foreign Assets held in the country, or an arrangement no longer
meets the requirements of Rule 17f-5, the Foreign Custody Manager
shall notify the Adviser, the Board and the Fund in accordance
with subsection F hereunder. If the Adviser determines that
withdrawal is in the best interest of the Fund, the Foreign
Custody Manager shall withdraw all Foreign Assets from the
Eligible Foreign Custodian, as soon as reasonably practicable, and
shall provide alternative safe keeping acceptable to the Foreign
Custody Manager. If the Adviser determines that it is in the best
interest of the Fund to withdraw all Foreign Assets and this
withdrawal would require liquidation of any Foreign Assets or
would materially and adversely impair the liquidity, value or
other investment characteristic of any Foreign Assets, the Foreign
Custody Manager shall immediately provide information regarding
the particular circumstances to the Adviser and to the Board and
shall act in accordance with instructions received from an
Authorized Officer, with respect to the liquidation or other
withdrawal.
J. Guidelines for the Exercise of Delegated Authority and Provision
of Information Regarding Country Risk Nothing in this Article 3
shall require the Foreign Custody Manager to consider Country Risk
as part of its delegated responsibilities under subsection D of
Article 3. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be responsible for, or
liable for any loss in connection with the placement of Foreign
Assets with or withdrawal of Foreign Assets from a Mandatory
Securities Depository nor be delegated any responsibilities under
this Article 3 with respect to Mandatory Securities Depositories
other than those set forth below.
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With respect to the countries listed in Schedule A, or added
thereto, the Foreign Custody Manager agrees to provide annually to
the Board and the Adviser, information relating to the Country
Risks of holding Foreign Assets in such countries, including but
not limited to, the Mandatory Securities Depositories, if any,
operating in the country. In addition, the Foreign Custody Manager
shall use reasonable care in the gathering of this information and
with regard to, among other things, the completeness and accuracy
of this information. The information furnished annually by the
Foreign Custody Manager to the Board should include but not be
limited to the following, if available:
(i) Legal Opinion regarding whether applicable foreign law
would restrict the access of the Fund's independent public
accountants to the books and records of the foreign
custodian, whether applicable foreign law would restrict
the Fund's ability to recover its assets in the event of
bankruptcy of the foreign custodian, whether applicable
foreign law would restrict the Fund's ability to recover
assets lost while under the foreign custodian's control,
the likelihood of expropriation, nationalization, freezes
or confiscation of the Fund's assets and whether there are
reasonably foreseeable difficulties in converting the
Fund's cash into U.S. dollars, or such other form of Legal
Opinion as is customary in association with Rule 17f-5
from time to time,
(ii) audit report of the Foreign Custody Manager,
(iii) copy of balance sheet from annual report of the
custodian,
(iv) summary of Central Depository Information,
(v) country profile materials containing market practice
for: delivery versus payment, settlement method, currency
restrictions, buy-in practice, Foreign ownership limits
and unique market arrangements,
(vi) The Foreign Custody Manager shall also provide such
other information as may be reasonably available relating
to Mandatory Securities Depositories, and, in accordance
with applicable requirements promulgated by the SEC from
time to time, to the criteria as set forth on Appendix B
hereto, as such Appendix may be revised by the parties
hereto from time to time; and,
(vii) such other materials as the Board may reasonably
request from time to time, including copies of contracts
with the subcustodians.
K. Most Favored Client If at any time the Foreign Custody Manager
shall be a party to an agreement, to serve as a Foreign Custody
Manager to an investment company, that provides for either (a) a
standard of care with respect to the selection of Eligible Foreign
Custodians in any jurisdiction higher than that set forth in
paragraph 1 of subsection D of Article 3 of this Agreement or
(b) a standard of care with respect to the exercise of the Foreign
Custody Manager's duties other than
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that set forth in subsection F of Article 3 of this Agreement, the
Foreign Custody Manager agrees to notify the Fund of this fact and
to raise the applicable standard of care hereunder to the standard
specified in the other agreement. In the event that the Foreign
Custody Manager shall in the future offer review or information
services with respect to Mandatory Securities Depositories in
addition to any services provided hereunder, the Foreign Custody
Manager agrees that it shall notify the Fund of this fact and
shall offer these services to the Fund.
L. Direction as to Eligible Foreign Custodians Notwithstanding
Article 3 of this Agreement, the Fund or the Adviser may direct
the Custodian to place and maintain Foreign Assets with a
particular Eligible Foreign Custodian acceptable to the Foreign
Custody Manager. In such event, the Custodian shall be entitled to
rely on any instruction as a Proper Instruction and may limit its
duties under this Article 3 of the Agreement with respect to such
arrangements by describing any limitations in writing with respect
to each instance.
4. Duties of the Custodian with Respect to Property of the Fund
A. Safekeeping and Holding of Property The Custodian shall keep
safely all property of the Fund and on behalf of the Fund shall
from time to time receive delivery of Fund property for
safekeeping. The Custodian shall hold, earmark and segregate on
its books and records for the account of the Fund all property of
the Fund, including all securities, participation interests and
other assets of the Fund (1) physically held by the Custodian,
(2) held by any subcustodian referred to in Section 2 hereof or by
any agent referred to in Paragraph K hereof, (3) held by or
maintained in The Depository Trust Company or in Participants
Trust Company or in an Approved Clearing Agency or in the Federal
Book-Entry System or in an Approved Foreign Securities Depository,
each of which from time to time is referred to herein as a
"Securities System", and (4) held by the Custodian or by any
subcustodian referred to in Section 2 hereof and maintained in any
Approved Book-Entry System for Commercial Paper.
B. Delivery of Securities The Custodian shall release and deliver
securities or participation interests owned by the Fund held (or
deemed to be held) by the Custodian or maintained in a Securities
System account or in an Approved Book-Entry System for Commercial
Paper account only upon receipt of proper instructions, which may
be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities or participation interests
for the account of the Fund, but only against receipt of
payment therefor; if delivery is made in Boston or New
York City, payment therefor shall be made in accordance
with generally accepted clearing house procedures or by
use of Federal Reserve Wire System procedures; if delivery
is made elsewhere payment therefor shall be in accordance
with the then current "street delivery" custom or in
accordance with such procedures agreed to in writing from
time to time by the parties hereto; if the sale is
10
<PAGE>
effected through a Securities System, delivery and payment
therefor shall be made in accordance with the provisions
of Paragraph L hereof; if the sale of commercial paper is
to be effected through an Approved Book-Entry System for
Commercial Paper, delivery and payment therefor shall be
made in accordance with the provisions of Paragraph M
hereof; if the securities are to be sold outside the
United States, delivery may be made in accordance with
procedures agreed to in writing from time to time by the
parties hereto; for the purposes of this subparagraph, the
term "sale" shall include the disposition of a portfolio
security (i) upon the exercise of an option written by the
Fund and (ii) upon the failure by the Fund to make a
successful bid with respect to a portfolio security, the
continued holding of which is contingent upon the making
of such a bid;
2) Upon the receipt of payment in connection with any
repurchase agreement or reverse repurchase agreement
relating to such securities and entered into by the Fund;
3) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
4) To the issuer thereof or its agent when such securities or
participation interests are called, redeemed, retired or
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
5) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Paragraph K hereof or into the name
or nominee name of any subcustodian employed pursuant to
Section 2 hereof; or for exchange for a different number
of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities or
participation interests are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
6) To the broker selling the same for examination in
accordance with the "street delivery" custom; provided
that the Custodian shall adopt such procedures as the Fund
from time to time shall approve to ensure their prompt
return to the Custodian by the broker in the event the
broker elects not to accept them;
7) For exchange or conversion pursuant to any plan of merger,
consolidation, re capitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion of
such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof;
11
<PAGE>
8) In the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such
warrants, rights or similar securities, or the surrender
of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
9) For delivery in connection with any loans of securities
made by the Fund (such loans to be made pursuant to the
terms of the Fund's current registration statement), but
only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities.
10) For delivery as security in connection with any borrowings
by the Fund requiring a pledge or hypothecation of assets
by the Fund (if then permitted under circumstances
described in the current registration statement of the
Fund), provided, that the securities shall be released
only upon payment to the Custodian of the monies borrowed,
except that in cases where additional collateral is
required to secure a borrowing already made, further
securities may be released for that purpose; upon receipt
of proper instructions, the Custodian may pay any such
loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
11) When required for delivery in connection with any
redemption or repurchase of Shares of the Fund in
accordance with the provisions of Paragraph J hereof;
12) For delivery in accordance with the provisions of any
agreement between the Custodian (or a subcustodian
employed pursuant to Section 2 hereof) and a broker-dealer
registered under the Securities Exchange Act of 1934 and,
if necessary, the Fund, relating to compliance with the
rules of The Options Clearing Corporation or of any
registered national securities exchange, or of any similar
organization or organizations, regarding deposit or escrow
or other arrangements in connection with options
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian (or a subcustodian
employed pursuant to Section 2 hereof), and a futures
commission merchant, relating to compliance with the rules
of the Commodity Futures Trading Commission and/or of any
contract market or commodities exchange or similar
organization, regarding futures margin account deposits or
payments in connection with futures transactions by the
Fund;
12
<PAGE>
14) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose
to be proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
C. Registration of Securities Securities held by the Custodian
(other than bearer securities) for the account of the Fund shall
be registered in the name of the Fund or in the name of any
nominee of the Fund or of any nominee of the Custodian, or in the
name or nominee name of any agent appointed pursuant to Paragraph
K hereof, or in the name or nominee name of any subcustodian
employed pursuant to Section 2 hereof, or in the name or nominee
name of The Depository Trust Company or Participants Trust Company
or Approved Clearing Agency or Federal Book-Entry System or
Approved Book-Entry System for Commercial Paper; provided, that
securities are held in an account of the Custodian or of such
agent or of such subcustodian containing only assets of the Fund
or only assets held by the Custodian or such agent or such
subcustodian as a custodian or subcustodian or in a fiduciary
capacity for customers. All certificates for securities accepted
by the Custodian or any such agent or subcustodian on behalf of
the Fund shall be in "street" or other good delivery form or shall
be returned to the selling broker or dealer who shall be advised
of the reason thereof.
D. Bank Accounts The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to
draft or order by the Custodian acting in pursuant to the terms
of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or
for the account of the Fund other than cash maintained by the Fund
in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the banking department of the Custodian or in such
other banks or trust companies as the Custodian may in its
discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each
such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved in writing by an
Authorized Officer. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be subject to
withdrawal only by the Custodian in that capacity.
The Custodian may, on behalf of any Fund, open and cause to be
maintained outside the United States a bank account with (a) an
Eligible Foreign Custodian (as defined in Article 3) or (b) any
person with whom property of the Fund may be placed and maintained
outside of the United States under (i) ss.17(f) or 26(a) of the
1940 Act, without regard to Rule 17f-5 or (ii) an order of the
U.S. Securities and Exchange Commission (a "permissible Foreign
Custodian"). Such account(s) shall be subject only to draft or
order by the Custodian or Eligible Foreign Custodian or
Permissible Foreign Custodian acting pursuant to the terms of this
Agreement to hold cash received by or from or for the account of
the Fund.
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<PAGE>
E. Payment for Shares of the Fund The Custodian shall make
appropriate arrangements with the Transfer Agent and the principal
underwriter of the Fund to enable the Custodian to make certain it
promptly receives the cash or other consideration due to the Fund
for such new or treasury Shares as may be issued or sold from time
to time by the Fund, in accordance with the governing documents
and offering prospectus and statement of additional information of
the Fund. The Custodian will provide prompt notification to the
Fund of any receipt by it of payments for Shares of the Fund.
F. Investment and Availability of Federal Funds Upon agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties, invest in
such securities and instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the
Fund.
G. Collections The Custodian shall promptly collect all income and
other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall promptly
collect all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or agent thereof and shall
credit such income, as collected, to the Fund's custodian account.
The Custodian shall do all things necessary and proper in connection with such
prompt collections and, without limiting the generality of the foregoing, the
Custodian shall
1) Present for payment all coupons and other income items
requiring presentations;
2) Present for payment all securities which may mature or be
called, redeemed, retired or otherwise become payable;
3) Endorse and deposit for collection, in the name of the
Fund, checks, drafts or other negotiable instruments;
4) Credit income from securities maintained in a Securities
System or in an Approved Book-Entry System for Commercial
Paper at the time funds become available to the Custodian;
in the case of securities maintained in The Depository
Trust Company funds shall be deemed available to the Fund
not later than the opening of business on the first
business day after receipt of such funds by the Custodian.
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<PAGE>
The Custodian shall notify the Fund as soon as reasonably practicable whenever
income due on any security is not promptly collected. In any case in which the
Custodian does not receive any due and unpaid income after it has made demand
for the same, it shall immediately so notify the Fund in writing, enclosing
copies of any demand letter, any written response thereto, and memoranda of all
oral responses thereto and to telephonic demands, and await instructions from
the Fund; the Custodian shall in no case have any liability for any nonpayment
of such income provided the Custodian meets the standard of care set forth in
Section 8 hereof. The Custodian shall not be obligated to take legal action for
collection unless and until reasonably indemnified to its satisfaction.
The Custodian shall also receive and collect all stock dividends, rights and
other items of like nature, and deal with the same pursuant to proper
instructions relative thereto.
H. Payment of Fund Moneys Upon receipt of proper instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
1) Upon the purchase of securities, participation interests,
options, futures contracts, forward contracts and options
on futures contracts purchased for the account of the Fund
but only (a) against the receipt of:
(i) such securities registered as provided in
Paragraph C hereof or in proper form for
transfer or
(ii) detailed instructions signed by an officer of the
Fund regarding the participation interests to be
purchased or
(iii) written confirmation of the purchase by the Fund
of the options, futures contracts, forward
contracts or options on futures contracts
by the Custodian (or by a subcustodian employed pursuant
to Section 2 hereof or by a clearing corporation of a
national securities exchange of which the Custodian is a
member or by any bank, banking institution or trust
company doing business in the United States or abroad
which is qualified under the Investment Company Act of
1940 to act as a custodian and which has been designated
by the Custodian as its agent for this purpose or by the
agent specifically designated in such instructions as
representing the purchasers of a new issue of privately
placed securities); (b) in the case of a purchase effected
through a Securities System, upon receipt of the
securities by the Securities System in accordance with the
conditions set forth in Paragraph L hereof; (c) in the
case of a purchase of commercial paper effected through an
Approved
15
<PAGE>
Book-Entry System for Commercial Paper, upon
receipt of the paper by the Custodian or subcustodian in
accordance with the conditions set forth in Paragraph M
hereof; (d) in the case of repurchase agreements entered
into between the Fund and another bank or a broker-dealer,
against receipt by the Custodian of the securities
underlying the repurchase agreement either in certificate
form or through an entry crediting the Custodian's
segregated, non-proprietary account at the Federal Reserve
Bank of Boston with such securities along with written
evidence of the agreement by the bank or broker-dealer to
repurchase such securities from the Fund; or (e) with
respect to securities purchased outside of the United
States, in accordance with written procedures agreed to
from time to time in writing by the parties hereto;
2) When required in connection with the conversion, exchange
or surrender of securities owned by the Fund as set forth
in Paragraph B hereof;
3) When required for the redemption or repurchase of Shares
of the Fund in accordance with the provisions of Paragraph
J hereof;
4) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: advisory fees,
distribution plan payments, interest, taxes, management
compensation and expenses, accounting, transfer agent and
legal fees, and other operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends or other distributions to
holders of Shares declared or authorized by the Board; and
6) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board, specifying the
amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person or
persons to whom such payment is to be made.
I. Liability for Payment in Advance of Receipt of Securities
Purchased In any and every case where payment for purchase of
securities for the account of the Fund is made by the Custodian in
advance of receipt of the securities purchased in the absence of
specific written instructions signed by two officers of the Fund
to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the
securities had been received by the Custodian; except that in the
case of a repurchase agreement entered into by the Fund with a
bank which is a member of the Federal Reserve System, the
Custodian may transfer funds to the account of such bank prior to
the receipt of (i) the securities in certificate form subject to
such repurchase agreement
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<PAGE>
or (ii) written evidence that the securities subject to such
repurchase agreement have been transferred by book-entry into a
segregated non-proprietary account of the Custodian maintained
with the Federal Reserve Bank of Boston or (iii) the safekeeping
receipt, provided that such securities have in fact been so
transferred by book-entry and the written repurchase agreement is
received by the Custodian in due course. With respect to
securities and funds held by a subcustodian, either directly or
indirectly (including by a Securities Depository or clearing
corporation), notwithstanding any provisions of this Agreement to
the contrary, payment for securities purchased and delivery of
securities sold may be made prior to receipt of securities or
payment respectively, and securities or payment may be received in
a form in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally
accepted trade practice in the applicable local market, (d) the
terms and characteristics of the particular investment, or (e) the
terms of instructions.
J. Payments for Repurchases or Redemptions of Shares of the Fund From
such funds as may be available for the purpose, but subject to any
applicable votes of the Board and the current redemption and
repurchase procedures of the Fund, the Custodian shall, upon
receipt of written instructions from the Fund or from the Fund's
transfer agent or from the principal underwriter, make funds
and/or portfolio securities available for payment to holders of
Shares who have caused their Shares to be redeemed or repurchased
by the Fund or for the Fund's account by its transfer agent or
principal underwriter.
The Custodian may maintain a special checking account upon which
special checks may be drawn by shareholders of the Fund holding
Shares for which certificates have not been issued. Such checking
account and such special checks shall be subject to such rules and
regulations as the Custodian and the Fund may from time to time
adopt. The Custodian or the Fund may suspend or terminate use of
such checking account or such special checks (either generally or
for one or more shareholders) at any time. The Custodian and the
Fund shall notify the other immediately of any such suspension or
termination.
K. Appointment of Agents by the Custodian The Custodian may at any
time or times in its discretion appoint (and may at any time
remove) any other bank or trust company (provided such bank or
trust company is itself qualified under the Investment Company Act
of 1940 to act as a custodian or is itself an eligible foreign
custodian within the meaning of Rule 17f-5 under said Act) as the
agent of the Custodian to carry out such of the duties and
functions of the Custodian described in this Section 3 as the
Custodian may from time to time direct; provided, however, that
the appointment of any such agent shall not relieve the Custodian
of any of its responsibilities or liabilities hereunder, and as
between the Fund and the Custodian the Custodian shall be fully
responsible for the acts and omissions of any such agent. For the
purposes of this Agreement, any property of the Fund held by any
such agent shall be deemed to be held by the Custodian hereunder.
17
<PAGE>
L. Deposit of Fund Portfolio Securities in Securities Systems The
Custodian may deposit and/or maintain securities owned by the Fund
(1) in The Depository Trust Company;
(2) in Participants Trust Company;
(3) in any other Approved Clearing Agency;
(4) in the Federal Book-Entry System; or
(5) in a Securities Depository (as defined in
Article 3).
in each case only in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, and at all times subject to the following
provisions:
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep securities of
the Fund in a Securities System provided that such securities are
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in the Securities System which
shall not include any assets of the Custodian or such subcustodian
or any other person other than assets held by the Custodian or
such subcustodian as a fiduciary, custodian, or otherwise for its
customers.
(b) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund, and the
Custodian shall be fully and completely responsible for
maintaining a record keeping system capable of accurately and
currently stating the Fund's holdings maintained in each such
Securities System.
(c) The Custodian shall pay for securities purchased in book-entry
form for the account of the Fund only upon (i) receipt of notice
or advice from the Securities System that such securities have
been transferred to the Account, and (ii) the making of any entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund only upon
(i) receipt of notice or advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all notices or advises from the Securities System of
transfers of securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
promptly provided to the Fund at its request. The Custodian shall
promptly send to the Fund confirmation of each transfer to or from
the account of the Fund in the form of a written advice or notice
of each such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transactions in the
Securities System for the account of the Fund on the next business
day.
18
<PAGE>
(d) The Custodian shall promptly send to the Fund any report or other
communication received or obtained by the Custodian relating to the
Securities System's accounting system, system of internal accounting
controls or procedures for safeguarding securities deposited in the
Securities System; the Custodian shall promptly send to the Fund any
report or other communication relating to the Custodian's internal
accounting controls and procedures for safeguarding securities
deposited in any Securities System; and the Custodian shall ensure that
any agent appointed pursuant to Paragraph K hereof or any subcustodian
employed pursuant to Section 2 hereof shall promptly send to the Fund
and to the Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and procedures
for safeguarding securities deposited in any Securities System. The
Custodian's books and records relating to the Fund's participation in
each Securities System will at all times during regular business hours
be open to the inspection of the Fund's Authorized Officers, employees
or agents.
(e) The Custodian shall not act under this Paragraph L in the absence
of receipt of a certificate of an Authorized Officer that the Board has
approved the use of a particular Securities System; the Custodian shall
also obtain appropriate assurance from an Authorized Officer that the
Board has annually reviewed and approved the continued use by the Fund
of each Securities System, so long as such review and approval is
required by Rule 17f-4 under the Investment Company Act of 1940, and
the Fund shall promptly notify the Custodian if the use of a Securities
System is to be discontinued; at the request of the Fund, the Custodian
will terminate the use of any such Securities System as promptly as
practicable.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or subcustodians or of any of its or their employees or from any
failure of the Custodian or any such agent or subcustodian to enforce
effectively such rights as it may have against the Securities System or
any other person; at the election of the Fund, it shall be entitled to
be subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such loss or
damage.
M. Deposit of Fund Commercial Paper in an Approved Book-Entry System
for Commercial Paper Upon receipt of proper instructions with respect
to each issue of direct issue commercial paper purchased by the Fund,
the Custodian may deposit and/or maintain direct issue commercial paper
owned by the Fund in any Approved Book-Entry System for Commercial
Paper, in each case only in accordance with applicable Securities and
Exchange Commission rules, regulations, and no-action correspondence,
and at all times subject to the following provisions:
19
<PAGE>
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep
commercial paper of the Fund in an Approved Book-Entry
System for Commercial Paper, provided that such paper is
issued in book entry form by the Custodian or
subcustodian on behalf of an issuer with which the
Custodian or subcustodian has entered into a book-entry
agreement and provided further that such paper is
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in an Approved Book-Entry
System for Commercial Paper which shall not include any
assets of the Custodian or such subcustodian or any other
person other than assets held by the Custodian or such
subcustodian as a fiduciary, custodian, or otherwise for
its customers.
(b) The records of the Custodian with respect to commercial
paper of the Fund which is maintained in an Approved
Book-Entry System for Commercial Paper shall identify by
book-entry each specific issue of commercial paper
purchased by the Fund which is included in the System and
shall at all times during regular business hours be open
for inspection by authorized officers, employees or agents
of the Fund. The Custodian shall be fully and completely
responsible for maintaining a record keeping system
capable of accurately and currently stating the Fund's
holdings of commercial paper maintained in each such
System.
(c) The Custodian shall pay for commercial paper purchased in
book-entry form for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice from the
issuer that such paper has been issued, sold and
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
purchase, payment and transfer for the account of the
Fund. The Custodian shall transfer such commercial paper
which is sold or cancel such commercial paper which is
redeemed for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice that
payment for such paper has been transferred to the
Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer or redemption and
payment for the account of the Fund. Copies of all
notices, advises and confirmations of transfers of
commercial paper for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be promptly provided to the Fund at its
request. The Custodian shall promptly send to the Fund
confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice of each
such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transactions in the System for the account of the Fund on
the next business day.
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<PAGE>
(d) The Custodian shall promptly send to the Fund any report
or other communication received or obtained by the Custodian
relating to each System's accounting system, system of
internal accounting controls or procedures for safeguarding
commercial paper deposited in the System; the Custodian shall
promptly send to the Fund any report or other communication
relating to the Custodian's internal accounting controls and
procedures for safeguarding commercial paper deposited in any
Approved Book-Entry System for Commercial Paper; and the
Custodian shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant to
Section 2 hereof shall promptly send to the Fund and to the
Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and
procedures for safeguarding securities deposited in any
Approved Book-Entry System for Commercial Paper.
(e) The Custodian shall not act under this Paragraph M in the
absence of receipt of a certificate of an officer of the Fund
that the Board has approved the use of a particular Approved
Book-Entry System for Commercial Paper; the Custodian shall
also obtain appropriate assurance from an Authorized Officer
that the Board has annually reviewed and approved the
continued use by the Fund of each Approved Book-Entry System
for Commercial Paper, so long as such review and approval is
required by Rule 17f-4 under the Investment Company Act of
1940, and the Fund shall promptly notify the Custodian if the
use of an Approved Book-Entry System for Commercial Paper is
to be discontinued; at the request of the Fund, the Custodian
will terminate the use of any such System as promptly as
practicable.
(f) The Custodian (or subcustodian, if the Approved Book-Entry
System for Commercial Paper is maintained by the subcustodian)
shall issue physical commercial paper or promissory notes
whenever requested to do so by the Fund or in the event of an
electronic system failure which impedes issuance, transfer or
custody of direct issue commercial paper by book-entry.
(g) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of any Approved
Book-Entry System for Commercial Paper by reason of any
negligence, misfeasance or misconduct of the Custodian or any
of its agents or subcustodians or of any of its or their
employees or from any failure of the Custodian or any such
agent or subcustodian to enforce effectively such rights as it
may have against this System, the issuer of the commercial
paper or any other person; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against this System, the
issuer of the commercial paper or any other person which the
Custodian may have as a consequence of any such loss or damage
if and to the extent that the Fund has not been made whole for
any such loss or damage.
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<PAGE>
N. Segregated Account The Custodian shall upon receipt of proper
instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Paragraph L hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and any registered
broker-dealer (or any futures commission merchant), relating to
compliance with the rules of the Options Clearing Corporation and
of any registered national securities exchange (or of the
Commodity Futures Trading Commission or of any contract market or
commodities exchange), or of any similar organization or
organizations, regarding escrow or deposit or other arrangements
in connection with transactions by the Fund, (ii) for purposes of
segregating cash or U.S. Government securities in connection with
options purchased, sold or written by the Fund or futures
contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
purposes, but only, in the case of clause (iv), upon receipt of,
in addition to proper instructions, a certificate signed by two
officers of the Fund, setting forth the purpose such segregated
account and declaring such purpose to be a proper purpose.
O. Ownership Certificates for Tax Purposes The Custodian shall
execute ownership and other certificates and affidavits for all
foreign, federal and state tax purposes in connection with
receipt of income or other payments with respect to securities
of the Fund held by it and in connection with transfers of
securities.
P. Proxies The Custodian shall, with respect to the securities
held by it hereunder, cause to be promptly delivered to the Fund
all forms of proxies and all notices of meetings and any other
notices or announcements or other written information affecting
or relating to the securities, and upon receipt of proper
instructions shall execute and deliver or cause its nominee to
execute and deliver such proxies or other authorizations as may
be required. Neither the Custodian nor its nominee shall
vote upon any of the securities or execute any proxy to
vote thereon or give any consent or take any other action with
respect thereto (except as otherwise herein provided) unless
ordered to do so by proper instructions.
Q. Communications Relating to Fund Portfolio Securities The Custodian
shall deliver promptly to the Fund all written information
(including, without limitation, pendency of call and maturities
of securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers and other persons relating to the
securities and participation interests being held for the Fund.
With respect to tender or exchange offers, the Custodian shall
deliver promptly to the Fund all written information received by
the Custodian from issuers and other persons relating to
the securities and participation interests whose tender or
exchange is sought and from the party (or his agents) making
the tender or exchange offer.
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<PAGE>
R. Exercise of Rights; Tender Offers In the case of tender offers,
similar offers to purchase or exercise rights (including,
without limitation, pendency of calls and maturities of
securities and participation interests and expirations of rights
in connection therewith and notices of exercise of call and put
options and the maturity of futures contracts) affecting or
relating to securities and participation interests held by the
Custodian under this Agreement, the Custodian shall have
responsibility for promptly notifying the Fund of all such
offers in accordance with the standard of reasonable care set
forth in Section 8 hereof. For all such offers for which the
Custodian is responsible as provided in this Paragraph R, the
Fund shall have responsibility for providing the Custodian with
all necessary instructions in timely fashion. Upon receipt of
proper instructions, the Custodian shall timely deliver to the
issuer or trustee thereof, or to the agent of either,
warrants, puts, calls, rights or similar securities for
the purpose of being exercised or sold upon proper receipt
therefor and upon receipt of assurances satisfactory to the
Custodian that the new securities and cash, if any, acquired by
such action are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof. Upon receipt
of proper instructions, the Custodian shall timely deposit
securities upon invitations for tenders of securities upon proper
receipt therefor and upon receipt of assurances satisfactory to
the Custodian that the consideration to be paid or delivered or
the tendered securities are to be returned to the Custodian or
subcustodian employed pursuant to Section 2 hereof.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary by proper instructions, to comply with
the terms of all mandatory or compulsory exchanges, calls,
tenders, redemptions, or similar rights of security ownership, and
shall thereafter promptly notify the Fund in writing of such
action.
S. Depository Receipts The Custodian shall, upon receipt of proper
instructions, surrender or cause to be surrendered foreign
securities to the depository used by an issuer of American
Depository Receipts, European Depository Receipts or International
Depository Receipts (hereinafter collectively referred to as
"ADRs") for such securities, against a written receipt therefor
adequately describing such securities and written evidence
satisfactory to the Custodian that the depository has acknowledged
receipt of instructions to issue with respect to such securities
ADRs in the name of a nominee of the Custodian or in the name or
nominee name of any subcustodian employed pursuant to Section 2
hereof, for delivery to the Custodian or such subcustodian at such
place as the Custodian or such subcustodian may from time to time
designate. The Custodian shall, upon receipt of proper
instructions, surrender ADRs to the issuer thereof against a
written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian
that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities
underlying such ADRs to the Custodian or to a subcustodian
employed pursuant to Section 2 hereof.
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<PAGE>
T. Interest Bearing Call or Time Deposits The Custodian shall, upon
receipt of proper instructions, place interest bearing fixed term
and call deposits with the banking department of such banking
institution (other than the Custodian) and in such amounts as
the Fund may designate. Deposits may be denominated in U.S.
Dollars or other currencies. The Custodian shall include in its
records with respect to the assets of the Fund appropriate
notation as to the amount and currency of each such deposit, the
accepting banking institution and other appropriate details
and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Custodian by the
banking institution. Such deposits shall be deemed portfolio
securities of the applicable Fund for the purposes of this
Agreement, and the Custodian shall be responsible for the
collection of income from such accounts and the transmission of
cash to and from such accounts.
U. Options, Futures Contracts and Foreign Currency Transactions
1. Options. The Custodians shall, upon receipt of proper
instructions and in accordance with the provisions of any
agreement between the Custodian, any registered broker-dealer
and, if necessary, the Fund, relating to compliance with the
rules of the Options Clearing Corporation or of any registered
national securities exchange or similar organization or
organizations, receive and retain confirmations or other
documents, if any, evidencing the purchase or writing of an
option on a security, securities index, currency or other
financial instrument or index by the Fund; deposit and
maintain in a segregated account for each Fund separately,
either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the
Fund; and release and/or transfer such securities or other
assets only in accordance with a notice or other communication
evidencing the expiration, termination or exercise of such
covered option furnished by the Options Clearing Corporation,
the securities or options exchange on which such covered
option is traded or such other organization as may be
responsible for handling such options transactions.
2. Futures Contracts The Custodian shall, upon receipt of
proper instructions, receive and retain confirmations and
other documents, if any, evidencing the purchase or sale of a
futures contract or an option on a futures contract by the
Fund; deposit and maintain in a segregated account, for the
benefit of any futures commission merchant, assets designated
by the Fund as initial, maintenance or variation "margin"
deposits (including mark-to-market payments) intended to
secure the Fund's performance of its obligations under any
futures contracts purchased or sold or any options on futures
contracts written by Fund, in accordance with the provisions
of any agreement or agreements among the Fund, the Custodian
and such futures commission merchant, designed to comply with
the rules of the Commodity Futures Trading Commission and/or
of any contract market or commodities exchange or similar
organization regarding such margin deposits or payments; and
release and/or transfer assets in such margin accounts only in
accordance with any such agreements or rules.
24
<PAGE>
3. Foreign Exchange Transactions The Custodian shall, pursuant
to proper instructions, enter into or cause a subcustodian to
enter into foreign exchange contracts, currency swaps or
options to purchase and sell foreign currencies for spot and
future delivery on behalf and for the account of the Fund.
Such transactions may be undertaken by the Custodian or
subcustodian with such banking or financial institutions or
other currency brokers, as set forth in proper instructions.
Foreign exchange contracts, swaps and options shall be deemed
to be portfolio securities of the Fund; and accordingly, the
responsibility of the Custodian therefor shall be the same as
and no greater than the Custodian's responsibility in respect
of other portfolio securities of the Fund. The Custodian shall
be responsible for the transmittal to and receipt of cash from
the currency broker or banking or financial institution with
which the contract or option is made, the maintenance of
proper records with respect to the transaction and the
maintenance of any segregated account required in connection
with the transaction. The Custodian shall have no duty with
respect to the selection of the currency brokers or banking or
financial institutions with which the Fund deals or for their
failure to comply with the terms of any contract or option.
Without limiting the foregoing, it is agreed that upon receipt
of proper instructions, the Custodian may, and insofar as
funds are made available to the Custodian for the purpose, (if
determined necessary by the Custodian to consummate a
particular transaction on behalf and for the account of the
Fund) make free outgoing payments of cash in the form of U.S.
dollars or foreign currency before receiving confirmation of a
foreign exchange contract or swap or confirmation that the
countervalue currency completing the foreign exchange contract
or swap has been delivered or received. The Custodian shall
not be responsible for any costs and interest charges which
may be incurred by the Fund or the Custodian as a result of
the failure or delay of third parties to deliver foreign
exchange; provided that the Custodian shall nevertheless be
held to the standard of care set forth in, and shall be liable
to the Fund in accordance with, the provisions of Section 9.
V. Actions Permitted Without Express Authority The Custodian may in its
discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided, that all such
payments shall be accounted for by the Custodian to the
Treasurer of the Fund;
25
<PAGE>
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all nondiscretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Fund except as otherwise directed by
the Fund.
5. Duties of Bank with Respect to Books of Account and Calculations of Net
Asset Value
The Bank shall as Agent (or as Custodian, as the case may be) keep such books of
account and render as at the close of business on each day a detailed statement
of the amounts received or paid out and of securities received or delivered for
the account of the Fund during said day and such other statements, including a
daily trial balance and inventory of the Fund's portfolio securities; and shall
furnish such other financial information and data as from time to time requested
by the Treasurer or any Authorized Officer of the Fund; and shall compute and
determine, as of the close of regular trading on the New York Stock Exchange, or
at such other time or times as the Board may determine, the net asset value of a
share in the Fund, such computation and determination to be made in accordance
with the governing documents of the Fund and the votes and instructions of the
Board at the time in force and applicable, and promptly notify the Fund and its
investment adviser and such other persons as the Fund may request of the result
of such computation and determination. In computing the net asset value the
Custodian may rely upon security quotations received by telephone or otherwise
from sources or pricing services designated by the Fund by proper instructions,
and may further rely upon information furnished to it by any authorized officer
of the Fund relative (a) to liabilities of the Fund not appearing on its books
of account, (b) to the existence, status and proper treatment of any reserve or
reserves, (c) to any procedures established by the Board regarding the valuation
of portfolio securities, and (d) to the value to be assigned to any bond, note,
debenture, Treasury bill, repurchase agreement, subscription right, security,
participation interest or other asset or property for which market quotations
are not readily available.
6. Records and Miscellaneous Duties
The Bank shall create, maintain and preserve all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All books of account and
records maintained by the Bank in connection with the performance of its duties
under this Agreement shall be the property of the Fund, shall at all times
during the regular business hours of the Bank be open for inspection by
authorized officers, employees or agents of the Fund, and in the event of
termination of this Agreement shall be delivered to the Fund or to such other
person or persons as shall be designated by the Fund. Disposition of any account
or record after any required period of
26
<PAGE>
preservation shall be only in accordance with specific instructions received
from the Fund. The Bank shall assist generally in the preparation of reports to
shareholders, audits of accounts, and other ministerial matters of like nature;
and, upon request, shall furnish the Fund's auditors with an attested inventory
of securities held with appropriate information as to securities in transit or
in the process of purchase or sale and with such other information as said
auditors may from time to time request. The Custodian shall also maintain
records of all receipts, deliveries and locations of such securities, together
with a current inventory thereof, and shall conduct periodic verifications
(including sampling counts at the Custodian) of certificates representing bonds
and other securities for which it is responsible under this Agreement in such
manner as the Custodian shall determine from time to time to be advisable in
order to verify the accuracy of such inventory. The Bank shall not disclose or
use any books or records it has prepared or maintained by reason of this
Agreement in any manner except as expressly authorized herein or directed by the
Fund, and the Bank shall keep confidential any information obtained by reason of
this Agreement.
7. Opinion of Fund's Independent Public Accountants
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to enable the Fund to obtain from year to year favorable opinions
from the Fund's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Fund's registration
statement and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
8. Compensation and Expenses of Bank
The Bank shall be entitled to reasonable compensation for its services as
Custodian and Agent, as agreed upon from time to time between the Fund and the
Bank. The Bank shall be entitled to receive from the Fund on demand
reimbursement for its cash disbursements, expenses and charges, including
counsel fees, in connection with its duties as Custodian and Agent hereunder,
but excluding salaries and usual overhead expenses.
9. Responsibility of Bank
So long as and to the extent that it is in the exercise of reasonable care, the
Bank as Custodian and Agent shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties.
The Bank as Custodian and Agent shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
The Bank as Custodian and Agent shall be held to the exercise of reasonable care
in carrying out the provisions of this Agreement but shall be liable only for
its own negligent or bad faith acts or failures to act. Notwithstanding the
foregoing, nothing contained in this paragraph is intended to nor shall it be
construed to modify the standards of care and responsibility set forth in
Section 2 hereof with respect to subcustodians and in subparagraph f of
Paragraph L of Section 3 hereof with respect to Securities Systems and in
subparagraph g of Paragraph M of Section 3 hereof with respect to an Approved
Book-Entry System for Commercial Paper.
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<PAGE>
The Custodian shall be liable for the acts or omissions of a foreign banking
institution to the same extent as set forth with respect to subcustodians
generally in Section 2 hereof, provided that, regardless of whether assets are
maintained in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from, or caused by,
the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign county including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
acts of war, civil war or terrorism, insurrection, revolution, military or
usurped powers, nuclear fission, fusion or radiation, earthquake, storm or other
disturbance of nature or acts of God.
If the Fund requires the Bank in any capacity to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Bank, result in the Bank or its nominee assigned to the Fund
being liable for the payment of money or incurring liability of some other form,
the Fund, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to
advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
Except as may arise from the Custodian's own negligence or bad faith, the
Custodian shall be without liability to any Fund for any loss, liability, claim
or expense resulting from or caused by anything which is (a) part of Country
Risk or (b) part of the "prevailing country risk" of the Fund, as that term is
used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as that term is now
or in the future interpreted by the U.S. Securities and Exchange Commission or
by the staff of the Division of Investment Management of the Commission.
10. Persons Having Access to Assets of the Fund
(i) No trustee, director, general partner, officer, employee
or agent of the Fund shall have physical access to the
assets of the Fund held by the Custodian or be authorized
or permitted to withdraw any investments of the Fund, nor
shall the Custodian deliver any assets of the Fund to any
such person. No officer or director, employee or agent of
the Custodian who holds any similar position with the Fund
or the investment adviser of the Fund shall have access to
the assets of the Fund.
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<PAGE>
(ii) Access to assets of the Fund held hereunder shall only be
available to duly Authorized Officers, employees,
representatives or agents of the Custodian or other
persons or entities for whose actions the Custodian shall
be responsible to the extent permitted hereunder, or to
the Fund's independent public accountants in connection
with their auditing duties performed on behalf of the
Fund.
(iii) Nothing in this Section 9 shall prohibit any Authorized
Officer, employee or agent of the Fund or of the
investment adviser of the Fund from giving instructions to
the Custodian or executing a certificate so long as it
does not result in delivery of or access to assets of the
Fund prohibited by paragraph (i) of this Section 9.
11. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, that the Fund may at any
time by action of its Board, (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Federal Deposit Insurance
Corporation or by the Banking Commissioner of The Commonwealth of Massachusetts
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction. Upon termination of the
Agreement, the Fund shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
Unless the holders of a majority of the outstanding shares of the Fund vote to
have the securities, funds and other properties held hereunder delivered and
paid over to some other bank or trust company, specified in the vote, having not
less than $2,000,000 of aggregate capital, surplus and undivided profits, as
shown by its last published report, and meeting such other qualifications for
custodians set forth in the Investment Company Act of 1940, the Board shall,
forthwith, upon giving or receiving notice of termination of this Agreement,
appoint as successor custodian, a bank or trust company having such
qualifications. The Bank, as Custodian, Agent or otherwise, shall, upon
termination of the Agreement, deliver to such successor custodian, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank hereunder and all books of account and
records kept by the Bank pursuant to this Agreement, and all documents held by
the Bank relative thereto. In the event that no such vote has
29
<PAGE>
been adopted by the shareholders and that no written order designating a
successor custodian shall have been delivered to the Bank on or before the date
when such termination shall become effective, then the Bank shall not deliver
the securities, funds and other properties of the Fund to the Fund but shall
have the right to deliver to a bank or trust company doing business in Boston,
Massachusetts of its own selection, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all funds, securities and properties of the Fund held by or
deposited with the Bank, and all books of account and records kept by the Bank
pursuant to this Agreement, and all documents held by the Bank relative thereto.
Thereafter such bank or trust company shall be the successor of the Custodian
under this Agreement.
12. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and the Fund
may from time to time agree on such provisions interpretive of or in addition to
the provisions of this Agreement as may in their joint opinion be consistent
with the general tenor of this Agreement. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
governing instruments of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
13. Certification as to Authorized Officers
The Secretary of the Fund shall at all times maintain on file with the Bank his
certification to the Bank, in such form as may be acceptable to the Bank, of the
names and signatures of the Authorized Officers of each fund, it being
understood that upon the occurrence of any change in the information set forth
in the most recent certification on file (including without limitation any
person named in the most recent certification who has ceased to hold the office
designated therein), the Secretary of the Fund shall sign a new or amended
certification setting forth the change and the new, additional or omitted names
or signatures. The Bank shall be entitled to rely and act upon instructions from
any officers named in the most recent certification.
14. Notices
Notices and other writings delivered or mailed postage prepaid to the Fund
addressed to Susan S. Newton, John Hancock Advisers, Inc., 101 Huntington
Avenue, Boston, Massachusetts 02199, or to such other address as the Fund may
have designated to the Bank, in writing, or to State Street Bank and Trust
Company, shall be deemed to have been properly delivered or given hereunder to
the respective addressees.
15. Massachusetts Law to Apply; Limitations on Liability
This Agreement shall be construed and the provisions thereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
30
<PAGE>
If the Fund is a Massachusetts business trust, the Custodian expressly
acknowledges the provision in the Fund's declaration of trust limiting the
personal liability of the trustees and shareholders of the Fund; and the
Custodian agrees that it shall have recourse only to the assets of the Fund for
the payment of claims or obligations as between the Custodian and the Fund
arising out of this Agreement, and the Custodian shall not seek satisfaction of
any such claim or obligation from the trustees or shareholders of the Fund. Each
Fund, and each series or portfolio of a Fund, shall be liable only for its own
obligations to the Custodian under this Agreement and shall not be jointly or
severally liable for the obligations of any other Fund, series or portfolio
hereunder.
16. Adoption of the Agreement by the Fund
The Fund represents that its Board has approved this Agreement and has duly
authorized the Fund to adopt this Agreement. This Agreement shall be deemed to
supersede and terminate, as of the date first written above, all prior
agreements between the Fund and the Bank relating to the custody of the Fund's
assets.
* * * * *
31
<PAGE>
In Witness Whereof, the parties hereto have caused this agreement to be executed
in duplicate as of the date first written above by their respective officers
thereunto duly authorized.
John Hancock Mutual Funds listed on Appendix A
by: /s/ Osbert Hood
---------------
Osbert Hood
Senior Vice President and Chief Financial Officer
Attest: Theresa Apruzzese
_______________________________
State Street Bank and Trust Company
by: /s/ Ronald Logue
----------------
Attest:
/s/ Gen Cioti
- -------------
s:\agrcont\agreement\custodia\state street amended with delegation
32
<PAGE>
APPENDIX B
Additional Information Relating to Mandatory Securities Depositories
The Foreign Custody Manager shall furnish annually to the Board such
information as may be reasonably available relating to the proposed
"safeharbor" criteria with respect to Mandatory Securities Depositories
as set forth below:
(a) whether an Eligible Foreign Custodian or a U.S. bank holding
assets at the depository undertakes to adhere to the rules, practices
and procedures of the depository;
(b) whether a regulatory authority with oversight responsibility for
the depository has issued a public notice that the depository is not in
compliance with any material capital, solvency, insurance, or other
similar financial strength requirements imposed by such authority, or,
in the case of such a notice having been issued, that such notice has
been withdrawn or the remedy of such noncompliance has been publicly
announced by the depository;
(c) whether a regulatory authority with oversight responsibility over
the depository has issued a public notice that the depository is not in
compliance with any material internal controls requirement imposed by
such authority, or, in the case of such notice having been issued, that
such notice has been withdrawn or the remedy of such noncompliance has
been publicly announced by the depository;
(d) whether the depository maintains the assets of the Fund's depositor
under no less favorable safekeeping conditions than those that apply
generally to depositors;
(e) whether the depository maintains records that segregate the
depository's own assets from the assets of depositors;
(f) whether the depository maintains records that identify the assets
of each of its depositors;
(g) whether the depository provides periodic reports to its depositors
with respect to the safekeeping of assets maintained by the depository,
including, but not limited to, notification of any transfer to or from
a depositor's account; and
(h) whether the depository is subject to periodic review, such as
audits by independent accountants or inspections by regulatory
authorities.
B-1
April 15, 1999
John Hancock Declaration Trust
101 Huntington Avenue
Boston, MA 02199
RE: John Hancock Declaration Trust (the "Trust")
on behalf of John Hancock V.A. Financial Industries Fund (the "Fund")
John Hancock V.A. 500 Index Fund (the "Fund")
John Hancock V.A. International Fund (the "Fund")
John Hancock V.A. Large Cap Growth Fund (the "Fund")
John Hancock V.A. Mid Cap Growth Fund (the "Fund")
John Hancock V.A. Regional Bank Fund (the "Fund")
John Hancock V.A. Small Cap Growth Fund (the "Fund")
John Hancock V.A. Core Equity Fund (the "Fund")
John Hancock V.A. Large Cap Value Fund (the "Fund")
John Hancock V.A. Sovereign Investors Fund (the "Fund")
John Hancock V.A. Bond Fund (the "Fund")
John Hancock V.A. High Yield Bond Fund (the "Fund")
John Hancock V.A. Money Market Fund (the "Fund")
John Hancock V.A. Strategic Income Fund (the "Fund")
File Nos. 33-64465; 811-07437 (0001003457)
Ladies and Gentlemen:
In connection with the filing of Post Effective Amendment No. 10 under the
Securities Act of 1933, as amended, and Amendment No. 10 under the Investment
Company Act of 1940, as amended, for John Hancock Declaration Trust it is the
opinion of the undersigned that the Trust's shares when sold will be legally
issued, fully paid and nonassessable.
In connection with this opinion it should be noted that the Fund is an entity of
the type generally known as a "Massachusetts business trust." The Trust has been
duly organized and is validly existing under the laws of the Commonwealth of
Massachusetts. Under Massachusetts law, shareholders of a Massachusetts business
trust may be held personally liable for the obligations of the Trust. However,
the Trust's Declaration of Trust disclaims shareholder liability for obligations
of the Trust and indemnifies the shareholders of a Fund, with this
indemnification to be paid solely out of the assets of that Fund. Therefore, the
shareholder's risk is limited to circumstances in which the assets of a Fund are
insufficient to meet the obligations asserted against that Fund's assets.
Sincerely,
/s/Alfred P. Ouellette
----------------------
Alfred P.Ouellette
Assistant Secretary
Member of Massachusetts Bar
S:/Ouellette/letters/pea0499b
CONSENT OF ERNST& YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the John Hancock Declaration Funds prospectus and "Independent
Auditors" and "Financial Statements" in the John Hancock Declaration Trust
Statement of Additional Information and to the incorporation by reference in
Post-Effective Amendment Number 10 to the Registration Statement (Form N-1A, No.
33-64465) of our report dated February 12, 1999 on the financial statements and
financial highlights of the John Hancock Declaration Trust.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 23, 1999
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<NAME> JOHN HANCOCK V.A. INTERNATIONAL FUND
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 150
<NAME> JOHN HANCOCK V.A. REGIONAL BANK FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> DEC-31-1998
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (394,271)
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<GROSS-EXPENSE> 103,816
<AVERAGE-NET-ASSETS> 13,577,200
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<EXPENSE-RATIO> 1.05
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 110
<NAME> JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<DIVIDEND-INCOME> 699,406
<INTEREST-INCOME> 179,397
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<EXPENSES-NET> 371,891
<NET-INVESTMENT-INCOME> 506,912
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 020
<NAME> JOHN HANCOCK V.A. EMERGING GROWTH FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 130
<NAME> JOHN HANCOCK V.A. SPECIAL OPPORTUNITIES FUND
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<NUMBER> 010
<NAME> JOHN HANCOCK V.A. GROWTH FUND
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<SERIES>
<NUMBER> 120
<NAME> JOHN HANCOCK V.A. GROWTH AND INCOME FUND
<S> <C>
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<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 040
<NAME> JOHN HANCOCK V.A. INDEPENDENCE EQUITY FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 080
<NAME> JOHN HANCOCK V.A. SOVEREIGN INVESTORS FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<SHARES-COMMON-PRIOR> 896,718
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 030
<NAME> JOHN HANCOCK V.A. 500 INDEX FUND
<S> <C>
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 070
<NAME> JOHN HANCOCK V.A. BOND FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 090
<NAME> JOHN HANCOCK V.A. STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 140
<NAME> JOHN HANCOCK V.A. HIGH YIELD BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 060
<NAME> JOHN HANCOCK V.A. MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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